Buying Tips and Help Resources
By Jonathan Buckley and UP Staff
We moved into the Bay Area in 2002. My wife had grown up in earthquake country (Seattle, WA), and we were nervous about the risk. The geological survey came back with good news – no known faults in the immediate area. We investigated earthquake insurance options – and balked at the almost $70,000 deductible, not to mention the premiums, which were higher than the premiums for our homeowner’s policy and our personal umbrella policies combined.
Two months later, we were talking to the insurance folks again. A series of “cluster” earthquakes started shaking our neighborhood soon after we moved in. It turns out that there was a previously undiscovered fault – right under our neighborhood. My wife was even shown on a local TV news program, enlisting neighborhood children to help her pack away our china and crystal, which had been displayed on shelves.
Like 7 out of 8 Californians, we decided to not buy the earthquake insurance. We just couldn’t justify the cost vs. the perceived low level of benefits. The house was built in 1987, and included all the recommended retrofits. As my wife said, if an earthquake did more than $70,000 of damage, she was moving to “tornado alley” anyway.
It turns out, as we’ve recently learned; we had not explored all our options. The California earthquake insurance situation is unique, and it pays to do your homework. Now that we’ve done our research, I changed my mind and I’m buying the coverage. The bottom line of my conclusion is:
Our renewed research started with the past issues of newsletters published by United Policyholders (http://www.unitedpolicyholders.org/newsletters) The newsletters identify companies that are selling earthquake insurance and they offer lots of good information on retrofitting your house.
If you can afford it, the best way to protect your investment in your home against the risk of quake damage is to retrofit and buy earthquake insurance.
One of the most important things to do is to ensure that your house is built to or is retrofitted to basic seismic safety standards. This is known as “mitigation”, and it will substantially reduce the risk of severe earthquake damage to your home. The more steps you take to retrofit and improve your home’s ability to resist the impact of an earthquake, the less likely you are to face expensive repairs.
Three relatively simple and cost effective methods of retrofitting include bracing your water heater, installing “sheer” panels and bolting your foundation. You can look at illustrations of these basic retrofits at: http://www.earthquakeauthority.com/preparedness/preparedness_home.html#top
A licensed, experienced contractor can perform these tasks for a reasonable cost; they don’t have to be someone who advertises themselves as a retrofitting or seismic specialist. If you have concerns about a proposal, pricing or quality of work already done, the Contractors State Licensing Board can help. In California, find them online at http://www.cslb.ca.gov/consumers, or call them toll-free at 1-800 321-CSLB (2752)
Don’t overlook the importance of mitigating damage to the contents of your home. You can do most contents mitigation yourself without spending a lot of money, with the exception perhaps of bracing large furniture items to the wall. There are a number of good products available at hardware and home improvement stores, including putty and gels that protect breakables, and straps and braces for electronic equipment, furniture and art work.
Three basic choices
That discouraging deductible
According to CEA staffer Rolf Erikson, there is a key difference between CEA and other policies re: what triggers a payment above the deductible. Most companies require an insured to actually spend the full amount of their deductible amount before they’ll pay benefits. The CEA uses the deductible as a trigger — once you establish that your damage exceeds it — Erikson says you are entitled to get paid the full difference between your deductible amount and the cost of repairs — regardless of whether or not you spent the amount of your deductible. This gives the property owner the options of being creative, economizing or making modifications to make the best use of the insurance monies.
From the insurer’s point of view, the high deductible serves two purposes. First, it keeps the premium costs somewhat lower. Second, it encourages policyholders to retrofit their homes according to the recommendations from the California Earthquake Authority (CEA), Federal Emergency Management Agency (FEMA) and others. Earthquake insurance is intended to be catastrophe insurance. It is designed to minimize the risk that policyholders will be left homeless after a major earthquake. It is not primarily designed to cover your personal property. (E.g. furniture, clothing, dishes, etc.)
