Q: Why earthquake insurance?

Most homeowners, mobilehome, condo, and renters policies don’t cover earthquake damage.

 

There are 2,000 known faults crisscrossing California, and on average, according to the official California Multihazard Mitigation Plan:

• Moderate earthquakes (magnitude 5.5) hit California 3 to 4 times a year.
• A strong earthquake (magnitude 6 to 6.9) hits California every 2 to 3 years.
• A major earthquake (magnitude 7 to 7.9) hits California about every 10 years.

 

Q: Will I be able to rely on the government to bail me out after an earthquake?

Not always. Today, even if a resident qualifies for a disaster grant, it may not cover the cost to repair or rebuild. Disaster loans, if available, are limited and must be repaid—their intent is to help you get back into your home, not to offer enough funds for you to rebuild or fully replace your property. After the August 2014 South Napa Earthquake, federal assistance for individuals wasn’t offered for nearly two months after the quake hit.

 

 

Q: I own my condo. Are there coverage options for me?

Condo owners have unique needs. Condo association master earthquake policies usually don’t cover damage to your personal belongings or damage to the inside of your home. And while some associations may cover earthquake damage to a condo building’s exterior, many also require owners to pay a portion of the repair costs or the association’s policy deductible (known as a Loss Assessment).

 

Q: I rent, so will my landlord’s policy cover my belongings?

No. If you rent, you need a separate renters policy for your own personal belongings. Renters earthquake insurance insures personal property such as TVs and furniture with a flat $750 deductible, and covers additional living expenses up to $25,000 with no deductible. Beginning January 1, 2016, you’ll be able to choose from 5, 10, 15, 20 and 25 percent deductibles. And you will be able to choose additional living expense coverage of up to $100,000, still with no deductible.

 

Q: Do you offer any discounts if my home has been earthquake retrofitted?

Yes. CEA policyholders who have retrofitted their house to withstand earthquake damage will receive a 5 percent premium discount if their house meet the following requirements:​​​

• Built before 1979.
• Wood-frame construction-type.
• Built on a raised foundation.
• Frame is bolted to the foundation.
• Home has cripple walls, and they are braced with plywood or its equivalent.
• Water heater is secured to the building frame.
• Homes built on a concrete-slab or combination-type foundation do not qualify.

Beginning January 1, 2016, select retrofitted houses may qualify for up to a 20 percent Hazard Reduction Discount on their policy premium.

Q: How likely is it that your home will be damaged in an earthquake

• Consider your home’s distance to fault lines.
  How close is your property to a fault line or fault line system? Visit the United States Geological Survey’s interactive fault map which illustrates faults that were believed to be sources of earthquakes of magnitude 6 or greater and know that new faults continue to be discovered. Don’t forget the August 2014 Napa quake surprised both residents and earthquake research experts alike, since this major fault in a highly populated area was not previously known to exist.
• Consider your property’s construction features.
  Wood frame homes with crawlspaces, multi-level homes and older homes have a higher risk of suffering severe damage from a large magnitude earthquake. Typically, newer homes or homes that are retrofitted to withstand an earthquake will suffer less damage. However, even homes retrofitted to meet the most recent code requirements may suffer damage from a strong quake.

Q: Can you afford to repair or rebuild your home if it’s severely damaged?

Without insurance, you may face a heavy financial burden if your home is severely damaged in an earthquake since typical homeowners policies do not protect against this peril. In the process of waiting for any assistance, you may also need to find somewhere to live and some way to pay unexpected living expenses out of pocket.

Q: Can you afford to live somewhere else while your home is being repaired?

If a large-magnitude earthquake strikes your area, leaving your home uninhabitable, where will you go? Will you be able to afford a place to stay until you are back on your feet? At a time when lodging and housing prices will skyrocket if a large earthquake wipes out a populated area, this could prove to be very difficult.  Earthquake insurance policies can also provides coverage for Additional Living Expenses to help with increased housing expenses following a catastrophic event.

