is the earthquake insurance worth the investment?

12 Replies | Orange County, California

is the earthquake insurance worth the investment? a lot of pros tell me because of high deductibles there is no point to buy the earthquake insurance at all. what is your opinion?

Earthquake insurance was worth it to me when I lived in California (up until three years ago). My deductible was 15% (which equated to many tens of thousands of dollars) and my annual premium cost several hundred dollars.

My next door neighbor there (San Jose), on the other hand, didn't think earthquake insurance was worth it. His view was that when the Big One hit, the SBA loan program would bail him out. Also, only a small percentage of Californians are participating in the California Earthquake Authority program (since private insurance companies bailed after losing big money in the 1994 Northridge quake). Insufficient participation in an insurance program suggests statistically there might not be enough money in the pool to cover the insured losses.  Perhaps my former neighbor is right.

@Dong Yan

I do not have Earthquake insurance either.  The most obvious drawback is that it is quite expensive.  Secondly, once the claim is made, insurance companies fight back as hard as they can to avoid payment.  I'll share a brief story that is relevant to your question.  There have definitely been multiple cases where adjacent buildings suffered damage during a natural disaster, but the insurance company refused to pay a dime and was not held liable in court.  Consider two adjacent buildings, A and B.  Building A has earthquake insurance while building B does not.  Both buildings are damaged during an earthquake. Part of building B falls and comes into contact with building A as clearly observed in the aftermath.  The owner of building A files a claim with his insurance company citing damage done due to earthquake.  The claim is overturned by the company.  The insurance company refuses to pay.  The owner of building A takes the insurance company to court stating the company is liable to cover the losses to building A.  The insurance company states that the damage done to building A was not caused by the earthquake, but rather, was caused by part of building B falling into building A.  The insurance company's defense states that since building B is not covered by earthquake insurance, the liability rests either on the owner of building B, or the contractor who built building B.  The court rules in favor of the insurance company since it could not be proven that building B did not cause the damage to building A. This is actually a true story and is testament to the nature of how insurance companies operate.  

So, if considering earthquake insurance (or flood insurance, or the like), it should only be considered if the surrounding units and/or buildings have the same type of insurance relative to that natural disaster. 

I've had it for my house but for my town home the numbers didn't make sense.  If you don't get insurance, then make sure you are disciplined enough to build up reserves every single year.  An earthquake will happen at some point and there will probably be some kind of bail out but that could take some time to get money and it won't cover all of your losses most likely.  

Thanks Chris! I had the earthquake insurance for years however everyone surround me doesn't have one and they said the same thing if there is huge earthquake then the insurance company will not able to afford to pay all the losses which make the perfect sense. however if it is minor damage we will have to pay it out of our pocket anyway due to the deductibles therefore I may not renew this year.



Originally posted by Account Closed:

@Dong Yan

I do not have Earthquake insurance either.  The most obvious drawback is that it is quite expensive.  Secondly, once the claim is made, insurance companies fight back as hard as they can to avoid payment.  I'll share a brief story that is relevant to your question.  There have definitely been multiple cases where adjacent buildings suffered damage during a natural disaster, but the insurance company refused to pay a dime and was not held liable in court.  Consider two adjacent buildings, A and B.  Building A has earthquake insurance while building B does not.  Both buildings are damaged during an earthquake. Part of building B falls and comes into contact with building A as clearly observed in the aftermath.  The owner of building A files a claim with his insurance company citing damage done due to earthquake.  The claim is overturned by the company.  The insurance company refuses to pay.  The owner of building A takes the insurance company to court stating the company is liable to cover the losses to building A.  The insurance company states that the damage done to building A was not caused by the earthquake, but rather, was caused by part of building B falling into building A.  The insurance company's defense states that since building B is not covered by earthquake insurance, the liability rests either on the owner of building B, or the contractor who built building B.  The court rules in favor of the insurance company since it could not be proven that building B did not cause the damage to building A. This is actually a true story and is testament to the nature of how insurance companies operate.  

So, if considering earthquake insurance (or flood insurance, or the like), it should only be considered if the surrounding units and/or buildings have the same type of insurance relative to that natural disaster. 

For most people that I talk to getting earthquake insurance comes down to 2 things: balancing cost/budget vs peace of mind.   You have to know YOUR reason for wanting earthquake.

I sell earthquake insurance at AAA here's what I have seen:

- the closer you are to the fault line (Los Angeles/Northridge area, Palm Desert), the less likely people buy earthquake insurance because the cost is prohibitive unless they have large amount of equity in the house... or unless they are close or in retirement age

- the further South you live: San Diego, Mission Viejo, San Juan Capistrano, the cheaper the earthquake CEA policy is.  As such, most people who call in in those areas buy earthquake for the simple peace of mind.  You can get a GREAT low deductible policy for $200-500/yr, whereas for the same policy in Los Angeles, it may cost closer to $900-1400/yr.

- I live in Santa Ana, my CEA policy covers me for around $440k in dwelling with 10% deductible, it's about $700+/yr.  It's a cost I'm willing to pay for peace of mind because I do have some equity in the house.  You may feel differently based on your personal financial situation

- I would suggest you call your insurance guy and get a quote for earthquake.... or just go on earthquakeauthority.com and quote yourself.  Based on the cost, ask yourself:  what do I want this policy to do for me?

- One of the BIGGEST reason why I got earthquake for myself is for the loss of use coverage (living expense), more so than the rebuilding of the house.  Even if the government helps you rebuild the house with assistance program, do you have enough savings (or cashflow from other business ventures/rental properties) to cover you and pay for LIVING expenses AND your mortgage while you wait for them to rebuild the house.  If you don't, that's when insurance can help. 

@Dong Yan   I totally agree with @Khiem Nguyen-Trong and will only add two things.

1.  If you have a large loan on the property you probably don't need it.  You can always just walk away.

2.  However, if you have paid off your home, it's really nice to have piece of mind.

Good investing...

We've got it for both our condo in RSM and our rental home in O'side.  Both have mortgages, and the insurance was just a few hundreds each.  We did it for peace of mind.

We never buy in CA before knowing where the faultlines are and the intensity of the shake zone.  We've purposely stayed out of some areas (like LA County) because we didn't want to deal with it.  Obviously, we're more concerned about the chance of a fire than we are of a damaging quake.

January 17, 1994 was the rudest awakening ever for us.

There were a lot of badly damaged and destroyed buildings. We have EQ insurance, and we also retro fitted the house foundation with a bunch of Simpson Stong Ties and hardware, better attaching the house to the foundation perimeter.

Hello,

As a workaround, I bought an umbrella insurance policy that covers 5 million (~$1200/year) which covers all 4 of my properties plus 2 of my cars.  I ASSUME this umbrella insurance policy covers for earthquake, but I should verify.