Earthquake Insurance: How to Decide Whether to Buy It
A 6.4 magnitude earthquake hit Ridgecrest, CA on July 4th,2019. The next day, there was an 7.1 magnitude aftershock. This was Southern California’s strongest earthquake in 20 years. Homeowner, condo, and renter’s insurance will not cover earthquake damage. Several Bay Area clients have asked whether they should buy earthquake insurance. I share my framework on how I coach clients through this decision.
When Earthquake Insurance Makes Sense
Earthquake insurance makes sense if a client has significant home equity. I reviewed the property insurance for a married couple with homes in San Francisco and the South Bay. Their net worth was $5M. Home equity equaled $3.3M. Since home equity was 66% of the net worth, I recommended earthquake coverage for their homes, contents, and loss of use. I referred them to an independent property insurance broker working with high-end properties.
When Earthquake Insurance Doesn’t Make Sense
If you recently purchased a home with a 5% down payment, then you likely don’t need earthquake insurance. In other words, low home equity means earthquake insurance is less compelling.
A typical Jane Financial client owns a condo unit or home worth $1M-$2M. They’ve made a 20% down payment, which is a significant amount of money. And their home equity has increased after a few years of mortgage payments, plus home value appreciation. In these situations, I coach clients as follows:
1. What Can You Afford?
Most earthquake insurance is provided by the California Earthquake Authority. The CEA is a privately funded, publicly managed organization that sells earthquake insurance policies through participating insurers like State Farm and AAA.
For a 2 BR/3BA, 1,300 sq ft condo on the Peninsula, a CEA policy is approximately $1,200 per year. This is based on deductibles, loss of use coverage, and loss assessment tailored to my client. I recommended that she add “loss assessment” coverage. This is specific to condos. Many Homeowner Associations (HOAs) don’t insure the structure. Instead, they plan to collect a special assessment in the event of earthquake damage. Because of her cash savings, she can afford higher deductibles in the event of earthquake damage. Higher deductibles lowered the premium.
Let’s say you own a $1.25M house and want a high-end insurer like Chubb. Expect earthquake coverage to cost $5,000-$8,500 per year. This assumes the home is bolted to the foundation. See below for tips on preparing your home before an earthquake.
Use the Premium Calculator at the CEA’s website to estimate your premium.
2. Can You Afford to NOT Have Earthquake Insurance?
I recently reviewed the insurance needs of a client with a $2M condo in San Francisco. They own the unit free and clear. I recommended earthquake insurance, but they balked at the cost. I then ran a long-term projection to model the worst-case scenario of The Big One destroying the entire condo and rendering it uninhabitable. Given their high incomes, they actually could afford to lose the entire $2M of home equity, and buy another home in the Bay Area.
Components of Earthquake Insurance
- Coverage A – Building Property. This is to repair/rebuild the structure. For condo owners, this is for the interior of your condo unit only. It will not cover the structure. The HOA earthquake policy (if in force) will cover the structure.
- Coverage C – Personal Property. Covers your stuff, e.g., furniture, kitchen equipment, clothes, and electronics.
- Coverage D – Loss of Use. Pays for certain living expenses if your home is uninhabitable.
- Coverage E – Loss Assessment: Applies to condos only. Helps pay for special HOA assessments to repair earthquake damage.
Prepare BEFORE An Earthquake
If you decide not to purchase earthquake insurance, you can still protect your home and personal safety. A lot of these tips are similar to baby/pet-proofing your home.
- Confirm your house is seismically retrofitted (i.e., bolted to the foundation). Hire a professional to inspect your current retrofitting, and receive a quote to bring the home up to code. The inspection fee is around $200.
- Install an automatic seismic gas shut-off valve on the gas line.
- Keep heavy items away from your bed. You don’t want a heavy picture frame crashing on your head if an earthquake strikes at night.
- Check out earthquakebracebolt.com to see if you qualify for a subsidy to offset an earthquake retrofit.
- Secure breakable items with museum/earthquake wax.
- Buy furniture straps to bolt tall bookcases and armoires to the studs in the walls.
- Tie down TVs.
- Have your go bag for your home, workplace, and car.
- Have emergency supplies, particularly water, to last 5 days. Aim for 1 gallon per day per person and pet.
- Alameda County Personal Emergency Preparedness Workshop: free two-hour workshop by the Alameda County Fire Department. Search Eventbrite for upcoming dates.
- CERT and SF NERT training: free twenty-hour training by the Alameda County and San Francisco Fire Departments, respectively. You’ll learn much more about personal preparedness and prevention. You’ll also learn hands-on disaster skills. I took the SF NERT course in 2014, and I thought it was terrific. There are CERT training courses throughout the Bay Area.
- The Red Cross has great tips on disaster preparedness for pets, particularly finding pet-friendly accommodations in case you can’t return home immediately.