Q: Can you afford to lose all your equity in an instant?

If you live in an earthquake prone area, you are taking a huge risk of losing all of your equity if your home remains unprotected by earthquake insurance. Do you really want to gamble with your future? It takes just a few minutes to get a quote and purchase earthquake insurance policy online from the leading provider of stand alone residential earthquake insurance.

Q: Will the government “FEMA” help bail me out after an earthquake?

Many homeowners think the government will be there to cover the financial burden when their home is a total loss due to a catastrophe. While FEMA is designed to offer individuals emergency assistance after a large catastrophic event, they are not going to repay all the equity lost to homeowners who suffered major losses. If you are faced with this devastating situation, you may be lucky to receive financial assistance in the form of government loans to help get you back on your feet, but these loans only provide a maximum of $200k with a long delay in receiving funds, must be repaid, and may come with tax implications. You will still be without the equity you worked so long and hard to earn, and be forced to face the fact that you must start rebuilding your financial nest egg from scratch.

Q: My home is newer so it’s not at risk of being damaged, should I be worried?

All structures are at risk of experiencing severe structural damage during a major earthquake. A large magnitude earthquake 7.0 or greater is capable of causing billions of dollars in damage, regardless of how new your home is or how much retrofitting was in place. The more efforts you put into protecting your home from damage caused by the ground shaking, the higher the chances that your property will stand strong during small and medium sized shockers. However, there is never a guarantee that any structure will survive a large magnitude earthquake, no matter what year it was built.

In 2014 the U.S. Geological Survey issued an updated version of its National Seismic Hazard Maps. These maps provide an estimate of the location, frequency and intensity of future earthquakes in the United States.

According to the USGS, 42 states in the U.S. have a “reasonable chance” of experiencing damaging ground shaking within the next 50 years. Sixteen states have a relatively high risk of experiencing a damaging earthquake.

 

Excluded Peril

Earthquake is an excluded peril under virtually all commercial property policies. In many policies, earthquake is excluded in conjunction with earth movement. The exclusion typically precludes damage caused not only by an earthquake itself but also by any earth sinking, rising or shifting that is related to an earthquake.

Why don’t commercial property policies cover damage caused by earthquakes? The reasons have to do with predictability, the potential for large losses and the spread of risk. Large quakes occur infrequently, are impossible to predict and can cause catastrophic losses. Also, earthquake risks are not spread evenly among policyholders. The concentration of risks and the uncertainty about future losses make earthquake a difficult peril to insure profitably.

Still, some insurers do offer earthquake coverage. These insurers have protected themselves against large quake losses via reinsurance or other financial mechanisms.

Fire or Explosion Following an Earthquake

While damage to property covered by an earthquake itself is excluded under a typical property policy, most policies cover ensuing loss caused by a fire or explosion.

 

That is, they cover loss or damage caused by a fire or explosion that results from an earthquake. This coverage is usually provided as an exception to the earthquake exclusion.

Suppose you own a building that is insured under a commercial property policy. Your policy contains the typical “earth movement” exclusion.

Three months after your policy takes effect your area is rocked by an earthquake. The quake does not damage your building but it ruptures a gas pipe near your property. Leaking gas ignites, triggering a fire that consumes your building. Because the damage to your building was caused by the fire and not the earthquake itself, the damage should be covered by your property policy.

Earthquake Insurance

If you are interested in purchasing earthquake insurance, contact your insurance agent or broker. Earthquake coverage may be available via an endorsement to your existing property policy. If your property insurer does not offer an earthquake endorsement, you may be able to purchase a separate earthquake policy from a different insurer.

Your insurer may use either of two standard ISO earthquake endorsements, which include both volcanic eruption and earthquake as covered perils. Alternatively, your insurer may utilize its own earthquake endorsement or policy form.

What to Look For

Whether you buy earthquake coverage as an endorsement or a separate policy, review your coverage carefully. Here are some provisions to look for.

