There are 1 million households in California which have purchased earthquake insurance protection for their homes. When a magnitude 7.1 event occurred near Ridgecrest, CA, on July 5, 2019 just after 8:00pm, the expense of a policy felt justified. Most homeowners and renters’ insurance policies do not cover damages or loss that occur during an earthquake. Just like you’d need to purchase flood insurance for that form of damage, you must have this separate option for complete coverage in the state.
The problem with earthquake insurance in California is that there has been an update to the prediction and risk models for this natural event. A long-term study called the UCERF3 (Uniform California Earthquake Rupture Forecast) has problematic news for some residents. It says that the issue of a “Big One” is less problematic for the northern part of the state when compared to the southern half. The report also specifically cites dangers in the Los Angeles area from this hypothetical event.
That means insurance premiums are now changing in the state, not because of the earthquakes, but due to the shift in seismic rifts. If you live in Sacramento, then the average annual cost for a policy is about $300 per year. For Los Angeles residents, it is $2,000 for the same coverage – and likely rising.
With some homeowners and renters seeing 200% to 300% increases in their proposed policies, now is the perfect time to review the California earthquake insurance pros and cons.
List of the Pros of California Earthquake Insurance
1. You will receive coverage if your home receives damage during an earthquake.
If the only thing you have protecting your property is a standard renters’ or homeowners’ package, then any damage to your house would not likely be covered if an earthquake were to occur. When you have California earthquake insurance, then your policy should pay for the repairs that are necessary or to facilitate the reconstruction of your structure. Without this option, there is a chance you could lose everything. If the Big One were to strike and level your house, you could be left homeless.
2. It is an affordable expense if you live in a low-risk region.
There are areas in Northern California where this insurance can run as low as $20 per month. Although the new seismic risk reports suggest that those living in the southern part of the state could see a significantly large expense for this coverage, you can still add it into your monthly mortgage payment with some lenders so that it becomes management on a monthly basis. Compared to the threat of what could happen should this natural disaster occur, you almost need to have this policy if you live in the state.
3. This coverage will give you additional benefits.
If you experience an earthquake on your property where the house becomes inhabitable due to the impact of this natural disaster, then some insurance policies will cover your living expenses until your home becomes livable once again. You’ll still need to pay your mortgage until the property becomes completely restored, but the other expenses of living in a hotel and having food are going to be manageable while you work to get back on your feet. Without California earthquake insurance, you could find yourself in a situation where you’re making monthly payments on a property where you can’t live.
4. Earthquake insurance gives you an extra level of peace.
When you have California earthquake insurance on a property in the state, then you are purchasing this policy for more than its practical reasons. You can have the peace of mind that comes when you know that you don’t need to worry about your property if something happens to it. Even if your home and all of your belongings get wiped out in the quake, you’ll have a financial resource that can help you to get back on your feet.
5. Older homes can get a discount if earthquake retrofitting occurs.
One of the reasons why there is a significant expense for California earthquake insurance is because of the age of the home involved. Older homes did not follow the same building codes that contractors follow today to protect against the shaking action of a quake. Simple retrofitting actions, like bracing problematic walls, strapping water heaters to the structure, and bolting the house to its foundation, can get you a significant discount on your earthquake insurance policy.
6. The valuation that you use for earthquake insurance is based on the cost of rebuilding.
When you take out a policy with California earthquake insurance, then what you are basing the value on is the amount it would take a contractor to rebuild your house if a qualifying event were to occur. Your property might be valued at more than $1 million, but the cost to rebuild the property might only be $150,000. That means, even with a 15% deductible, you’d only spend a little over $20,000 out-of-pocket to get the results you need for restoration. Then your property would have a similar value, if not more, once the work was complete.
That’s why an assessment of what you’ll actually need is necessary. Some homeowners base their request for insurance off of the current value of their property, which means they’re paying too much for additional coverage that they might not need.
7. All homeowners’ insurance companies in California offer this policy.
California law requires that any company which offers a homeowners’ insurance policy must also carry an earthquake insurance option. There are no exceptions to this rule as there are in some of the other states. You can choose to go with a mini-policy that excludes patios or detached structures to save some money if you want. Everyone that works with the California Earthquake Authority (CEA) to ensure that the coverage remains available.
