How Much Is Earthquake Insurance? Do You Need It?

Talking about insurance isn’t exactly thrilling. We understand. But you know what’s even worse? A large stack of bills following an unexpected emergency, such as an earthquake!

Damage can range from a small crack in the wall to an unplanned home demolition, depending on the size of the quake. That means a strong earthquake could wipe out your savings. And, despite the fact that earthquakes can be as destructive as tornadoes or fires, they are not covered by standard homeowners insurance.

Think again if you think you can avoid earthquake insurance because you don’t live in California. The National Earthquake Information Center detects approximately 50 earthquakes per day, with an annual total of 20,000.  Yikes!

So, should you go out and buy earthquake insurance right now? No way, not yet. In this article, we’ll discuss how much earthquake insurance costs, what it covers, and whether it’s worth it for you.

• What Is Earthquake Insurance?
• What Does Earthquake Insurance Cover?
• What Factors Affect Earthquake Insurance Costs?
• Earthquake Insurance Rates in California by City
• Earthquake Insurance and Deductibles
• Is Earthquake Insurance Worth It?
• How Much Earthquake Insurance Should I Buy?
• How to Save on Earthquake Insurance

What Is Earthquake Insurance?

If your home or personal property is damaged in an earthquake, earthquake insurance will reimburse you for repair and/or replacement costs. It will also cover the costs of temporary living arrangements if your home is destroyed. After all, isn’t the loss of a home bad enough without having to stay with relatives in the interim? While you wait for renovations, a hotel sounds much more appealing.

With the right coverage, you can protect both your home and your budget!

Don’t worry if you need more information—we’ve put together a comprehensive guide to earthquake insurance.

If an earthquake damages your home, your insurance policy will cover the following:

• Dwelling coverage includes repairs to your home and any attached structures, such as a garage or a pool.
• Personal property insurance provides reimbursement for your belongings, such as clothing and furniture.
• Loss of use coverage: additional living expenses, such as hotel bills and dining costs, that you may incur if your home becomes unlivable.
• There is a set amount that earthquake insurance will pay for, so while it will help put a roof over your head, it will most likely not be enough to restore your entire home and belongings to their former glory.

It’s important to note that earthquake insurance does not cover other natural disasters caused by earthquakes, such as flooding or sinkholes. Even if the disaster was caused by an earthquake, you’d probably need to purchase a separate policy for it.

However, if the earthquake causes a fire, your homeowners insurance will cover it. And any damage to your vehicle would most likely be covered by your auto insurance.

What is the cost of earthquake insurance? It all depends.

The exact cost will be determined by your coverage limits, deductibles, and a variety of other factors, including:

• Your postal code. Your insurance rates will be higher if you live in an area prone to severe earthquake damage. (Duh!)
• Your house’s age. Because newer homes are built with better materials and can be designed to withstand earthquakes, they typically cost less to insure than older homes.
  The total number of stories. Taller homes are more likely to collapse during an earthquake, so they are typically more expensive to insure. (Imagine the premiums for the Leaning Tower of Pisa.)
• The cost of rebuilding. If your home is expensive and would be expensive to rebuild, your earthquake insurance rates will almost certainly be expensive as well.

 

• The type of soil. Soft, sandy soil is more likely than clay or rock to amplify earthquake waves. So, if your house is built on soft soil, it will likely sustain more damage during an earthquake.
  Materials for the foundation. Raised foundations are more adaptable to earth changes, which is critical during an earthquake. This is referred to as elasticity.
• The materials used in the construction of your home. Because wood is more elastic than other building materials, homes with wood frames typically cost less to insure.

You can probably tell from these examples that earthquake insurance rates (and, for that matter, all insurance rates) are primarily determined by risk.

If the insurance company believes the risk of insuring your home is high, your monthly premium will be high as well. And what if the risk is minimal? You guessed it—your premium will be modest.

We are unable to provide specific figures for the cost of earthquake insurance. However, we recommend that you contact one of our Endorsed Local Providers (ELPs), who will be able to provide you with exact figures and clearly explain the factors that determine your rate. (These people are math nerds!)

We’ll be blunt: if you live in an earthquake-prone area, such as California, earthquake insurance will most likely be prohibitively expensive. The greater the risk of earthquakes in your area, the more you’ll have to pay out of pocket.

California has the most damaging earthquakes of any state.

In fact, earthquake damage is so common in California that the state has its own rules and marketplace for earthquake insurance.

First, the ground rules. Insurance companies that provide homeowners insurance to California residents must also provide an earthquake insurance add-on in writing. Policyholders have 30 days from the date of the offer to accept it. If they do not, the offer is deemed to be rejected.