• What constitutes an event? Earthquake coverage typically specifies a time period (typically 168 hours) during which all quakes or volcanic eruptions are considered a single event. For instance, if an earthquake and four aftershocks occur within a seven-day period, all five will be considered a single earthquake. Your limit and deductible will apply to all damage caused by all quakes that take place within the 168 hour period.
• Policy Limit or Sublimit? If earthquake coverage is added to your property policy as an endorsement, it may be subject to a sublimit (reduced limit) rather than the limits that apply to other perils. Read the limits section to determine whether a sublimit applies.
• Deductible Earthquake coverage is subject to a deductible that applies on a percentage basis. Your deductible options may range from 2 to 25% depending on your location and the nature of your building. The deductible may be a percentage of either the limit or the value of the damaged property. A separate deductible usually applies to each earthquake (or eruption).
• Masonry Veneer Some policies exclude damage to exterior masonry veneer (except stucco) on wood frame walls unless the policy specifically states that veneer is covered. Veneer may be covered if it exists on a small portion of the exterior wall.
• Cost Premiums for earthquake coverage vary widely depending on a variety of factors. These include the location of your property and its proximity to active faults; the property’s age and type of construction; the number of stories; and seismic improvements you have made.

Risk Management

Whether or not you decide to buy earthquake insurance, you should evaluate your earthquake risks. Depending on the results of your assessment, you may need a risk mitigation plan. Numerous resources are available online to help you through this process. As a starting point, check out the “QuakeSmart Tool Kit” provided by FEMA and “Earthquake Hazards 101” from the USGS.

Earthquakes are devastating natural events. From the business insurance standpoint, earthquakes represent the worst kind of risk – the one that everyone “knows” is going to happen “someday.” Earthquakes cannot be prevented or stopped. Building codes can be updated to help protect buildings, but this has only helped in recent years. In the 1994 California Northridge earthquakes, insurers saw claims exceeding $12 Billion according to the California Department of Insurance.

Even in the face of such risk, only 12% of California homeowners purchase earthquake coverage.

Earthquakes are also regional events limited to known fault zones. These are high risk areas, but can go decades with no activity. Out of sight, out of mind – in 1996, 30% of California homeowners purchased earthquake insurance, one decade later, that number has fallen to 12% even though the risk is the same.

Because of the nature of the risk, insurers exclude and do not cover earthquake losses under standard residential or business insurance policies. This includes the standard business owners policy.

Because the losses of a new quake in populous California, the state has set up the California Earthquake Authority. Property and Casualty Insurers commit up to $1.3 billion for the fund. Californians pay more than half of all of the earthquake insurance premiums in the United States.

The Earthquake Endorsement
Earthquake coverage is purchased as an endorsement to the standard business owners policy. The endorsement covers damage caused by shaking during an earthquake including structural building damages and the damage to property.

 

The endorsement must be purchased from the business insurer although California businesses can go through the California Earthquake Authority for coverage.

As a Separate Policy
Earthquake insurance can be purchased as a separate policy. This makes sense for larger businesses seeking to save premiums overall on their business insurance coverage.

However, for smaller businesses it may prove difficult – in the event of a loss – to make claims with separate insurers for damage. For example, fire damage caused by a gas explosion is still a covered fire loss – not an earthquake loss – but, the small business owner may submit the claim to the separate earthquake insurer. It would be easier to submit the claim to one insurer and have the insurer allocate the loss to fire or earthquake.

Costs and Deductible
Earthquake insurance is purchased as a premium per $1,000 of valuation. Premiums vary from location with the Western United States having premiums ten times as high as those in the Eastern United States. The premiums also take into account age of the buildings and types of structure with wood frame buildings being cheaper than brick and stone. The Insurance Information Institute states (using residential figures) premiums run thirty to sixty cents per $1,000 in the East, while similar coverage runs three to fifteen dollars per $1,000 in the West.

Earthquake insurance carries a percentage deductible ranging from 10 – 15%. This means if the business suffers an earthquake loss of $1 million, the business would be responsible for the first $100 – 150 thousand.