Under the CEA policy, damage to personal property does not count towards the deductible, even if you are paying premiums for expanded personal property coverage. Unlike other earthquake policies, a CEA policy will not pay for any personal property damage until the structural deductible is met. The only claim the CEA will honor without your meeting the deductible is for “loss of use”. Therefore, buying expanded personal property coverage becomes a very different decision from the decision to buy basic earthquake insurance, which primarily covers the structure. The cost benefit trade-off is quite different as well, as we’ll see in a later article. For now, let’s concentrate on the issue of basic earthquake coverage for your structure.
It’s important to understand that the insured value of your house is determined by your homeowners insurance. If you are underinsured on your homeowner’s policy, you are underinsured on your earthquake policy as well. How do you determine the replacement cost of your house? You can start by reviewing the United Policyholders’ publication titled “Do’s and Don’ts When Insuring Your Home”. (Online @ UP website or request a printed copy @ (510) 763-9740).
It helps to “guesstimate” what the rough dollar-per-square-foot rebuilding cost. would be. Here in California, it would be difficult to build a nice, standard house, (hardwood floors, tile counters, etc) for less than $200 per square foot. Count on that getting a lot more expensive after a disaster, when contractors will be in demand and materials will be in short supply. $200-$350 per square foot was common after the 2003 SoCal firestorms.
Geovera Insurance Company’s standard policy works much the same way as the CEA policy, with the exception that covered personal property damage counts towards the deductible. However, the standard policy only covers $5,000 of personal property damage, so this difference is small in actual practice. Geovera’s comprehensive policies are quite different, and will be described in depth in a future article.
Another option is buying through GeoVera, a subsidiary of St. Paul/Travelers. www.geovera.com Like the CEA, Geovera carries an excellent rating from A.M. Best (“A” for Geovera; “A-for CEA). There are also insurance companies, such as Fireman’s Fund, that still underwrite and sell earthquake coverage as a companion product to their homeowners’ policies.
The CEA and Geovera will both generate a quote for you via their online facility, or you can call a licensed agent. Geovera’s website offers the additional benefit of letting you buy the quoted coverage on the spot. I submitted my house information, and received a quote for $460,000 of coverage, with a 15% deductible, personal property coverage of $5,000 and loss of use coverage of $1,500. This is the basic policy each company offers.
The following quote from the CEA website describes the process: “The CEA hired EQECAT, Inc., headquartered in Oakland, to develop earthquake loss estimates for residences in every region of the state. Seismologists, geologists, and engineers examined the most recent scientific information available for every ZIP Code in the state. The scientists considered all known faults (and made reasonable assumptions for unknown faults) and proximity to faults; estimated the likelihood of future seismic activity on known faults; and evaluated soil types throughout the state. Other experts in their fields then subjected EQECAT's findings to extensive, public peer review.”
While she did not describe any other company’s process for determining earthquake insurance rates, Ms. Kincaid believes their process delivers a more accurate rating of the risks, and that CEA competitors, who do not use this process, may be undercharging on their premiums. The risk of undercharging premiums is that the insurer may not have sufficient reserves to fully pay claims after a major earthquake.
Location, Location, Location
This time, the CEA was substantially less expensive. This result lends some weight to the explanation Ms. Kincaid gave me, and raises the question of how sustainable the Geovera rates will be in high risk areas, along with concerns of self-selection bias (i.e., all the high risk consumers will chose Geovera, while the lower risk ones will be indifferent or choose CEA coverage).
OK, I understand it. Should I get it?
The most common reason consumers choose not to insure their homes against earthquake damage is the 15% deductible. People understandably have trouble with the concept that they might have losses of tens or even hundreds of thousands of dollars before their coverage pays a dime.
I took a look at what it might take to make a rational person buy earthquake insurance at the current rates I was quoted. I live in the Bay Area, so I took the 70% risk over the next 30 years and figured this means approximately a 2.3% risk each year. OK, and let’s assume that the house becomes a total loss in an earthquake. In this case, for a $460,000 home, insurance would pay about $391,000 of my rebuilding costs (85%). Using these assumptions, the expected loss in any given year would be almost $9,000 (2.3% of $391,000). Suddenly those premiums look a little more reasonable from a statistical perspective.
