Should you buy earthquake insurance?

Apr 14, 2000

Buying earthquake insurance can be a very difficult choice. When I bought my house less than a year ago, I had to make the choice. I nearly choked when I saw the price. My earthquake insurance is virtually the same cost as my regular house insurance. That's right - the same price just for earthquake. $600 for insurance, $600 for earthquake insurance.

Nonetheless, I did not hesitate to sign up.

What is Earthquake Insurance?
Just like it sounds, earthquake insurance insures you against catastrophic loss created by an earthquake. Having lived through the Loma Prieta Earthquake in 1989 (on my wife's birthday, no less - talk about a downer), I know what kind of damage can be done. And, just like in flood, fire, etc. the damage is complete.

Why doesn't this insurance work like other insurance?
Earthquake insurance is different for two reasons. First, it is nearly impossible to predict. Second, loss is nearly catastrophic on a wide basis, but not for everyone. For some, even small earthquakes can cause huge damages.

With fires, for example, only rarely is an entire area hurt. With hurricanes and floods, certain areas are more likely to be hit, and the rate of damage can be estimated over time. Thus, the insurance rates for people in known flood plains are higher than for those not in flood areas. Unlike floods, though, people have some control because they can build stronger/better houses, and thus avoid the problems of earthquakes.

What does it all mean?
Earthquakes can hit any time, and nearly anywhere without any kind of regularity. Thus, it is hard for the statisticians to spread the risk. As a result of unexpected catastrophic losses, many insurers simply stopped insuring against earthquakes. They claim to not be able to collect earthquake premiums fast enough to cover the losses on the same.

The problem really is one where statistics breaks down. This phenomenon is discussed by Sam Savage (at who makes a living pointing out how "expected" outcomes don't work when bad things are not accounted for. An example Professor Savage uses is the drunk crossing back and forth on a busy highway. On average, he is at the center line. In reality, he is dead. The same is true of earthquakes - on average each home in California would suffer a little loss. In reality, a few homes suffer catastrophic loss.

As a result of this problem, publicly managed agencies like the California Earthquake Authority stepped in to guarantee huge amounts of funds in case of catastrophic loss.

How does it work?
You buy earthquake insurance through your regular insurer, though some do not carry it. The insurer passes on the insurance from the earthquake authority to you at a markup.

The deductible on earthquake insurance is huge - 15% of the covered amount. That means if your house is worth $200,000, you will not get any payment unless damage exceeds $30,000. Older earthquake insurance had a "co-pay" whereby you would pay 85% of any cost, but that has been eliminated in favor of the new homeowner pays first deductible.

However, the payment you receive is based on estimated damage and not on actual repairs. Thus, if you have total loss of a $200,000 house, you get a check for $170,000. You can spend that much, or you can put in any extra money you want.

Other coverage
Other earthquake coverage includes loss of use and contents. Contents coverage has no deductible, but does not kick in until the 15% structural deductible is met. There is also an extra $10,000 coverage (again, after the structural deductible is met) to bring your house up to code (as those repairs may be more expensive).

However, loss of use has no deductible - meaning hotel bills are paid up to $1500 during repairs, regardless of actual damage.

So, why do I get the insurance?
So, why do I pay the $600 a year? My house is worth $150K or so structurally. Over the 30 years I own the house (I will never own it that long, but let's suppose I will own some house for that long) I will pay $18,000. That is $18,000 for something that will return me $127,500 in case of total loss. In other words, there is no way I can self insure.

So I ask myself, how can I not get this? There is simply no way I could ever recover in the case of an earthquake, and even a huge deductible does not deter me from what I am afraid of - this BIG one.

The California Earthquake authority has more information at:

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Member: Michael Risch
Location: Palo Alto, CA
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