In June of this year, six earthquakes rocked California, from Mammoth Lakes south to San Bernardino. While we love living in this beautiful State, it does require us to be aware and prepared for some of the risks of living in Earthquake Country!
On October 3, 2016, the Los Angeles Times wrote an article about how homeowners in California are taking risks by not having earthquake insurance. In fact only 17% of all California homeowners have earthquake insurance. In this blog I will share the benefits of having earthquake coverage as well as key information to help you determine if this coverage is right for you. For anyone who has lived in Southern California for any length of time, you know that this is indeed Earthquake Country! In fact, a little shaking of the ground barely generates a comment from locals! It has to be a fairly large earthquake to get our attention. That being said, earthquakes are no laughing matter. A casual observer can see hairline stucco cracks radiating out from windows in homes of even fairly recent construction. While our homes in Southern California are designed to be earthquake tolerant, they are NOT earthquake proof! One of the most common questions I am asked as an insurance professional is, "should I purchase earthquake insurance for my home?" The answer to this question is not a pure “yes” or “no,” but each individual situation needs to be examined. While only you can decide what the right decision on purchasing earthquake insurance is for you, Here are a few thoughts to consider. First of all, the "big player" for earthquake insurance in California is the California Earthquake Authority, or “CEA.” Admitted insurance companies in California (those who have been licensed by the California Department of Insurance) who sell homeowners insurance policies are REQUIRED BY LAW to offer earthquake insurance through the California Earthquake Authority. In fact, insurance buyers are required to be offered earthquake insurance. That’s how important the State of California views earthquake insurance. In addition to the CEA, there are a number of other companies that offer earthquake insurance as well. They often offer earthquake insurance for larger risks like apartments or retail buildings. With that introduction to the earthquake insurance market, the question remains, “should I buy earthquake insurance?” In my opinion, the main concern you should have is another “EQ” word, and that word is “equity.” Equity is the value of your home, minus any financial encumbrances you have on it. In other words, the value of your home minus the mortgage. For several years, many people had negative equity, or they were “upside down” on their home, meaning that they owed more than the home was worth! For someone in an “upside down” situation, purchasing earthquake insurance may not make sense. The reason for this is, if an earthquake were to occur, the purchaser could still very well find themselves without a home. They purchased insurance on their home, but after the deductible is factored in, all of the money goes to the mortgage company, and the homeowner does not have the means to rebuild! The earthquake policy ended up leaving them in a worse position because they paid premiums for a policy that provided them little to no benefit. On the other hand, someone who has a substantial amount of equity should seriously consider purchasing earthquake insurance. When you have a mortgage on your home, you and the financing institution share ownership of the property. As you pay down your mortgage, your share of the ownership goes up, the bank’s goes down. The amount of money (equity) that needs protecting goes up as the years go by. We are currently seeing a rise in property values which is increasing the values of homes throughout the state. You may very well have gone from “upside down” to being very well placed value-wise in a very short period of time! If you are in this position, a visit with your insurance agent is certainly in order. It is also important to note that Earthquake policies are structured differently than regular homeowner’s policies. Rather than having a set dollar amount of a deductible ($1000, $2500, etc.), the deductibles are set as a percentage of the total rebuild cost of your home. Currently, the CEA offers a 25%, 20%, 15%, 10%, as well as a 5% deductible. How it would work is, if your home costs $300,000 to rebuild the deductible would be $45,000 if you were to have a 15% deductible. If you were to purchase a policy with a 10% deductible, you would pay $30,000 out of pocket. This high deductible structure has kept many people from purchasing a policy, and that reticence is certainly understandable based on the scenario I detailed above. The logic in purchasing an earthquake policy if you have equity in your home, even if you do NOT have the $45,000 to rebuild as mentioned in the scenario above is that you would at least get SOMETHING out of your home. If you had $150,000 worth of equity, and you had $45,000 as your deductible, you could still potentially get over $100,000. Without the coverage, you get nothing. People often ask about whether or not the Federal government would help out in that situation. While I’m not disparaging the hard-working people of FEMA, the assistance provided by the Feds is often uneven at best. Using FEMA as your sole hope for insurance is probably not a good idea. As I said before, purchasing an earthquake policy is not a black and white issue. It takes thought and information: something that our office can provide. If you are struggling with whether or not to purchase earthquake insurance, give our office a call. You may reach us at (661) 946-4224, or you can email me at dave@thedaveowens.com. I or my licensed staff will be happy to go over the “ins and outs” of earthquake insurance. I would also strongly suggest that you check out the following website http://www.shakeout.org/california/ for information on how to get prepared for the “Big One.” Whether or not earthquake insurance is right for you, every family should have an earthquake disaster plan, and this site can help you be prepared.
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AuthorDave Owens, Owner/Agent. I have proudly served in the Insurance Industry for over 20 years. Archives
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