However, I live in a relatively new house, and we have taken care of all the recommended mitigation steps. Surely my home isn’t likely to be a write-off as a total loss in an earthquake! If we assume that $230,000 of damage occurs, or half the value of the home, then the expected loss in any given year is still more than $3,700 (2.3% of $161,000). In fact, if you expect about $147,000 of damage, buying earthquake insurance still seems prudent (using the CEA premium as an example). How likely is any one home to be damaged in a major earthquake? No one really knows.
Given all the uncertainty, it probably shouldn’t be surprising that each time there is a major earthquake, more people sign up for insurance, and then they slowly drop it again over time. No one wants to believe that the next big earthquake could be in their neighborhood, but it’s important to remember that the 1989 Loma Prieta and 1994 Northridge earthquakes were far less severe than the “Big One” experts are certain is coming.
The U.S.Geological Survey, (USGS) and the California Geological Survey, (CGS) offer online and print resources. The USGS posts a daily CA. quake predictor, http://pasadena.wr.usgs.gov/step/, and seismic risk maps at http://eqhazmaps.usgs.gov/. The CGS also offers information and maps at http://www.consrv.ca.gov/CGS/geologic_hazards/earthquakes/index.htm.
So, What Does it All Mean?
The next major California earthquake is coming. This is not exactly new information, as we have been repeatedly told that “the big one” is coming. Despite this, 7 out of 8 Californians have chosen to not purchase earthquake coverage. And yet, according the US Geological Survey, there is a 70% chance of a magnitude 6.7 or higher earthquake striking the Bay Area in the next 30 years.
The risks are there for anyone in California. Ironically, for Californians in low risk areas, such as Mission Viejo, earthquake insurance is a much easier sell. The total financial loss is still there, but the insurance is much less costly. Here in the Bay Area, with inflated real estate values, another monthly cost is the last thing most homeowners want to hear about. Few, however, are in a position to replace their homes if the next big earthquake destroys them.
This article was written at UP’s request by, Jonathan Buckley, Buckley Financial Planning, San Ramon, CA. www.buckelyfinancialplanning.com, with editing assistance and additions by United Policyholders staff.
By Jia-Rui Chong and Hector Becerra
September 8, 2005
U.S. Geological Survey seismologist Lucy Jones remembers attending an emergency training session in August 2001 with the Federal Emergency Management Agency that discussed the three most likely catastrophes to strike the United States.
First on the list was a terrorist attack in New York. Second was a super-strength hurricane hitting New Orleans. Third was a major earthquake on the San Andreas fault.
Now that the first two have come to pass, she and other earthquake experts are using the devastating aftermath of Hurricane Katrina as an opportunity to reassess how California would handle a major temblor.
Jones, scientist-in-charge for the geological survey's Southern California Earthquake Hazards Team, and other experts generally agree that California has come a long way in the last two decades in seismic safety.
In Los Angeles, all but one of 8,700 unreinforced masonry buildings — considered the most likely to collapse in a major quake — have been retrofitted or demolished. The state spent billions after the 1994 Northridge quake to retrofit more than 2,100 freeway overpasses, reporting this week that only a handful remain unreinforced.
Despite these improvements, however, officials believe that a major temblor could cause the level of destruction and disruption seen over the last week on the Gulf Coast.
More than 900 hospital buildings that state officials have identified as needing either retrofitting or total replacement have yet to receive them, and the state recently agreed to five-year extensions to hospitals that can't meet the 2008 deadline to make the fixes. More than 7,000 school buildings across the state would also be vulnerable during a huge temblor, a state study found, though there is no firm timetable for upgrading the structures.
And four Los Angeles Police Department facilities — including the Parker Center headquarters in downtown — worry officials, because they were built to primitive earthquake standards and might not survive a major temblor. Only two of the LAPD's 19 stations meet the most rigorous quake-safe rules.
