Should You Purchase Earthquake Insurance?

Should You Purchase Earthquake Insurance?

This week's earthquakes in the Desert Southwest have many people asking about quake insurance.  Most homeowners, renters and business insurance policies do not cover damage from earthquakes. This poses a problem not unlike the one faced by people living in coastal or flood-prone areas. Just as they need specific flood insurance, people in quake-prone areas need quake insurance.
Insure.com points out:

Since the beginning of the 20th Century, earthquakes have occurred in 39 states. Approximately 90 percent of Americans live in areas considered seismically active. Even so, only a small percentage of people purchase earthquake insurance.
A.M. Best Co. Inc., an insurance rating agency, estimates that only 10 to 15 percent of U.S. homeowners have earthquake insurance. The company says that, even in quake-prone California, "only 12 percent of 2005 residential insurance packages and 11 percent of commercial packages included earthquake coverage." The San Francisco Chronicle puts the California coverage numbers a little higher.

What's the risk? Probably higher than you think. And it's growing.

FEMA calculated in 2000 that annual losses due to earthquakes in the United States are about $4.4 million.

The Insurance Information Institute says:

The [FEMA] report ... points out that the potential cost of earthquakes has been growing because of increasing urban development in seismically active areas and the vulnerability of older buildings, which may not have been built or upgraded to current building codes. According to the study, 84 percent of the nation's annual losses are expected to occur in:
  • California
  • Oregon
  • Washington
... Other areas at risk include the central United States, within the New Madrid Seismic zone, which includes parts of:
  • Illinois
  • Kentucky
  • Tennessee
  • Missouri
  • Arkansas
  • and the Charleston, S. C. area.
In addition to California metropolitan areas, cities ranked among the top 40 high-loss potential urban areas include:
  • Seattle
  • Portland, [Ore.]
  • New York City
  • Salt Lake City
  • St. Louis
The study pointed out the need for increased recognition of metropolitan areas with "low seismic hazard" but "high seismic risk," such as New York City and Boston, which have high concentrations of buildings and an infrastructure that was built without taking into account seismic codes. Although the likelihood of catastrophic quakes occurring in these areas is statistically low, the potential cost is very high. In addition, because of the perception of low risk, neither the public nor the private sector has developed earthquake preparedness programs that teach people how to protect against earthquake damage and injury.

In the continental United States, earthquakes occur most frequently west of the Rocky Mountains. While the United States experiences only 2 percent of the world's earthquakes, some 90 percent of its population lives in seismically active areas. Statistics show that since 1900, earthquakes have occurred in 39 states and caused damage in all 50 states. More than 3,300 Americans have died in earthquakes during the last century.

Historically, the most violent earthquakes have occurred in the central United States. The largest earthquake in the continental United States was along the New Madrid Fault in Missouri, where a 3-month long series of quakes in 1811-1812 included three quakes larger than a magnitude of 8. The state with the most major earthquakes is Alaska, but the one with the most damaging earthquakes is California.

How expensive is quake insurance? The Insurance Information Institute says:

[D]eductibles can range from 2 percent to 20 percent of the replacement value of the structure. This means that if it cost $100,000 to rebuild a home and there was 2 percent deductible, the consumer would be responsible for the first $2,000... Insurers in states like Washington, Nevada and Utah, with higher than average risk of earthquakes, often set minimum deductibles at around 10 percent. In most cases, consumers can get higher deductibles to save money on earthquake premiums. [...]

Premiums also differ widely by location, insurer and the type of structure that is covered. Generally, older buildings cost more to insure than new ones. Wood-frame structures usually benefit from lower rates than brick buildings because they tend to withstand quake stresses better. Regions are graded on a scale of 1 to 5 for likelihood of quakes, and this may be reflected in insurance rates offered in those areas.

The cost of earthquake insurance is calculated on [a] "per $1,000" basis. For instance, [insuring] a frame house in the Pacific Northwest might cost $1 to $3 per $1,000 worth of coverage, while it may cost less than fifty cents per $1,000 on the East coast.

[Insuring] a brick house would cost approximately $3 to $15 per $1,000 in the Pacific Northwest, while it would cost between 60 [and] 90 cents in New York. Earthquake insurance is available from most insurance companies in most states.

Washington state's insurance commissioner gives this advice:

Unlike most homeowner or tenant policies, earthquake insurance primarily covers major losses. It normally is sold with deductibles equaling 10 to 25 percent of the structure's policy limit. Recently, the industry trend has been to raise deductibles.

This limit works much like the deductibles on your auto insurance. The result is that the insurance pays only for damages that exceed the deductible. However, unlike car insurance, some earthquake policies treat contents and structure separately. This means the deductible amount applies separately to the:

  • Total amount of the loss for contents
  • Total amount of the loss for the structure
  • Total amount of the loss for unattached structures like garages, sheds, driveways or retaining walls

Not all policies are alike. You should compare the coverage differences between companies to get the coverage that best meets your needs.

See a list of the 10 costliest quakes in the United States.

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