Earthquake Insurance $300/yr, worth it?

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fundtalker123
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Earthquake Insurance $300/yr, worth it?

Post by fundtalker123 » Fri Aug 12, 2011 9:10 pm

I have been offered earthquake insurance by my property insurer, USAA, although it is really provided by "California Earthquake Authority", which seems to be some kind of statewide insurer pool. Earthquake coverage is not part of regular homeowners insurance, but letter states "California law requires that earthquake be offered to you".

Anyway, the decision to pay for it or not puzzles me, this being for a "Black Swan" type event. Would you take it or not?

Parameters:
- $300 per year to cover ~$500k dwelling value in San Diego
- deductible is 15% of dwelling value, so won't start unless damage >$75k
- $5000 contents coverage (if full deductible paid)
- $1500 additional living expanses (if full deductible paid)

Considerations:
- We have ~$700k in equity in the home
- $300 per year is quite affordable minor expense compared to our whole budget (one hundredth of our mortgage payment, and less than basic land line phone we pay $30/mo for just in case reliable 911 response is needed)
- Deductible is huge -- an earthquake that causes >$75k to dwelling would be a bigger one than has happened in modern history in San Diego
- If such a big Earthquake did happen it might kill us as well, so we couldn't collect
- Real estate agent said "Don't worry about earthquakes, your house will be taken down by a fire or mudslide long before it will by an earthquake"

A discussion on "risk of earthquake in San Diego" is on this site:
http://www.shakeout.org/sandiego/hazards.html

Quote:
San Diego County ... does not have the history of earthquakes common to the rest of southern California. The Rose Canyon Fault, the only major active earthquake fault in the urban San Diego Area, has not produced a major earthquake since long before European settlers arrived in the area. Yet it is considered active by the State as it has had a history of earthquakes in the last 11,000 years. Our relatively short history in the region has created a false sense of immunity from earthquakes in the San Diego Area, but a major earthquake along the length of the Rose Canyon Fault could result in devastating consequences. [NOTE: we are within a mile of this fault]

Earthquake damage to buildings and infrastructure and secondary effects such as fires that often are started in earthquakes are a very real danger for all residents of the San Diego Area. If a major earthquake occurs during fire season then the fire damage could easily exceed the damage caused by shaking.

BruDude
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Post by BruDude » Fri Aug 12, 2011 9:11 pm

$75k deductible? Yikes...are you sure there aren't any other insurers that offer a flat dollar amount instead of percentage basis?

bombcar
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Post by bombcar » Fri Aug 12, 2011 9:27 pm

No insurers offer Earthquake insurance in CA without huge deductibles or huge premiums, because if you're affected, the whole area is.

HOWEVER, check your fire policy. Make sure that a fire caused by an earthquake would be covered.
Last edited by bombcar on Fri Aug 12, 2011 9:29 pm, edited 1 time in total.

Avo
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Post by Avo » Fri Aug 12, 2011 9:27 pm

I live in Santa Barbara, and would not dream of being without earthquake coverage. I pay much more than you to get a much lower deductible; policy is through GEICO, not the CA Earthquake Authority. I'm traveling at the moment & don't have details at hand.

I think that damage to my house from an earthquake is much more likely than from a fire, and I can't afford to sustain a major loss to my house, so I pay for coverage.

sscritic
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Post by sscritic » Fri Aug 12, 2011 9:55 pm

Some history might help for those outside CA. Sometimes "normal" risk assessment is inadequate (as we have learned from the financial crisis). Before the Northridge earthquake (even after Loma Prieta), there was a brisk competition in homeowners insurance between companies. Then January 17, 1994 happened.

After that day, insurers withdrew from the homeowner's insurance market. The insurance company I had, refused to renew any homeowner's policies.
In January 1994, a 6.7-magnitude earthquake struck California’s San Fernando Valley. It was the costliest earthquake in U.S. history and occurred on a previously undocumented fault.

Prior to Northridge, policymakers and insurance companies had dramatically underestimated the potential losses that would be caused even by moderate earthquakes, and California earthquake insurance premiums did not reflect the risk. Insurers and consumer groups quickly became aware that residential earthquake insurers were overexposed and would quickly exhaust their claims-paying resources if another significant earthquake occurred.

