An earthquake can be a devastating natural disaster that can damage or destroy a home and its foundation. Although these natural disasters are primarily associated with California, they can and do occur throughout the country. Despite their destructive powers, these events are not covered by many standard homeowners insurance policies. Understanding your risk will help you decide whether this is something worth purchasing to protect your home or business.
Not Standard Coverage
Although earthquakes are relatively rare compared to other natural disasters, they tend to cause very expensive damage. Even a minor earthquake can crack or shift a building's foundation, and foundation damage is always tricky and expensive to repair. Even if the foundation damage appears minor, small shifts in a home's foundation can cause problems down the line, including cracks in the wall, leaky roofs and doors that don't close properly.
More severe foundation damage can ruin the structural integrity of a home or even lead to its collapse. Foundation damage usually costs several thousands to repair, and that figure does not include any of the other problems a tremor might cause, like water damage from a broken pipe or repairing a caved-in ceiling.
Simply put, damage from a tremor is too expensive to include for free in a standard homeowners policy. This is why most insurance companies require customers to buy a separate rider. Paying extra for this coverage helps to offset the cost of a potential claim. In California, where risks are highest, this insurance can be purchased through the California Earthquake Authority. This insurance is optional, but it might be a good investment for people living in high-risk locations.
High Risk Areas
Although nowhere in the United States is technically completely safe from potential earthquakes, some areas are much higher risk than others. This risk is directly tied to the geography of the area where you live. States situated along fault lines, or the junction of two tectonic plates, are more likely to be affected.
In general, the greatest risk areas sit along the coast of California, the southern coast of Alaska, and Hawaii. However, several isolated spots throughout the country also have very high levels of risk, including an area called the Madrid Seismic Zone, a region that straddles the junction of:
This map from the United States Geological Survey shows which areas of the country have the highest and lowest risk.
This insurance will cover any damage to your structure arising directly from an earthquake, such as a cracked foundation or caved-in ceiling. It will also generally cover your personal belongings, such as a TV that breaks after falling over. However, floods caused by an ensuing tidal wave or tsunami would generally be covered under flood insurance rather than your earthquake policy; although the events may have occurred together, you would need to file two claims.
Structures outside the home, such as in-ground pools, may not be covered by all earthquake policies. You'll need to check with your insurance company to confirm exactly what structures are protected and whether additional coverage can be purchased for these structures.
Making the Decision
When deciding whether you need this insurance, you'll need to weigh the benefits and drawbacks of purchasing a policy. The cost of repairs and the likelihood of an earthquake need to be balanced against the cost of coverage.
The exact costs of these policies will vary depending on the value of your home, where you live, the company you obtain coverage from and other similar factors. However, these policies tend to be fairly expensive, with some costing nearly as much as a standard homeowners policy. If you're adding an earthquake rider to an existing policy, the cost will generally be lower, but this option is not available in all areas. Additionally, earthquake insurance tends to have a high deductible, often between 10 and 20% of the home's value.
The high cost of this insurance is due in part to its relative unpopularity. Since only a fraction of all homeowners choose to carry these policies, the risk pool is small and insurance companies must charge higher premiums to offset the cost of claims. As more people begin to buy this coverage for their homes, the cost will likely go down.
If you do not own your home, you don't need to worry about insuring the structure. Your landlord will provide coverage for the building. However, your personal belongings must be insured through a renter's policy. If you already have renter's insurance, check with your insurer to determine whether damage to your belongings might be covered.
In most cases, renter's insurance won't cover earthquake-damaged items. In that case, you'll need to carefully consider whether your belongings are worth the cost of extra insurance. Unless you own very expensive personal property, it may be cheaper to replace a few damaged items than to carry full earthquake coverage.
Coverage for Businesses
For small business owners, the costs of this type of insurance can be exorbitant. Commercial policies can be several times as expensive as personal policies, and the cost may be outside of the budget for many companies. Businesses that lease their space generally will not benefit from earthquake coverage. However, if the business owns substantial equity in the property, it may still be a wise choice to make the investment.
Worth the Expense?
Although this insurance can be expensive, repairing or replacing a home devastated by a quake will cost much more. It's up to you to find a balance between the cost of coverage and the risk of losing your home when deciding whether you need a policy.
Discussing your options with your current insurer may help you get a clearer picture of exactly what it would cost to add this policy and whether the risk is great enough to make the investment worthwhile.