"We could be dealing with infrastructure issues a lot like New Orleans," Jones said. "Our natural gas passes through the Cajon Pass…. Water — three pipelines — cross the San Andreas fault in an area that is expected to go in an earthquake." Railway lines are also vulnerable, she said.
A catastrophic temblor at the right spot along the San Andreas could significantly reduce energy and water supplies — at least temporarily, she and others said. Researchers at the Southern California Earthquake Center said there is an 80% to 90% chance that a temblor of 7.0 or greater magnitude will strike Southern California before 2024.
"We aren't anywhere close to where I wish we were" in terms of seismic safety, Jones said.
Seismologists are particularly concerned about a type of vulnerable building that has received far less attention than unreinforced masonry.
There are about 40,000 structures in California made from "non-ductile reinforced concrete," a rigid substance susceptible to cracking. This was a common construction ingredient for office buildings in the 1950s and '60s, before the state instituted stricter standards. Few such structures have been seismically retrofitted, officials said.
Seismic safety advocates have also recently lost some major battles in Sacramento. The state rejected a proposal from the Seismic Safety Commission in the wake of the 2003 San Simeon earthquake to force owners of unreinforced masonry buildings to post warning signs. In that quake, two women died when the roof slid off of a two-story Paso Robles brick building where they worked.
Last week, the Legislature sent to the governor's desk a bill that encourages local governments to develop retrofitting programs for "soft story" wood-frame apartment buildings.
There are an estimated 70,000 such structures in the state, and experts worry that they could sustain major quake damage, because they often have tuck-under parking and lack solid walls at their bases.
The danger of this kind of construction was illustrated in the 1994 collapse of the Northridge Meadows apartment complex, in which 16 residents were killed.
There are other potential safety gaps as well.
Although Los Angeles, Long Beach, Pasadena and several other cities have reinforced almost all their masonry buildings, about a third of such structures across the state remain unprotected, said Frank Turner, an engineer with the Seismic Safety Commission.
A state study published last year on hazard reduction paints a sobering picture of California's earthquake danger. About 62% of the population lives in a zone of high earthquake danger, including 100% of the population of Ventura County, 99% of Los Angeles County and 92% of Riverside County.
Since 1971, there have been at least 13 earthquakes of magnitude 6.0 or greater in the state, and research conducted after the 1989 Loma Prieta quake in the Bay Area found a 62% probability that at least one earthquake of magnitude 6.7 or more would strike the Bay Area before 2032.
"We're pretty confident we have some of the best buildings in the world here, but … there are always going to be losses, because these are extraordinary events," Turner said.
Still, Southern California's geography could help prevent a catastrophe on the scale of that in New Orleans.
Because the Los Angeles region is so much larger than the Louisiana city, it is difficult to conceive of a disaster — "short of an A-bomb" — that would blanket the whole city, let alone the whole county, in ruin, said Lee Sapaden, a spokesman for Los Angeles County's Office of Emergency Management.
Earthquakes tend to do the most damage closest to the epicenters. The 1994 Northridge quake, for example, damaged a large swath of the San Fernando Valley as well as parts of Hollywood and the Westside. But areas farther to the east and south, such as Long Beach and Orange County, saw little damage.
A large quake in the Valley would probably still allow emergency supplies and rescuers to reach the area from other locations such as the San Gabriel Valley and South Bay, Sapaden said.
Emergency crews would have better mobility than those in New Orleans, he added, because even if freeways were wrecked, aid would probably be able to get through the vast majority of areas on surface streets. "Here in Southern California, Riverside, San Bernardino, Orange and Santa Barbara counties would help us out, just like we would help them," he said.
One of the biggest concerns of seismic safety officials is the fate of hospitals.
The 1971 Sylmar earthquake pushed Olive View Medical Center a foot off its foundation, causing the first floor to collapse, killing three patients and a hospital worker. The 1994 Northridge quake knocked 23 hospitals temporarily out of service.
After that quake, the Legislature passed a law requiring that hospitals retrofit buildings to withstand a major temblor or replace them with new ones. About 78% of hospitals have at least one building deemed at risk, said Jan Emerson, spokeswoman for the California Hospital Assn.