By January 1995, fearing potential insolvency from another huge earthquake, insurers representing about 93% of the homeowners insurance market in California severely restricted—or refused to write altogether—new homeowners policies because of the law that they also offer earthquake insurance. This triggered a crisis that by mid-1996 seriously threatened the vitality of the state's housing market.
Here is what happened to one insurer, 20th Century, one of the largest auto insurance companies in CA that was expanding into homeowners.
In 1994, 20th Century Insurance was a company on the rise. It was a financially healthy company, reporting a total net of $734.8 million in the preceding 35 years of operation. They were exploring plans to expand their business by selling insurance in other states such as, Arizona, Nevada and Oregon. The company was also looking at the idea of possibly changing the company's name, in light of the newly approaching 21st Century. However, all its plans for growth were immediately put on hold due to the January 17, 1994, magnitude-6.7, Northridge Earthquake that cost the company over $1,065 billion.

The Northridge Earthquake was recently characterized as one of this nations' most costly disasters ever, as it has been 20th Century's most costly and devastating in terms of its finances, reputation and survival.

In the past five years since this catastrophic occurrence, 20th has encountered near financial ruin, class action lawsuits filed by homeowners, name smearing and accusations of illegal business dealings made to the press by their disgruntled claim's manager and a near take-over of the company by their financial savior Automobile Insurance Group (AIG).
They were taken over by AIG in 2005.

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Post by McCharley » Fri Aug 12, 2011 10:15 pm

I live in Seattle, where there has not been a really bad earthquake in modern times. But it is due for a big one according to science (and Indian oral history), so I carry earthquake insurance. Mine is like $500/yr. on a $300k total policy, with a big deductible. It is not easy to get EQ insurance here, and my house is old.

Use insurance to shield yourself from expenses which would ruin you. This sounds cheap to me.

BruDude
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Post by BruDude » Fri Aug 12, 2011 10:25 pm

McCharley wrote:Use insurance to shield yourself from expenses which would ruin you.
Agreed with this.

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DiscoBunny1979
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Post by DiscoBunny1979 » Fri Aug 12, 2011 10:36 pm

Avo wrote:policy is through GEICO, not the CA Earthquake Authority.
---
As I understand it, you buy a California Earthquake Policy Coverage through the agent you use for home owners insurance. The insurance agent at Geico, Famers, Allstate, whoever, buys the policy for the home owner through the CA Earthquake Authority. So, all policies are by the CA Earhtquake Authority - the pool of policies for earthquake risk in CA

And if $300 or $500 is the only cost to get Earthquake Coverage in California - it's deal. Sign up yesterday. It takes up to 30 days from acceptance to take affect in some locations. My estimated cost for coverage on my house is $1,300 a year. What would you rather pay?

Remember this is "insurance" against catastrophy. It's not insurance for the the little things in life . . . like those tremors that knock over your TV. It's for almost total destruction AND it works in conjunction with your home owners policy so that the adjustor determines which policy will cover what type of damage.

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PaddyMac
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Post by PaddyMac » Fri Aug 12, 2011 10:44 pm

$300 is peanuts if your house is red-tagged. When we were hit by the Northridge earthquake, the insurance agent was very symphathetic and basically gave us lots of credit for stupid stuff that was next to worthless, like plates and glasses. At that time deductibles were very reasonable, so by the time we were finished we got paid enough for the stuff we had to replace. The insurance company paid for the townhouse to be fixed (new carpets, paint, etc.) and paid for our rent in another townhome for a year, etc.

Those policies are long gone now of course, but even the state insurance would be valuable if you have $100K+ worth of damage. (Our neighbor did in Sherman Oaks - big house, and the whole front of it collapsed.)

We were more worried about landslides in the SO house, as it was on a hillside and the street above started moving one year (after 3 weeks of rain). And there is no insurance for that.