Other Business Policies That Cover Earthquake Losses
Other common business insurance policies may cover earthquake losses without additional endorsement:

• Commercial Auto – Most standard commercial auto policies cover loss or damage from earthquakes. This can include damage from falling debris, fire, or other events.
• Workers’ Compensation – Injury to employees at work by earthquake effects is a covered loss under workers’ compensation insurance.
• Business Interruption – Some business interruption policies do not exclude earthquakes as covered events, but check with your insurance professional.

 

If you do business in an at risk area (especially California or the West), you may want to consider a separate earthquake policy or consider an endorsement adding such protection. This is one risk that you know will happen someday.

Question: Can I Use the Price Per Square Foot to Figure Home Values?

A reader asks, “I keep reading that the real estate prices per square foot are falling, but the asking prices for homes I’m looking at keep going up. This doesn’t make sense to me. If the price per square foot is dropping, then values should drop, too. Can I use the price per square foot to figure out values? I don’t want to pay more than I have to.”

Answer: It’s true that the price per-square-foot for a home could fall while the overall prices for homes can go up, because per-square-foot costs that you read about are based on one of two computations. To figure the price per-square-foot, take the sales price and divide it by the square footage.

Say you are looking at a 1,500-square-foot home that is listed for $150,000.

The price per-square-foot is $100. Maybe the home next door is 2,000 square feet, and it is listed at $185,000. The price per-square-foot of the larger home is $92.50. Which is a better buy? (Don’t worry, it’s a trick question.)

Smaller square-foot homes command higher per-square-foot costs. Larger square-foot homes command lower per-square-foot prices. To get a good feel for square-foot pricing, it helps to look at how square footage is calculated.

 

Median vs. Average Per-Square-Foot

You can arrive at the average-per-square-foot cost of a home by adding the square-foot cost of each home that has sold in any given area and dividing by the number of homes that sold.

For example, say three homes sold on Broadway for $200,000 each. Property A was 1,000 square feet, and Properties B and C two were $1,200 square feet. Two more homes sold a block away. Property D was $180,000 and 1,200 square feet, while Property E was $585,000 and 2,100 square feet.

Property A sold at $200 per square foot.

Property B sold at $167 per square foot.

Property C sold at $167 per square foot.

Property D sold at $150 per square foot.

Property E sold at $278 per square foot.

The average per-square-foot cost is $192.

The median price is the halfway point. It is the middle price point. It means half the homes sold above the median and half sold below the median. It is often used as a more accurate measure of value; although it’s better than a mean pricing, especially when there are extremes. However, it, too, is not a clear picture.

In the example for average per-square-foot costs above, the median price would be $167.

Per square-foot costs are used in construction. The square-foot cost to rebuild your home, if it’s older, is going to be higher, most likely, than the cost to buy. Those can be based on averages because 2x4s, Sheetrock and other construction materials cost the same per square foot.

It’s not wise to base the purchase price of a home you are going to buy on either median nor average per-square-foot costs. That’s because each home is unique.

Prices per-square-foot can vary based on location, condition, improvements and updates, including lot sizes, and whether it’s a one-story or multi-level home, among other factors.

The main reason prices per-square-foot is important is to show you trends. If you can compare the average price-per-square-foot for the past 12 months, you can determine whether values are rising or falling.

But much of that depends on the average size of home. As long as all homes are similar in square footage, the average price per-square-foot will show you a trend. But if some homes are larger than others, an average won’t help you at all.

The answer to whether it’s better to buy a smaller home at a higher per-square-foot or a larger home at a smaller per-square-foot cost depends on the the typical average square footage of homes in that area. Although many buyers want to buy a larger home, if that larger home is a white elephant, it’s not the best financial choice.

 

 

How Does the Price Per-Square-Foot Help to Determine Values?

In short, it really doesn’t. You can’t take the average price per-square-foot and multiply it times the square footage of the home you are thinking about buying. It doesn’t work that way. The pricing per-square-foot simply gives you average or median ranges.