But hospitals, many of which are fighting budget problems, have balked at the price tag — estimated at $24 billion for 2002-2030 — and in many cases have successfully pushed Sacramento to delay the retrofitting deadline. The state has already granted about 200 requests for extensions to make the necessary repairs by 2013, according to a state document.
Safety officials said more work is also needed at schools.
A 2002 state study found that more than 7,500 school buildings across California are expected to "perform poorly" in a major temblor.
The Los Angeles Unified School District has completed seismic upgrades to nearly 2,000 buildings, spending $222 million on the effort, according to Richard Luke, director of design for the district.
But the district has not finished upgrades on 600 portable buildings and will look at an additional 239 buildings identified by the Division of State Architect as possibly performing poorly during a major quake.
Jones of the geological survey and Turner of the Seismic Safety Commission believe that one worst-case scenario would involve a massive temblor on the San Andreas fault around where major utility lines run, possibly compromising water and power supplies.
"We should not be at all surprised if something similar to Hurricane Katrina mirrors itself in California," Turner said. "There have been lots of articles written about the failure of levees in the [Sacramento-San Joaquin] Delta, the loss of drinking water in California. This is just the tip of the iceberg."
About 60% of Southern California's water is imported from outside the region in three major aqueducts that cross the San Andreas fault, making them particularly vulnerable to major earthquake damage.
One branch of the 444-mile California Aqueduct, which carries water from the delta, virtually sits on top of the fault for a few miles near Palmdale. A second aqueduct from the Colorado River crosses the fault near Beaumont. And the Los Angeles Aqueduct, which transports snowmelt from the eastern Sierra, runs across the San Andreas in a mountain tunnel between Lancaster and Santa Clarita.
Southern California water managers say they've made progress in recent years building local reserves they could turn to if they lost water from one or more of the transport systems.With such efforts, "we feel even more confident we are able to provide sufficient water to sustain us during an earthquake," said Debra Man, chief operating officer of the Metropolitan Water District of Southern California, the region's main water wholesaler.
Jim McDaniels, chief operating officer for the Los Angeles Department of Water and Power's water system, said that if disaster struck, the DWP could double its groundwater pumping within the basin and draw from its four big local reservoirs.
Major gas lines also come into Southern California over the San Andreas at several points, including at Indio, Palmdale, the Cajon Pass and the Tejon Ranch. Still, officials at the Southern California Gas Co. expressed confidence that the system could withstand a strong earthquake, noting they have been upgrading the pipeline for years.
Another open question is whether the major quake would cause damage to fire stations, police headquarters and facilities of other emergency agencies, possibly slowing their response. A state study found that many of the 1,300 emergency operations buildings were constructed before strict quake building standards were enacted in 1986, and that only a portion of those had been retrofitted.
At the LAPD, the only four facilities to meet the most recent and rigorous "essential building" standards are the department's newest: the West Valley and Mission police stations and two 911 dispatch centers.
Yvette Sanchez-Owens, head of the department's facilities management office, said she is most concerned about three stations built in the 1960s: Rampart, Hollenbeck and Harbor. Police officers at the Harbor station in San Pedro have been relocated to trailers while a new station is built; officers could be moved out of the Hollenbeck station in Boyle Heights sometime this fall as preparation for construction of a new station begins.
As for Parker Center, it already sustained significant damage during the Northridge earthquake. It is also scheduled to be replaced, but not for several years.
"It could be in real trouble," Sanchez-Owens said. "It's definitely not built up to standard."
Times staff writer Bettina Boxall contributed to this report.
To make an educated decision about insuring your home against the risk of an earthquake, you'll need to get a few quotes from competing insurers. Read UP's buying tips to get a sense of the dollar amounts and types of coverage you want, write them down on a piece of paper, then call around or use the Internet to get "apples to apples" premium quotes from competing insurance companies. The basic categories are: Dwelling, Contents, Garages, Fences, Pools, Outbuildings, Building Code Compliance, Temporary/Additional Living Expenses.
