Do I Need Earthquake Insurance?

So I live in Granada Hills and I know my community was virtually made famous worldwide in January of 1994 when the “Northridge” earthquake caused more property damage than any other seismic event in the United States.  But my home is 40 years old and it’s gone through the Sylmar quake in 1971 and the Northridge quake in 1994 and we’re still here.

I’ve been underwriting home insurance and earthquake insurance in California for the past 24 years and I am asked daily: “Do I need earthquake insurance?”.  My responses vary but I generally advise whatever will help you sleep better at night!   The peril of earthquake is excluded by the California Homeowners policy (ISO Form HO-3).

I find it odd that a bank will not fund your mortgage, not even for a moment, if your fire insurance is not bound and fully paid for the first year, but they don’t even ask about earthquake insurance. If you had a family member who lived in Florida and asked you if you thought he should get Hurricane insurance, wouldn’t the answer be obvious?

Yet still only 10% of our home insurance customers carry earthquake insurance. In order to understand why let’s look at how earthquake insurance works. It’s very different from the insurance on your home or car in several ways. First the way it’s underwritten. The risk of earthquake is hard for an actuary to determine; nothing happens for a very long time and then, everyone has a claim at once.  Insurance carriers must spread the risk geographically and adjust for risk by premium and high deductible options.

Earthquake deductibles are not like home or auto deductibles, they are a percentage usually 15% (sometimes 10%)  but never a fixed amount; the percentage applies to the coverage limit not the damage that may occur.  With some earthquake policies, the coverage limit is determined by the amount your carry on your homeowners policy; whilst other policies quote a predetermined coverage amount based on the age of the home, size of the home and style of construction. 

Following the 1994 Northridge earthquake, and resulting financial “earthquake” that the carriers suffered, no company wanted to offer coverage for the next seismic event in California.  Farmers, Allstate, State Farm and the others discontinued offering earthquake insurance.  

But when the Insurance commissioner came out and said to the carriers, “If you want to write Homeowners policies in California, you must provide an offer of earthquake insurance”, the California Earthquake Authority came into being.  

With seed money from Warren Buffet’s Berkshire Hathaway, the California Earthquake Authority (CEA) was formed. Most of the carriers that wanted to offer homeowners insurance in California became “member” companies and were required to offer CEA coverage to each and every policyholder.  This was fine with the member carriers because the CEA would agree to isolate the home insurer from any future earthquake losses and pay claims from their own assets together with any reinsurance they would purchase.  No other insurance company’s assets would stand behind the CEA and certainly not the State of California.

It is important to know that CEA policies have restrictions as well; for example, there is no coverage for separate structures.  Detached structures such as garages, swimming pools, fences, decks, retaining walls, gazebos, detached guest houses or anything else outside the foundation of the main structure would not be covered. Contents would be limited to $5,000 and loss of use would be limited to $1,500.  The deductible could only be 15%. This would truly be catastrophic coverage only, intended to be useful to the insured whose home was severely damaged or totally destroyed, but not much else.

As the years went by and the assets of the CEA grew into billions and billions of dollars, they began to offer their policyholders the option of buying the deductible down to 10%, increasing the contents up to $100,000 and the loss of use protection up to $15,000.  The policy was better, but still not great.  This allowed for the “private” sector to fill the gap of what consumers wanted with what has come to be known as the stand alone earthquake policies.  

Today there are a handful of earthquake policies offered by private companies; Geovera Insurance Company, Pacific Specialty Insurance Company, Fidelity National Insurance Company and Axis Reinsurance Company. 

Geovera Insurance Company offers and earthquake policy that has a single limit and makes use of a single limit deductible. The four areas of coverage; Dwelling, Separate Structures, Contents and Loss of Use (along with debris removal if needed) would all be lumped together into one single limit. Losses from any of these areas would be eligible for reimbursement from Geovera once the deductible has been met.  

Axis Reinsurance Company offers a policy that relies on the amount of dwelling coverage from the insured’s Homeowners policy. This policy is not a single limit but rather follows a formula similar to a Homeowners policy. The formula is: coverage A for the dwelling, 10% of coverage A for separate structures, 50% of coverage A for contents and $25,000 for loss of use. Axis offers both 10% and 15% deductibles. Naturally, the higher the deductible, the lower the premium. Axis likes homes that are not older than 1955 but will consider older homes if evidence of retrofitting can be provided.  

Each of these companies has a useful place in the market; however, there is not one company that is the best fit for every home. All of the earthquake policies on the market have sub limits and all consumers should take care to carefully read any policy they are considering.  

The peril of earthquake is unlike any other peril one can insure against and the underwriting for earthquake is difficult and the process is complicated and ever changing.

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