Whether you’re preparing to purchase your first homeowners’ insurance policy or considering updates to your existing plan, you may have noticed that earthquakes are not considered a covered loss by most providers. As public adjusters, we’ve seen what happens when an earthquake destroys the homes of individuals without earthquake coverage. Unfortunately, it typically results in an extremely stressful situation for the homeowners, and we’re unable to help them obtain a settlement.
In this article, we’ve answered some of the most common questions about earthquake insurance. If you’re considering earthquake insurance, this guide will help you get started.
How does earthquake insurance work?
In 1996 the California Legislature established the California Earthquake Authority (CEA) as a publicly managed, largely privately funded entity. The CEA is now the largest provider of earthquake insurance in the U.S., with more than 1 million active policies in California at the end of 2017.
In many ways, earthquake insurance is similar to homeowners insurance. One of the major differences is that mortgage providers don’t require earthquake insurance as a condition of the loan, as they would require homeowners’ insurance. Although earthquake insurance isn’t mandatory, the law requires that insurance providers give you the option of purchasing coverage. Policies include basic residential coverage and loss of use coverage, with other options available. Some plans might have separate deductibles for structural damage and personal property. Before buying a policy, take time to confirm whether there are multiple deductibles or a single overall deductible.
The first thing many homeowners notice when searching for a policy is that deductibles operate very differently. Deductibles for earthquake insurance are steeper than homeowners’ insurance, but the deductible is subtracted from your covered damage, so you don’t have to pay anything before you receive your claim payment. Depending on your ability to manage the premiums, you’ll typically have the option to select deductibles at 10%, 15%, 20%, or 25%.
What should an earthquake insurance policy include?
According to the Insurance Information Institute, the standard CEA policy includes a deductible that is 15 percent of the home’s replacement cost. Personal possessions are covered up to $5,000, and “loss of use” expenses (the additional cost of living elsewhere while home repairs are made) are covered up to $1,500.
If you’re considering earthquake insurance, you’ll want to ensure it provides sufficient coverage for structural repairs. If you have multiple structures on your property, such as a pool house or detached garage, be sure to clarify if those buildings will be covered in the same way as your house. Your policy should also have coverage for your structures, personal belongings, and any additional living expenses that might accumulate during repairs.
You’ll find optional coverage available for land restoration, building code upgrades, and emergency repairs. Be sure to seriously consider whether you’ll need that coverage! Just because it is considered ‘optional’ by your provider, doesn’t mean the risk is insignificant. Oftentimes, structure repair can be the costly first step toward restoration after an earthquake. Without coverage, you may still have major out of pocket costs.
What is a reasonable deductible for an earthquake insurance policy?
Unlike homeowners insurance where you can set the dollar value of your deductible, the deductibles for earthquake insurance are usually calculated based on a percentage of your policy limit. For example, if your home is insured for $750,000 and your deductible is 10%, you could find yourself paying $75,000 out of pocket.
There is no definitively ‘reasonable’ deductible cost. Instead, you’ll need to calculate what you could afford in the event of disaster. When comparing policies, be sure to consider the annual premiums as well. You’ll be able to achieve maximum financial security by selecting the lowest deductible with an affordable premium.
Have more questions about earthquake insurance coverage? Don’t hesitate to reach out to us! As public adjusters, we’re not involved in the sale of insurance coverage and we don’t receive compensation if you purchase a policy. We’ve seen the aftermath of earthquake damage firsthand, and we’d like to help you make sure that you’re protected before the unexpected occurs.