Your options are very limited so it's much easier than shopping for auto or homeowners coverage. There are only a few companies selling earthquake insurance these days, and some are very selective about who and what they will insure.
Once you've read UP's buying tips and articles and gotten the premium quotes, you can make the right decision for you, your family and your property. Your buying options vary according to:
Check UP's links to Internet Shopping Resources to find sites that help you get quotes online. The following are the primary options for California property owners:
The California Earthquake Authority: www.earthquakeauthority.com
Insurance companies like State Farm, Allstate, Farmers and CSAA that no longer sell their own EQ policies to CA customers are required by law to participate in the CEA. The CEA is managed by a professional staff, but the participating private insurance companies are involved in issuing the policies, collecting premiums and servicing claims.
The CEA is now the only option for many California property owners who want to buy quake coverage. It is working hard to lower its rates, improve its products and give consumers more options while strengthening its claims-paying capacity and finance structure. We recommend getting a quote for a CEA policy before you make your decision.
Pacific-Select Property Insurance: www.calquake.org
GeoVera Insurance: www.geovera.com
By JOHN HARRINGTON - IR Business Editor - 07/27/05
The Monday evening earthquake that was the talk of the town Tuesday had Helenans calling their insurance agents to determine whether their homeowner policies covered earthquakes, and to find out what it costs to add coverage.
"We've had at least a dozen calls, and they're still coming in," said Rick Cochrane of Cochrane Insurance Agency Tuesday afternoon.
Along with floods, for which damage is insured by the federal government, earthquakes are a major category of natural disaster not covered by most basic policies. Policies typically cover fire and lightning, hail and wind damage, weight of ice and snow and other naturally caused damage.
"The one natural disaster we have in Montana that we would suggest people be covered for is earthquakes," said Denise Wolf, an agent with Farm Bureau Financial Services. "But it happens so infrequently that a lot of people don't think about it."
State Farm agent Jim Donaldson said not all homes can be insured against earthquake damage.
"The big thing is it's got to have a continuous foundation," he said. "Stone foundations aren't eligible."
Some companies — including both State Farm and Farm Bureau — placed 30-day moratoriums on earthquake coverage following Monday's tremor, meaning someone who signed up today wouldn't be covered for that period of time. In the case of State Farm, Donaldson said the moratorium is automatic whenever there's an earthquake of 5.0 magnitude or greater centered within 100 miles of the city.
Local agents said that within the Helena area, location doesn't figure into the cost of earthquake coverage. The same home built in the soft Valley floor or the bedrock of the South Hills would cost the same to insure, they said.
Earthquake insurance can be expensive here, ranging from $1 to $3 per thousand dollars of value of the home. At $2 per thousand, an earthquake endorsement would cost $400 per year for the owner of a $200,000 home, with deductibles typically ranging from 5 to 10 percent.
Consequently, few people carry the coverage.
Cochrane estimated that only around 10 percent of his homeowner policy holders have earthquake insurance, "and I assume that's about average for the area," he said. "It's kind of expensive to add it, but as an agent you just kind of hold your breath and hope it doesn't happen."
Donaldson said close to 20 percent of his customers carry the earthquake coverage, which he strongly encourages.
"We just have so many earthquakes," he said, noting that Montana is the fourth-most seismically active state. "If I've got property, I've got earthquake coverage on it."
"It's truly like almost all insurance. The individual has to balance the cost against the risk," Cochrane added.
"This earthquake is a wake-up call. It can happen here."
John Harrington can be reached at 447-4080 or email@example.com.
as posted at msn.com
By Liz Pulliam Weston
Many who live in flood- or quake-prone areas choose to 'go bare,' reasoning that the remote risks aren't worth the cost of pricey and limited coverage.
Software engineer Roopesh N. Sheth paid for earthquake insurance when he bought his first home last year. After all, he lives in California.
This year, though, he let the policy lapse — joining the vast majority of homeowners who “go bare” when it comes to some aspect of catastrophic coverage.
