earthquake insurance

Earthquake insurance

Since the Northridge earthquake in 1994, almost no private insurance companies offer earthquake insurance in California. It is primarily available only through a state-run insurance pool, the California Earthquake Authority (CEA).  Should you buy insurance or a seismic retrofit?

The CEA website states, “If an earthquake causes insured damage greater than the CEA’s claim-paying capacity, policyholders with earthquake damage may be paid a prorated portion of their covered losses. Or, the CEA Governing Board may approve installment payments”  So even if you buy insurance, you might collect much less than your policy allows

Four issues to consider in answering that question include

  • Safety
  • Stress from disaster
  • Loss of deductible
  • Comparative cost

If your house is on a hillside, an earthquake could kill you. A retrofit could save your life; insurance cannot.

CEA insurance has a dwelling deductible that you choose, from 5% to 25%. Premiums vary accordingly.  Assume that you choose to pay a higher premium for the minimum 5% deductible, and that your home is insured for $500,000.  The first $25,000 in earthquake damage would not be covered.  How far would that go toward paying for a seismic retrofit which on average cost between 1% and 3% of a home’s value?

Even if the insurance covers most of your loss imagine the anguish, loss of housing, delay in getting your life back to normal if your house came off its foundation.  It only has a $5,000 personal property limit and almost no coverage for temporary housing.

We urge you to compare costs of a retrofit versus insurance.  The CEA premium calculator can quickly show you the annual premium for earthquake insurance.

The average Bay Area home with average coverage runs about $4,000 a year.

Insurance and retrofits are not mutually exclusive. Maybe you can afford both.  But if not, remember, you pay for a retrofit only once and many retrofitted houses will survive the earthquake just fine not need insurance if they are retrofitting properly

CEA Solvency

A magnitude 7.0 earthquake on the Hayward Fault is projected to cause up to $9.5 billion in insured residential losses.  The Hayward Fault is overdue for a major earthquake.  The California Earthquake Authority (CEA) writes about 76% of earthquake insurance policies in the state, according to Market Watch.   Would the CEA be able to pay the claims?

According to its most recently published financial statement, the CEA could pay up to $11.5 billion in claims, based on its “available capital, risk-transfer coverage, available letters of credit, debt, and post-event prospective participating insurance company assessments.”

In short, the CEA might be able to pay the claims with its reserves, and with reinsurance, borrowing, rescheduling its debts and leaning on private insurance companies, but it might not.

The CEA has been accumulating a reserve to pay claims ever since it began in 1996. The Loma Prieta and Northridge earthquakes occurred only four years and three months apart.  What if a major earthquake in Southern California drains that CEA reserve, and a little later the Hayward Fault breaks loose?  What will all your earthquake insurance premium payments get you?

The state of California does not back up CEA earthquake insurance, in the event that claims from a major earthquake were to exhaust all CEA funds.

Here’s some info from the USGS Shakeout Scenario

:

The 2008 Great Southern California ShakeOut was based on a potential magnitude 7.8 earthquake on the southern San Andreas Fault— approximately 5,000 times larger than the magnitude 5.4 earthquake that shook southern California on July 29, 2008. It’s not a matter of if an earthquake of this size will happen—but when. And it is possible that it will happen in our lifetime.
Dr. Lucy Jones of the U.S. Geological Survey led a group of over 300 scientists, engineers, and others to study the likely consequences of this potential earthquake in great detail. The result is the ShakeOut Earthquake Scenario, which was also the basis of a statewide emergency response exercise, Golden Guardian 2008.
In an earthquake of this size, the shaking will last for nearly two minutes. The strongest shaking will occur near the fault (in the projected earthquake, the Coachella Valley, Inland Empire and Antelope Valley). Pockets of strong shaking will form away from the fault where sediments trap the waves (in the projected earthquake, it would occur in the San Gabriel Valley and in East Los Angeles).
Such an earthquake will cause unprecedented damage to Southern California—greatly dwarfing the massive damage that occurred in Northridge’s 6.7-magnitude earthquake in 1994. In summary, the ShakeOut Scenario estimates this earthquake will cause over 1,800 deaths, 50,000 injuries, $200 billion in damage and other losses, and severe, long-lasting disruption. The report has regional implications and is a dramatic call to action for preparedness.

The full publication can be found here: http://pubs.usgs.gov/of/2008/1150/

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