Now, let’s talk about that marketplace, which is known as the California Earthquake Authority (CEA). With over 1 million policyholders, the CEA is the largest provider of residential earthquake insurance in the United States.

Consider it California’s financial shock absorber. Furthermore, policyholders must purchase their CEA insurance policy from the same insurance company that provides their homeowners insurance.

Back to the California earthquakes. A magnitude 6.7 earthquake in the Los Angeles area is 60% likely in the next 30 years. And the likelihood of a magnitude 6.7 earthquake in the San Francisco Bay area within the next 30 years is 72%!

Other parts of California aren’t as vulnerable (or as densely populated) as Los Angeles and the San Francisco Bay Area, but they’re still more vulnerable than the rest of the country. If you live in California and are interested in earthquake activity in your area, the CEA has a useful tool that allows you to view earthquake risk and fault activity in your county.

So, if you live in California, you should at the very least investigate your earthquake insurance options.

Take special note of earthquake insurance deductibles. Earthquake insurance deductibles are typically higher than those in standard homeowners or renters insurance policies, regardless of where you live in the United States. Your deductible will be even higher if you live in a city near an active fault.

Earthquake insurance deductibles are not only higher, but they are calculated differently than most insurance policy deductibles. Rather than allowing you to select your own deductible amount, earthquake insurance deductibles are calculated as a percentage of your policy limits.

Assume your earthquake insurance policy provides $300,000 in dwelling coverage (with a 10% deductible) and $100,000 in personal property coverage (with a 2% deductible).

The table below, based on the same figures, shows sample damage amounts, how much you would pay out of pocket, and how much your insurer would pay.
Dwelling protection

Personal property insurance

	Dwelling coverage	Personal property coverage	Total
Coverage limits	$300,000	$100,000	–
Deductible	10%	2%	–
Damages	$100,000	$80,000	$180,000
Amount you’re responsible for	$30,000	$2,000	$32,000
Amount insurer is responsible for	$70,000	$78,000	$148,000

 

There’s more to it. Earthquake insurance companies typically require you to pay separate deductibles for your dwelling and personal property coverage. So, in the preceding example, you’d end up paying a $32,000 deductible out of your own pocket—$30,000 for your home plus $2,000 for your belongings.

The answer comes down to three questions:

1. How likely is it that an earthquake will happen in your area?

Although no one can predict the future, there are some smart ways to estimate the likelihood of a damaging earthquake in your area.

We discovered two useful tools. The first is a fault map provided by the United States Geological Survey. It depicts seismic activity in each of the United States’ regions.

The second method for estimating the likelihood of a major earthquake in your area is to consult one of FEMA’s hazard maps. The maps depict the likelihood and magnitude of an earthquake in your area.

2. How likely is it that an earthquake would cause damage to your home?

There is no hard and fast rule for determining which earthquake magnitude is most likely to cause damage to your home. However, the general rule of thumb is that damage usually does not occur until the magnitude exceeds a 4 or a 5.

Instead of relying on wild guesses, the best way to assess the likelihood of earthquake damage to your home is to consider the same factors that insurance companies use to calculate your premium.

3. Would you be able to afford to repair or replace your home after an earthquake without the help of insurance?

This is the most important question. We obviously do not want you to lose your home. But, in the event of a devastating earthquake, we don’t want you to lose your savings.

Consider how much it would cost to repair or rebuild your home without insurance, and how you would pay for it. Even if your home is destroyed by an earthquake, you must continue making mortgage payments if you haven’t already paid it off.

We wrote a separate blog post here to provide more information so you can answer the question, “Do I need earthquake insurance?”

Purchase enough earthquake insurance to cover the cost of rebuilding your home and replacing your possessions. But, as with any rule, there are exceptions. In general, the best financial strategy is to safeguard your assets in the event of an emergency.

Keep in mind that we’re discussing construction and repurchasing costs. That means you must calculate the amount of money required to rebuild your home and repurchase your belongings.

Finding the average rebuilding cost per square foot for your area and multiplying that number by your home’s overall square footage is the best way to determine the true construction cost of rebuilding your home. For example, if the average cost of rebuilding in your area is $100 per square foot and your home is 2000 square feet, the cost to rebuild your home would be $200,000.

You can either ask your insurance agent or hire an appraiser to estimate the cost of replacing your personal belongings. In either case, they will be able to provide you with accurate estimates.

How to Reduce the Cost of Earthquake Insurance

If you’ve decided to purchase earthquake insurance but are concerned about the cost, don’t worry—there are some smart ways to reduce your premium.

Retrofitting

By the way, this has nothing to do with vintage décor. Most earthquake insurance companies will give you a discount if you retrofit your home. Insurance companies will usually offer discounts if you spend the time and money necessary to strengthen your home to withstand an earthquake.