One of the reasons we left CA was that we were tired of worrying about the equity in the house (aka "our retirement money") and the danger of earthquakes and landslides.

sscritic
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Post by sscritic » Fri Aug 12, 2011 11:02 pm

DiscoBunny1979 wrote: As I understand it, you buy a California Earthquake Policy Coverage through the agent you use for home owners insurance. The insurance agent at Geico, Famers, Allstate, whoever, buys the policy for the home owner through the CA Earthquake Authority. So, all policies are by the CA Earhtquake Authority - the pool of policies for earthquake risk in CA
Not quite:
The law requires insurers that sell residential property insurance in California to offer earthquake coverage to their policyholders. Residential property insurance includes coverage for homeowners, condominium owners, mobilehome owners, and renters. In offering earthquake coverage, insurance companies can become a CEA participating insurance company and offer the CEA’s residential earthquake policies or they can manage the risk themselves. To date, companies that sell over two-thirds of the residential property insurance in the state have opted to become CEA participating companies.

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fundtalker123
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Post by fundtalker123 » Fri Aug 12, 2011 11:08 pm

Here's a question: we live right on the edge of a canyon, so an earthquake big enough to knock down our house would probably knock our whole lot down to the bottom of the canyon. How can the insurance pay to rebuild even if the lot doesn't even exist anymore to rebuild on. In that case would they pay out cash value?

madbrain
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Re: Earthquake Insurance $300/yr, worth it?

Post by madbrain » Sat Aug 13, 2011 12:27 am

fundtalker123 wrote:I have been offered earthquake insurance by my property insurer, USAA, although it is really provided by "California Earthquake Authority", which seems to be some kind of statewide insurer pool. Earthquake coverage is not part of regular homeowners insurance, but letter states "California law requires that earthquake be offered to you".

Anyway, the decision to pay for it or not puzzles me, this being for a "Black Swan" type event. Would you take it or not?

Parameters:
- $300 per year to cover ~$500k dwelling value in San Diego
- deductible is 15% of dwelling value, so won't start unless damage >$75k
- $5000 contents coverage (if full deductible paid)
- $1500 additional living expanses (if full deductible paid)
$300 is insanely cheap for the amount of coverage. At this price I would definitely sign up.

For comparison, here in San Jose, I got a California Earthquake Authority quote of $8845 per year, for $1.75 million dwelling coverage. 15% deductible also which is $262k .

The current properly market value is only about $850k, and my equity is under $200k. So the $262k deductible is greater than my equity.
Considerations:
- We have ~$700k in equity in the home
$700k equity but the dwelling replacement cost is only $500k ?
I guess that's another argument for getting it.
- If such a big Earthquake did happen it might kill us as well, so we couldn't collect
True, but your estate might still collect. If the $700k equity is a large part of your net worth, then it sounds like a good deal.
- Real estate agent said "Don't worry about earthquakes, your house will be taken down by a fire or mudslide long before it will by an earthquake"
I guess that may be true in San Diego. Here in the Bay area, I think it's only a matter of time before the "big one" hits. I'm jealous of the rate you are getting.

You may be lucky that there is so little history about earthquakes in San Diego, that may be what drives this very low premium.

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krantcents
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Post by krantcents » Sat Aug 13, 2011 11:33 am

I live in southern California and have earthquake coverage through my regular policy. I do not like the state program. I think it is generally too expensive for the coverage. I pay much less with significantly better coverage. Find a good agent who can look for regular insurance companies that will cover earthquake in the policy.
Last edited by krantcents on Sat Aug 13, 2011 11:16 pm, edited 1 time in total.

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DiscoBunny1979
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Post by DiscoBunny1979 » Sat Aug 13, 2011 11:47 am

sscritic wrote:
DiscoBunny1979 wrote: As I understand it, you buy a California Earthquake Policy Coverage through the agent you use for home owners insurance. The insurance agent at Geico, Famers, Allstate, whoever, buys the policy for the home owner through the CA Earthquake Authority. So, all policies are by the CA Earhtquake Authority - the pool of policies for earthquake risk in CA
Not quite:
The law requires insurers that sell residential property insurance in California to offer earthquake coverage to their policyholders. Residential property insurance includes coverage for homeowners, condominium owners, mobilehome owners, and renters. In offering earthquake coverage, insurance companies can become a CEA participating insurance company and offer the CEA’s residential earthquake policies or they can manage the risk themselves. To date, companies that sell over two-thirds of the residential property insurance in the state have opted to become CEA participating companies.
---------

So, I stand corrected, I should have written "a majority of policies in CA are underwritten by the CA Earthquake Authority" . . . But here's my big however, Why would you buy earthquake coverage from an independent company that might not be able to pay all claims because their pool of buyers of the insurance is not big enough? Therefore, I'd be cautious in terms of whether the insurance can actually pay off in terms of such catastrophy. WHY? Because you won't be the only claim. How many other folks in your area also have the same insurance? AND what kind of exclusions does the private insurance have that the CA Earthquake Authority doesn't? One should compare the tiny print in each policy - which I assume is hard to do until you pay the premium and get the "policy" in hand.

