Friday, April 18, 2014

Earthquake & Flood Insurance are not included in Your Homeowners Insurance – Part 1

In the past two months the west coast of the United States was rattled with several small earthquakes. This reminded me to share with my clients and friends that earthquake insurance and flood insurance is not included in your homeowners insurance policy.

Earthquake insurance can be purchased through private insurance markets either individually or through the same insurance carrier that provides your homeowners insurance. Specifically on the west coast some large insurance companies have gotten out of earthquake insurance all together in the last decade. However, as an insurance agent I find the coverage readily available in the marketplace. In California there is an organization that helps place the consumer with affordable earthquake insurance called the California Earthquake Authority (CEA). The insurance companies that participate in the CEA provide earthquake insurance in partnership with the CEA generally at a reduced premium  compared to coverage offered by carriers that do not participate.

The deductibles are much higher than your homeowner’s insurance policy. This was a result of changes in the industry to keep earthquake private, available to the consumer and relatively affordable. So the deductibles can range from 5% / 10% / 15% / 20% / 25% depending on the carrier. So, if you chose a 10% deductible and the replacement cost value of your home is $354,000 you would be responsible for the first $35,400 before insurance would step in and pay up to the replacement cost value of your home. That may seem like a lot of money for a deductible but if you keep in mind the potential loss to your home it is easier to finance $35,400 than it is $354,000. The lower the deductible the higher the insurance premium and consequently the higher the deductible the lower the insurance premium.

The decision to buy earthquake insurance is a calculated risk. For some it is just not an option because they cannot afford to. For those who can afford the coverage but do not buy it is a strategic decision based on how much equity you have in your home, the likely hood that an earthquake will damage your home and whether you have the resources to make the repairs.

There is a myth that in the event of a disaster the government will step in and pay for you to rebuild. You should not base the value of your investment in your home on the assumption that the government will pay. Using the last four natural disasters as an example the government will help provide you with temporary living arrangements feed and clothe you and provide a low interest loan so you can rebuild.

What is most important regarding earthquake insurance is to have a conversation. Now that you know that your homeowners insurance will not provide coverage for earthquake you can decide whether to buy earthquake insurance or not and if you do buy what deductible to choose. Talk to your insurance agent for examples of coverage and shop the insurance markets for the best premium.

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