Home Owner Insurance - is Earthquake Protection Really Necessary?

If you came home and found nothing but a pile of rubble, could you afford to replace your home? For many, the answer would depend on what caused the damage. If it were wind, fire, or a motor vehicle accident, the answer most likely is yes. Standard homeowner insurance covers such damage, and mortgage lenders require that homes be insured up to their replacement value. If an earthquake caused the damage, however, then it would depend on whether the homeowner has earthquake insurance.

According to the United States Geological Survey, 5,000 earthquakes large enough to be felt strike the United States each year. The vast majority are on the West Coast, but since 1900, earthquakes have occurred in 39 states and caused some damage in all 50. According to the Federal Emergency Management Agency, earthquakes are the fourth leading cause of property damage in the United States. They cause an average of $4.4 billion a year in property losses, trailing only floods ($5.2 billion), hurricanes ($5.4 billion), and fires ($8.6 billion).

About half of the damage to residences caused by earthquakes is due to the shaking of the structures. The other half is the result of fires that erupt when natural gas lines rupture, electrical wiring sparks, lit candles tip over, or cooking food ignites. Water from broken pipes also causes damage, destroying walls, ceilings, floors, and personal property. Both fire and water damage are covered by traditional homeowners insurance, even if an earthquake was the root cause of the damage.

The shaking of a powerful earthquake can damage the structure of a home in many ways. Masonry is especially susceptible to breakage. Chimneys, fireplaces, and brick or block walls can crack or even collapse. Tiles on floors, backsplashes, and bathroom walls can buckle, break, or come loose. Concrete slabs and foundations can crack. If the structural damage is severe enough, the property can be condemned, even if it is left standing. Structural damage due to and earthquake’s shaking is not covered by traditional home owner insurance.

Personal property is also vulnerable to shaking damage. Porcelain and glass objects can fall and break. Paintings and mirrors can come loose from walls and smash on the floor. Electronics, such as televisions, computers, and stereo systems, can be thrown to the ground, damaging fragile components. Earthquake-conscious homeowners can take preventative steps to secure fragile objects to walls and cabinets, but insuring them is still a good idea. Personal property damaged by shaking is not covered by standard homeowners insurance policies.

Shaking damage is insurable, but it requires a separate insurance policy or an endorsement to an existing one. In most states, private insurance companies offer earthquake insurance. In California, the state has joined with private insurance companies to create an insurance fund that offers limited residential earthquake coverage. The California Earthquake Authority (CEA) works with private insurance companies to provide earthquake “mini-policies” to help homeowners repair and rebuild their homes. The coverage is designed to keep a “roof over the head” of anyone whose home was damaged in an earthquake. The mini-policies do not cover patios, decks, pools, or other structures that are not part of the dwelling.

Many things affect the cost of earthquake insurance: the location of the home, what was used to build it, and its age. Because of the amount of seismic activity in the West, homes there cost more to insure than homes in the rest of the country. Within California, homes in certain areas cost more to insure than homes in other areas. Brick homes cost more to insure than wood-frame homes, because they are less flexible and more likely to crack or collapse. Older homes cost more to insure than newer ones, partly because newer homes are built to more stringent safety standards and partly because older building materials are less supple and resilient than newer ones. Over a long period of time, lumber dries out, making it more likely to crack or break under stress. Concrete develops small cracks that can weaken it, making it less able to withstand strong shaking.

Deductible amounts for earthquake insurance are computed on a percentage basis, from 2% to 20% of the home’s value. Some homeowners prefer to assume the risk of paying a higher deductible in order to keep their premiums lower. Many of those who cannot afford to pay a large deductible—$80,000 on a $400,000 house, for example—opt to pay more in premiums, guarding against a larger outlay in the event of an earthquake.

For many people, the only way to pay a large sum, such as an $80,000 deductible, is to tap into their home equity. The problem, of course, is that home equity is tied to the condition of a home. A dwelling severely damaged in an earthquake would likely decline in value to such an extent that no equity will remain. Unless the homeowner has other assets, he or she will have nothing left to pay the deductible. For those without earthquake insurance, the prospect is even worse. They not only will have no equity, but they will also have no insurance money for rebuilding. The only thing they will have is a mortgage that still needs to be paid. A home is the largest asset most people possess. Insuring it is not a frill. It is a necessity.