The decision not to buy insurance for earthquakes, floods, hurricanes and other natural disasters isn’t always conscious: Some homeowners don’t realize they’re not already covered. But many others, faced with high premiums and policies with limited coverage, gamble that they won’t need insurance help to rebuild after a disaster.
“There’s a pretty high deductible (on an earthquake policy), and the contents coverage was really low,” said Sheth, 28, who lives with his wife in San Diego. “We decided we would just take our chances.”
So is going bare a smart choice, or a dangerous one?
Oh, I wish I could offer a concrete yes or no. Usually I'm a hardliner when it comes to insurance. As I've written before — in columns such as "3 costly myths about insurance" — insurance is best used to protect ourselves against uncommon but financially devastating events, and natural disasters certainly qualify.
But in this case, the cost/benefit analysis is trickier than usual. Sometimes the price of catastrophic insurance is chokingly high, while the risk remains remote. My husband and I, living in Southern California, have struggled mightily with this issue ourselves.
The answer for us, and for anyone, depends on three factors: your location, your financial situation — and your comfort with risk.
The key is to make an informed choice. And I’m here to help you with that.
Know your insurance policy inside and out
First, you need to know what disasters your homeowners’ insurance does and doesn’t cover adequately. A review of your policy and a chat with your insurance agent should alert you to any gaps.
Then, where you can buy extra coverage depends on the location of your home and the particular catastrophe you’re trying to protect against. This is where things get a touch complicated. Earthquakes and floods, for example, aren’t covered by standard homeowners policies. If you live in an area that’s prone to other natural disasters, such as hurricanes, tornadoes or hail storms, your homeowners insurance may not cover damage from those calamities, either.
Here’s where you can get the more common types of disaster coverage:
Earthquake coverage in most states can be purchased from your homeowners insurance company. In California, most policies are sold by the state-run insurance pool, the California Earthquake Authority (CEA), although a few private companies also sell earthquake coverage.
Flood insurance is typically provided by the National Flood Insurance Program, which is run by the federal government. A handful of private companies also write policies through a special arrangement with the feds. In states prone to floods your mortgage lender may require that you buy the coverage.
Hurricane and other windstorm insurance varies by state, and sometimes by county. Several states, including Alabama, Florida, Louisiana, Mississippi, North Carolina, South Carolina and Texas, offer windstorm coverage pools for people who can’t get private coverage. Residents of some coastal counties in Georgia and New York can get wind and hail coverage through FAIR (Fair Access to Insurance Requirement) plans, which are high-risk pools run by insurance companies. Your insurance agent or state insurance department will have more details.
Owners may still say 'no dice'
"It’s too expensive." Disaster coverage can indeed be pricey. The annual premium for flood insurance is $382 a year for an average coverage amount of about $137,000. A windstorm policy in South Carolina costs $461 for $100,000 of coverage. Earthquake insurance can range from a couple of hundred dollars to several thousand dollars a year.
"The deductibles are too high." This is particularly the case for earthquake insurance, which typically has a 10% to 15% deductible. That means you have to pay the first $20,000 to $30,000 of damage on a home insured for $200,000 before your coverage would kick in. Deductibles are usually 2% for windstorm coverage (or $4,000 on the $200,000 home), although they range from 1% to 15% of the insured value of the house. Federal flood insurance comes with a much lower deductible, $500 to $1,000.
"The coverage is too limited." Bare-bones CEA earthquake policies — the kind Sheth had in San Diego — cover only $5,000 in damage for all the contents of your home and don’t cover swimming pools, landscaping or outbuildings. Additional coverage can be purchased for a higher premium.
"It’s not mandatory." As noted, if you live in a flood plain, your mortgage lender will insist you buy flood insurance. (Ask to see the latest flood plain maps, though.) Otherwise, catastrophic coverage typically isn’t a requirement for getting a home loan.
