Is Earthquake Insurance Worth the Expense?
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Dear Phyllis,
Because earthquake insurance is so costly, my wife and I have always opted to not purchase the additional coverage. But after recent quakes, I am wondering whether this is a wise decision. Is earthquake insurance worth the expense? Penny Pincher
Dear Penny Pincher,
Recent studies indicate that less than 20% of California homeowners have earthquake insurance. Homeowners without a mortgage, or who have substantial equity, have a lot to lose if “the big one” hits. For them, purchasing earthquake insurance is the only rational option.
The case for earthquake insurance is much less clear for homeowners with large mortgages. Those with little equity share the exposure (risk) with their lender, and in many cases, when uninsured, these homeowners just walk away in the event of a disaster.
So should you or shouldn’t you purchase earthquake insurance? Let’s look at the numbers to help you decide.
Assume you insure your home for $1,000,000 and carry a $700,000 mortgage. If you have a 10% deductible, you pay the first $100,000 out of pocket (deductibles typically range from 10% to 15%). If your home suffers $100,000 in damage, your insurance pays nothing because the loss falls within your deductible.
If your home sustains $800,000 in damage, the policy still excludes the first $100,000. The lender must also approve any insurance payout. You do not receive a check directly. In this case, the insurance company pays enough to satisfy the mortgage and, ideally, provide funds to rebuild.
Is earthquake insurance worth the expense?
The cost of earthquake insurance depends on numerous factors, such as location, number of stories, age of the home, cost to rebuild, and the amount of coverage you have for personal property. One caveat when shopping for earthquake insurance is to be sure the cost to rebuild makes sense. My insurance company believes I can rebuild my home for $150 a square foot, and that’s laughable. The cost to rebuild a modest home is likely around $350 per square foot. If you do opt for earthquake insurance, make sure your coverage is adequate (and this applies to your homeowner’s policy as well).
