According to the Los Angeles Times, only 17% of California’s homeowners have earthquake insurance. Knowing you are protected in case “the big one” hits is a great thing for peace of mind, especially for those of us in the San Francisco Bay area.
Until recently, available policies have had very high deductibles and very limited benefits for temporary housing and personal belongings. Now, however, some highly-rated carriers are offering more generous policies that may be well-suited for clients with homes worth over $500,000. These more robust policies offer lower deductibles, a bigger pool of money for temporary housing and personal belongings, and even a cash out option (you can take the insurance money and opt out of rebuilding). (For more, see: Homeowner's Insurance Guide: A Beginner's Overview.)
These new policies are expensive - at times quite a bit more expensive than previous options - but their coverage might be very beneficial as a way to protect your equity. So does earthquake insurance make sense? This article discusses practical considerations to keep in mind when it comes to evaluating earthquake insurance and your circumstances.
1. Is Earthquake Insurance Worth It for You?
From a true high-level perspective, the question revolves around whether you are willing and able to bear the financial burden of repairing or replacing your home should it become damaged or destroyed by an earthquake.
A related question is how much are you at risk of a partial or complete loss. I believe the value equation depends on many factors that go beyond a simple analysis of cost. Here are a few that have come up in past client discussions.
2. Has the Home's Construction Been Analyzed?
A foundational consideration (pun intended) which was brought to my attention by a property and casualty insurance professional is that a home built on a concrete slab might be prone to more pricey repairs in the event of an earthquake as the sewer lines, plumbing and the like come up through the concrete slab. By contrast, a home built on a foundation with “post and pier foundation” that includes a crawl space underneath might sustain damage during a quake, but may be more easily restored and/or repaired.
Here are a few additional questions to ask when evaluating your property.
3. When Was the House Constructed?
Newer homes are constructed to incorporate updates to the building code to help reduce risk of loss due to seismic movement. If the house is older, has retrofitting been completed? I believe this point is self-explanatory.
4. Has the Land's Soil Condition Been Surveyed?
Check the California Office of Emergency Services (CalOES) for earthquake preparedness information. This site contains information related to the California Residential Mitigation program, otherwise known as “brace and bolt,” and a program to help homeowners cover some of the costs of making their home more resistant to earthquake damage.
The CalOES website also features MyHazards, a handy form where homeowners can enter an address and see whether their property location is at high risk for ground shaking, and whether their property is at risk for landslide hazard, seismic hazard (soil liquefaction). Homeowners can also evaluate their property’s proximity to earthquake fault zones.
5. Is the Home Financed With Recourse or Non-Recourse Debt?
In California, a mortgage taken out for the initial purchase of a home (a “purchase money mortgage”) is likely to be a non-recourse loan. A “non-recourse loan” means that in the event of a default, the house is the lender’s sole collateral. However, if the home is refinanced, the refinanced loan is typically a recourse loan - meaning that in the event of a default, the borrower’s home plus their other assets are collateral for the loan and the lender can sue the borrower to have their wages garnished. The type of loan - along with other factors like one’s own moral compass, the value of maintaining a good credit rating, and protection of one’s equity in the home - all influence the decision to carry or not carry earthquake insurance. (For more, see: What Is and Isn't Covered by Homeowners Insurance.)