earthquake insurance in california

When the water began to drain from New Orleans in 2005, we learned that most homeowners in New Orleans did not have flood insurance, since they were supposedly in “low risk” areas. More than 60% of homeowners will need to rely on their own savings and limited federal assistance to rebuild New Orleans, at an uncalculated cost to homeowners and taxpayers.

Could that level of disaster, especially that level of disaster without insurance, happen in California? Fewer than 15% of California homeowners currently have earthquake insurance, due to its high cost, “it can’t happen to me or my house” factor, and coverage is not required by mortgage providers. The next big earthquake will result in billions in uninsured damage, but is earthquake insurance really worth the high cost?

How did we get here?

The state of California requires all homeowners insurance providers to offer at least earthquake insurance (albeit at a high cost). Until 1994, it was widely available, but the high costs of damage from the Northridge earthquake caused 97% of homeowners insurance providers to withdraw from the state of California. In response, the California legislator formed the California Earthquake Authority to provide earthquake insurance.

What is the California Earthquake Authority and how does it work?

The California Earthquake Authority provides two-thirds of earthquake policies in California, sold through its member providers, such as Allstate and State Farm. An owner purchases the policy through his regular insurance agent, but the policy is actually a CEA policy.

The CEA currently has about $7.2 billion to pay claims, which it claims is enough to pay foreseeable damages (Loma Prieta in 1989 had $6 billion in total damages). If damage claims exceed $7.2 billion, then each claim would receive a prorated share of their losses, unlike a regular insurance company, which promises to pay actual damages under the insurance policy. The state of California cannot help pay claims out of general funds.

The policies also have a high deductible, usually 15% of the value of the home. In other words, your home must be damaged by more than 15% of its value before the insurance begins to pay. So this insurance isn’t for cracks in your driveway, it’s for significant structural damage to your home. The policy also pays for limited contents (starting at $5K) and loss of use (starting at $1,500).

Why is earthquake insurance so expensive?

Insurance premiums are calculated based on probabilities: the probability that a house like yours in a neighborhood like yours will burn down, or that a driver like you will have an accident. Using data from millions of households, these probabilities can be calculated with reasonable accuracy. But no one can reliably predict the likelihood of an earthquake strong enough to damage your home.

And, as you might imagine, damage from an earthquake, flood, or hurricane is widespread, potentially over thousands of square miles, rather than one or a few dozen houses, as in a fire. As such, the insurer would have to pay out zero claims or billions of dollars in claims – too much variance to plan reasonably or quote accurately.

Are we really at risk here in San Jose?

According to the USGS, there is a 62% chance of an earthquake measuring 6.7 or greater (such as the Northridge earthquake) in the Bay Area in the next 30 years. In my zip code (San Jose 95126), the USGS calculates an 80% chance of a 6.0 earthquake and a 20% chance of a 7.0 in the next 30 years. Whether you consider it to be a high risk depends on your tolerance for earthquake risk: I consider a high risk of a moderate earthquake and a somewhat low risk of a terrible earthquake, in the next 30 years.

But like any real estate issue, it’s all local. The actual location of your home significantly affects your risk: bedrock, bay reclaimed land, soil type, nearby streams, actual distance from the epicenter can all affect potential damage.

But of course many earthquakes happen where the USGS wasn’t even aware of a fault line, and we never know when or where it will happen, until it happens.

Should I get earthquake insurance?

Factors to consider:

• Could you pay to rebuild your home with your own savings and investments?
• Can you afford to pay the high cost of insurance, indefinitely?
• Could you make your current mortgage payments and a new loan to rebuild?
• Can you mitigate your potential losses by bolting your roof to the walls and the walls to the foundation, for example?
• What is your risk tolerance for an earthquake?
• What are the risks of the current construction of your house (type, age, foundation)?
• What are the risks of your specific location (soil type, distance to known faults)?

Are they worth the costs?

Let’s say you have a house that would cost $250,000 to rebuild, you’ll own the house for the next 30 years, and your earthquake premiums are $1,200 per year. Over the next 30 years, that would be a total of $36,000 in premiums (assuming your premiums don’t go up, to simplify the calculations).

Instead of buying insurance, invest the premiums in a diversified mutual fund. With an 8% annual return, you’d have $135,000 (before taxes) in year 30.* But of course, you’ll only have that total in year 30, not year one, which means that if the earthquake happens tomorrow, you won’t have I don’t have the money.

The deductible is another big drawback for many homeowners. Insurance pays only for major structural damage, not broken dishes or cracked driveways, which means you’re less likely to use it. Keep in mind, however, that you won’t need to come up with cash for the deductible; You can opt out of those repair or rebuild costs, or you can apply for an SBA loan to pay the deductible (assuming a federal disaster occurs). area is declared).

Why not just get federal help or “walk away” and let the bank keep the property?

The federal government would likely provide access to SBA loans, if the area is declared a federal disaster area (small business not required). However, the maximum loan of $200,000 from the SBA may not be enough to rebuild your home, and it is a loan you must pay (in addition to your current mortgage).

If you have refinanced your mortgage, you have a recourse mortgage, which means that the bank can not only foreclose on the property in the event of a default, but the bank can also go after your personal assets and future income in the event of a default. non-payment. . So you can’t just walk away, especially if you have a good income and some personal assets. The bank may be able to help you by deferring payments for a few months, but you still have to pay off the loan.

last thoughts

We have earthquake insurance on our house. Our house was not yet built in the 1906 earthquake (so who knows if it would hold up), it is over 75 years old and not bolted to the foundation, and we have a refinanced mortgage. For my family, the insurance premiums are worth the peace of mind in the event of a major earthquake. That’s exactly what insurance is for: the “you never know.”

*calculations ignore inflation