"The government will help us out." After a major disaster, the Federal Emergency Management Agency (FEMA) provides grants for emergency repairs and temporary housing, while the Small Business Administration (SBA) offers low-interest loans for rebuilding.In fact, if you have insurance, your ability to get government help may be limited. Grants are usually reserved for those who are uninsured, and loans are restricted to amounts that your insurance doesn’t cover.
“After Northridge (the big quake that struck Southern California in 1994), we made a lot of loans covering just the deductibles,” said SBA public affairs officer Ken Shuman.
Time for a reality check
The government might not step in. The president has to declare a major disaster before FEMA and SBA can step in to help. If the damage is limited, that might not happen -- even if you personally suffer a catastrophic loss. The vast majority of floods, for example, are not declared major disasters.
The help might not be enough. FEMA grants may be limited, and SBA loans for home repairs top out at $200,000. (You can expect repair costs to soar after a disaster, by the way, because every available contractor will be working overtime.)
You may be adding considerably to your debt burden. SBA loans are just that — loans. You’re required to pay the money back. So, between your mortgage and your SBA loan, you could end up owing a lot more on your property than it’s worth.
Now that you've considered some pros and some cons, ask yourself the following questions:
Do I live in a high-risk area? Most homeowners tend to downplay the risks they face, even if they’re living directly above an earthquake fault or on the beach of an East Coast state.
Coastal states from Texas to Maine are most at risk for hurricanes, as is Hawaii. People who live west or just east of the Rockies are at earthquake risk, as are those in Alaska, New England and the New Madrid fault area along the Mississippi River. Floods can happen just about anywhere.
Have I really weighed the potential costs? To be flip: It only takes one natural disaster to ruin your whole day — and your finances.
Insurance is designed to protect you against financial setbacks you couldn’t easily recover from on your own. Clearly, most people couldn’t pay for a new house out of pocket.
Have I set up an emergency fund? If you can get your hands quickly on a lot of cash, you may decide to forgo insurance.
Sheth set up a home-equity line of credit in part to help pay for earthquake repairs that might be needed in the future. He knew that the time to get such loans is before anything happens.
“The appraisal may not go so well after the earthquake,” he chuckled.
Have I invested in mitigation? Homes both new and old can be fortified substantially with some special construction measures. And truth be told, this is what many earthquake experts do, rather than pay expensive premiums for earthquake insurance.
The type of home you have affects your risk. One-story homes that are "tied together" — with the roof bolted to the walls, and the walls to the foundation — tend to survive earthquakes and windstorms better than multistory homes that aren't. Likewise, houses with big openings, such as plate-glass windows or large garage doors, fare worse than ones without those features.
The Institute for Business and Home Safety has a “Fortified For Safer Living" program that specifies building techniques that can help homes better withstand disaster. The institute estimates these safer-building methods add about 10% to the construction cost of a new house. But the price may purchase much less damage if disaster strikes.
Am I prepared to walk away? If you don’t have much equity in your home, and you have no ethical qualms about reneging on your mortgage, you could simply plan to hand your house keys back to your lender if a natural disaster leaves your home a pile of rubble.
That’s the option many homeowners took in hard-hit Northridge. As is typical after a disaster, foreclosures spiked in the area after the 1994 quake damaged thousands of homes (and, ultimately, many credit reports as well).
If you have lots of equity, though, and your home represents a big chunk of your net worth, the scales start tilting heavily toward the need to pay up for extra insurance coverage.
That’s what my husband and I ultimately decided to do. Living in California, we’ve seen firsthand what an earthquake can do to a home. We don’t enjoy writing that check for earthquake insurance every year, but it does buy us something of substantial value: peace of mind.
United Policyholders is a non-profit organization founded in 1991 and dedicated to educating the public on insurance issues and consumer rights. UP publishes educational materials and serves as a resource for individual and business policyholders and residents of communities with insurance problems. UPs Amicus Project provides information to courts of law to support policyholders legal rights. UP unites policyholders and their advocates by sharing information. Write to UP at 110 Pacific Ave., PMB 262, San Francisco, CA. 94111, call us at (510) 763-9740, or visit our website at www.unitedpolicyholders.org.