8. It helps to cover the engineering expenses for a complete repair.
One of the most essential questions that homeowners must ask themselves if they live in an area prone to earthquakes is if they can pay for the repairs if something should happen. It is important to look at more than the cost of replacing a roof or fixing a few walls. Homes that qualify for a claim with California earthquake insurance typically need an engineering solution as part of the rebuilding process. This expense can easily start at $50,000 for even a small home. If you can afford to pay for a policy with a lower deductible, which might be just 2% of the rebuilding cost in some low-risk areas of the state, then this is a small expense that is definitely worth considering.
9. Plans for renters help to cover personal property losses.
If you live near a fault and want to protect your possessions as a renter, then you must add California earthquake insurance to your standard policy. It will cover many of the same benefits that homeowners receive, including any temporary rent increases or hotel bills you must pay due to damage to your apartment or other rental. The CEA allows you to increase the base policy of personal property up to $100,000, and then there is a $750 deductible to pay for your personal property at any coverage level.
You can also add $25,000 worth of loss of use value to your renters earthquake insurance to make sure that you can recover faster financially from a natural disaster like this one.
10. The prices of earthquake insurance can go down.
About 75% of California homeowners will experience a small decrease in their overall earthquake insurance policies thanks to the updated risk elements that were recently published. This protection is similar to what you can experience with an adjustable rate mortgage. Although there is a chance that the rates could spike, much like they are in the Los Angeles area, you can also see a decrease in regions where the risks are lower of having a high magnitude event occur.
List of the Cons of California Earthquake Insurance
1. California earthquake insurance can come with a significant deductible.
Deductibles are the amount of money that you pay out-of-pocket without any help from your insurance. In a standard homeowners’ policy, you might choose an expense level that is somewhere between $500 to $7,500. You’ll cover that portion of the expense, and then the insurance handles the rest of the claim. A higher deductible usually leads to a lower premium, but not with California earthquake insurance.
Your deductible with this policy is based on a percentage of the overall limit of the policy. Because California is a high-risk state, the insurance deductible is somewhere between 10% to 15% for most properties. That means a $500,000 structure would come with a $50,000 to $75,000 deductible that would be part of your overall claim that you’d need to pay.
2. Your contents are limited to a set dollar amount.
Earthquake insurance only provides a set dollar amount for any damages that occur to your personal belongings. Because this natural disaster is not usually covered by a renters’ or homeowners’ plan, you’ll need to set a specific limit for the breakable items that you keep in the home. Electronics tend to receive the most damage, so a $10,000 rider for personal possessions might not be enough to cover your entire loss in this area. You’d likely need to opt for increased contents coverage.
Because of this disadvantage, only 10% of homeowners in California carry earthquake insurance even though 90% of these potential natural disasters occur in the state.
3. There are multiple exclusions you’ll want to consider adding.
Every insurance policy comes with some type of exclusion that limits the amount of compensation that’s available under a standard plan. Your typical homeowners’ policy might limit your claim for firearms to $2,000 and your jewelry to $1,000 if a loss occurs. California earthquake coverage has the same disadvantage.
You’ll need to pay more for the loss of pools, fences, landscaping, and separate structures on your property – like a barn. The standard policy will also exclude claims for items that are quite fragile, such as china, crystal, or chandeliers.
4. Your loss of use benefit might not cover all of your expenses.
Although earthquake insurance will pay for your living expenses if you have a loss of use issue with your property, this coverage is usually limited to 20% of the dwelling limits. Some providers base their figure on a set amount of time after the disaster, which is usually between 6-24 months. Some insurers might give you a set limit that you cannot exceed, no matter how much your expenses are, and that figure can be as low as $1,500 in some areas.
5. You cannot count uncovered losses toward your deductible.
Let’s say that you’re paying $2,000 per year for California earthquake insurance with your Los Angeles-area home. Now we’ll add the hypothetical Big One to this disadvantage, causing severe damage to your property. Your house is covered, but you didn’t take out riders for your additional buildings, fences, or pool.
The insurance adjuster says that you have $150,000 in losses because of the damage to your fences and pool. You also have a $50,000 deductible on your home. In this situation, you’ll be paying $200,000 out-of-pocket because most policies will not take into consideration the losses that you experience outside of the coverage you purchase.