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Post by Alan S. » Sat Aug 13, 2011 6:12 pm

Whatever the primary insuror is, they surely carry layers of reinsurance with large international reinsurance companies such as General Re, Munich Re or others. The primary insuror probably carries a minor portion of the exposure for their own account.

Note that your decision should be based on not only historican seismic activity in the ares, but also several characteristics of your land and dwelling structure. You indicated you were on the edge of a canyon. That often suggests that you are sitting on unconsolidated soils, generally loosely compacted which substantially increases damage from earthquakes and landslide. Also, if you have a tile roof, the added weight of the tile is another negative factor. Another negative factor is differing construction materials such as a mixture of frame and masonry and use of any masonry veneers. 2 by 6 wall studs are much better than 2 by 4s. The more of these exposures you have the better buy the EQ coverage is. Check the amount of coverage for earth movement or landslide if any, and if the coverage includes replacement cost if you rebuild elsewhere. For fires, policies typically cover the cost of replacement on the same lot but allow you to build elsewhere subject to those limits in the event of a total loss.

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Post by fundtalker123 » Thu Aug 18, 2011 1:03 am

Alan S. wrote:Whatever the primary insuror is, they surely carry layers of reinsurance with large international reinsurance companies such as General Re, Munich Re or others. The primary insuror probably carries a minor portion of the exposure for their own account.

Note that your decision should be based on not only historican seismic activity in the ares, but also several characteristics of your land and dwelling structure. You indicated you were on the edge of a canyon. That often suggests that you are sitting on unconsolidated soils, generally loosely compacted which substantially increases damage from earthquakes and landslide. Also, if you have a tile roof, the added weight of the tile is another negative factor. Another negative factor is differing construction materials such as a mixture of frame and masonry and use of any masonry veneers. 2 by 6 wall studs are much better than 2 by 4s. The more of these exposures you have the better buy the EQ coverage is. Check the amount of coverage for earth movement or landslide if any, and if the coverage includes replacement cost if you rebuild elsewhere. For fires, policies typically cover the cost of replacement on the same lot but allow you to build elsewhere subject to those limits in the event of a total loss.
Thanks for the info

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celia
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Post by celia » Thu Aug 18, 2011 1:56 am

20th Century Insurance was only selling auto and homeowners/earthquake insurance in So Cal and Arizona at the time of the Northridge earthquake. Since they were not geographically diversified, a great percentage of their customers had to file claims. This is why they went under, from my understanding.

OP's house and land is worth at least $700K. If the house was completely ruined, the land would assumedly remain (provided it doesn't overlook a canyon or ocean). That is why the $500K rebuilding cost is less than owner's equity.

We carry earthquake insurance. Ours is about as expensive as the homeowner's insurance. I don't think it is true that you're more likely to have a fire than an earthquake. You can often do something to stop a fire coming your way, but you can't stop the earthquake. My only reservation in carrying it is that if damage was greater than 15% of the rebuilt value of the house, my neighbors' houses would also be destroyed. I don't think many of them carry the insurance so we probably wouldn't want to rebuild in the same neighborhood where others will be left with empty lots. We'd probably take the money and move.

You're not as likely to die in the earthquake as you might think. The building codes have been strengthened so we can survive "reasonable" earthquakes.

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Post by wlpotts » Thu Aug 18, 2011 2:45 am

I would suggest that you also request obtaining additional quotes that would take into consideration;

1. A lower deductable
2. A lesser amount of gross payout
3. An increase in the temporary relocation benefits Ie. Max $ for housing, term of benefit period, immediate access to funds for relocation expenses, etc.
4. Getting competing quotes from other insurers.
5. Consider preparing an evacuation plan that takes into consideration that the San Diego area may very well be without roads, railways, water, electric, communications, emergency response systems, hospitals, and that the area in general might end up being in a state of emergency.

Hope this helps!

Warren P.
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