There’s been a whole lot of a shakin’ going on, and I’m not talking about Jerry Lee Lewis.
For the past week a rapid-fire volley of different magnitude earthquakes has been rumbling throughout Southern California, from Catalina to the Coachella Valley, making one wonder whether it’s time to finally pull the trigger on that earthquake insurance policy.
What is earthquake insurance? It’s a form of property insurance that pays the policyholder in the event of an earthquake that causes damage to the property. Most ordinary homeowners’ insurance policies do not cover earthquake loss.
If you live in California, which is ground zero for earthquakes, it seems like it should be a no-brainer to own an earthquake insurance policy, especially if you have equity to protect in your home.
But before you pull out your pen, there’s that deductible in California, which is usually 15 percent. In other words, if your home is merely damaged, not destroyed, you may be on the hook for restoring your home without any financial assistance from your insurer. Let’s put this thought into real dollar terms. If you own a home that is insured for $500,000, you would be out of pocket about $75,000 before your insurer pulled one dime out of its own pocket.
The actual premium that you pay will depend on several factors, including your zip code, the date of your home’s construction and even the materials used in its construction. Rates may be cheaper for wood than homes made of brick, for example.
The California Earthquake Authority (http://www.earthquakeauthority.com) features a nifty little calculator that will estimate all these variables, which includes insurance coverage for the loss of your personal items and the time you might have to relocate (“loss of use”) to a hotel/motel while your home is being rebuilt. You can also purchase a “mini-policy” that covers your home’s main structure but not the pool or adjoining patio.
Californians lead the nation in the number of insurance policies, but, still, only 12 percent of all Californians have insurance policies.
Although everybody pretty much agrees that the big one is coming to California, it would seem the above figure is unusually small, relative to the reality of the Big One actually arriving on our doorsteps. One reason so few people own earthquake insurance policies is that companies don’t go out of their way to market them. They’d rather invest their money elsewhere, for instance, paying out auto insurance claims. It’s said that after the 1994 Northridge, Calif., quake, it took insurance companies more than two decades to recover the profits they had collected from premiums.
By law, insurers that offer property insurance also have to offer earthquake insurance. To protect themselves in the event of a catastrophe, insurers pool their customers’ premiums in the CEA to cover claims. That pool is now up to about $10 billion. That may sound like a lot, but $10 billion doesn’t buy what it used to.
Here’s one more rub: The state of California specifically states that it does not back up CEA earthquake insurance, in the event that claims from a major earthquake were to drain all CEA funds, nor will it cover claims from non-CEA insurers if they were to become insolvent due to earthquake losses. In other words, you could have earthquake insurance, but if the fund is dry, it’s dry, and you could be out of luck.
Still, whether to take out an earthquake insurance policy is a discussion worth having with your insurance agency. If you’re not someone who likes to roll the dice with your financial future, you might feel it best to get some protection, on the basis that any protection is better than none.
Another argument for securing a policy is that you should not expect the Federal Emergency Management Agency, better known as FEMA, to bail you out in the event your home is destroyed. Although the federal government in our most recent recession seemed to be bailing everyone out, don’t count on it in your case. Government disaster-relief programs, including the Governor’s Office of Emergency Services (OES) in California, are designed to help you get partly back on your feet but not to replace your home and everything you lose.
If you do obtain a policy — because you don’t want to be standing in line at FEMA — make sure you read your policy’s fine print, especially for exclusions, loss of use (the cost of lodgings until your home is rebuilt), and uncovered losses (items like your fence, patio and pool, which, if damaged, will not count toward or satisfy your deductible).
So, yes, read the fine print because you don’t want to be shaken down twice!
Regardless of whether you choose to buy an earthquake policy, there are some smart moves that can help you reduce your losses in a major quake. The California earthquake authority gives homeowners discounts on their policies when they retrofit their older homes to better fit current earthquake standards — for instance, if you bolt the home to foundation; brace cripple walls with plywood and strap water heaters to the home’s structure.
In addition, it’s wise to add locks and latches to china cabinets and use museum putty to secure precious breakables.