6. Newer homes in California rarely suffer from a catastrophic loss.
Total loss claims with California earthquakes are rare, even when you look at the biggest events of the last 30 years in the state. The Loma Prieta and the Northridge earthquakes in 1989 and 1994 respectively generated a total of 235,000 combined claims with an average value of approximately $45,000.
The reason why losses are minimal is because most California homes are built to withstand severe earthquakes. Unless you live near the beach or have an older home that has walls which could buckle, your most significant threat of loss comes from unreinforced masonry, like a wall, chimney, or fascia. It is not unusual for the quake damage to stay within the limits of the deductible, which means the entire repair becomes the responsibility of the homeowner.
7. It does not cover the after-effects that an earthquake might cause.
California earthquake coverage is very specific in what it will cover. If your home experiences damage because of the shaking action of the quake, then the policy will kick in to give you what you need. It will not cover fires from the quake, so you’ll need to make sure that your standard homeowners’ policy covers that form of damage. Land damages are not covered by this policy either, including erosion, sinkholes, or cracks in the ground that may occur because of the actions of an earthquake. You’ll need a separate policy for water damage too, since a sewer or plumbing break, or flooding, will not receive coverage under most plans.
You’ll need to do your own research to see individual pros and cons for your situation and how it could impact the final cost of your coverage.
8. Almost 50% of the cost of earthquake insurance can go to reinsurance.
The California Earthquake Authority was created by the state legislature in 1996 after the Northridge quake that killed 57 people and injured almost 9,000 others. It handles earthquake coverage for the state and has about $17 billion in reserve in case the next one hits. CEA underwrote $778 million in premiums in 2017, but it also spend almost half of that amount on reinsurance to protect against a 8.0 earthquake happening in a populated area.
That figure protects the CEA against the possibility of bankruptcy, but it is also responsible for some of the increases that are showing up in premiums. There is no backstop for losses with this natural disaster as there would be with a major flood.
9. Most Californians are still struggling with home equity issues.
The goal of earthquake insurance in California is to cover the equity that you have in your property. If you own your home outright or have a significant amount paid into it, then this policy can protect you from a catastrophic loss. Most Californians don’t carry this policy because they are already underwater with their mortgage. With no equity, there’s no reason to pay up to $7,500 more per year for the structure.
If the Big One hits and there is zero equity in the property, then the smarter financial position would be to walk away from the mortgage.
10. There is a lot of distrust of the CEA in California.
Another disadvantage that limits the number of homeowners who pursue earthquake insurance coverage is the fact that there is a lot of distrust of the California Earthquake Authority. The CEA has already gone on record to say that they would stop paying out claims, even if they are valid, if the losses exceed what is available in reserves.
Although the leadership of the CEA says that they could handle two Northridges, which is a reference to the costliest earthquakes in California’s history, the Big One could create damages that are much more extensive.
11. Renters have minimal loss of use protection with earthquake insurance.
Renters receive a basic loss of use coverage that provides a $1,500 benefit in case an earthquake happens. Even if you maximize the coverage to its fullest extent, the most that renters can have to cover their additional living expenses due to the loss of a rental home is $25,000. Although there isn’t a deductible requirement put on this benefit, it doesn’t take long for families to burn through this coverage and not have anywhere else to turn with their added expenses.
Verdict on the Pros and Cons of California Earthquake Insurance
California earthquake insurance is an investment that makes sense if you have a lot of equity in your property or own the home outright. Even with an insurance claim coming with a 15% deductible of the home’s value, this option is a way to recover quickly from a natural disaster while giving yourself a place to live until repairs are complete.
The only problem with some policies is that your home may need to break free from its foundation for you to make a valid claim. You’ll also want to speak with your insurance provider to ensure that there is enough money in reserves to pay your claim if you have a high-value property.
The pros and cons of California earthquake insurance must also include your location, the type of home you own, and the amount of risk that exists in your location. If you live in the Los Angeles area, then it might be a good idea to look at these key points to see if a policy makes sense.
About the Author of this Article
Natalie Regoli is a seasoned writer, who is also our editor-in-chief. Vittana's goal is to publish high quality content on some of the biggest issues that our world faces. If you would like to contact Natalie, then go here to send her a message.