California Earthquakes

Recent earthquakes in Haiti, Chile, Mexico, New Zealand, and the magnitude 9.0 Tohoku Earthquake that struck Japan in 2011 which was followed by a tragic mega tsunami are reminders that earthquakes can happen any time in California where earthquake preparedness is essential, according to California Earthquake Authority (CEA), a privately-funded, publicly-managed organization. CEA sees Christchurch as a community better prepared for the two large earthquakes that recently rocked New Zealand, where almost everyone in that country has earthquake insurance on their home, and Christchurch will recover despite thousands of houses being destroyed in recent months. On the other hand in California which houses two-thirds of the nation’s earthquake risk, most residents are living within 30 miles of major fault lines. However, just 12 percent of homes have earthquake insurance. CEA also added that it is very hard to imagine how a community would recover from future inevitable earthquakes, when nearly all the damaged homes are completely uninsured for the loss. Without earthquake insurance, a California homeowner is out-of-pocket the full cost of fixing the home, and will continue making mortgage payments while also paying the cost of living elsewhere while the home is being repaired. In fact, earthquake prediction by the US Geological Survey (USGS) documents that California has a 99.7% probability of having an earthquake magnitude of 6.7 or larger during the next 30 years. The southern segment of San Andreas Fault has the highest probability of generating such an earthquake in Southern California with a 67% chance of striking Los Angeles Area, while Hayward Fault is the most likely earthquake source in Northern California with a 63% chance of striking San Francisco Bay Area. This article explains in more details why California earthquake insurance is an essential component of earthquake preparedness that would ease the burden and give Californians the strength to rebuild and return back quickly to their normal lifestyle.

Disaster Relief

Many people wrongly believe that the US government will take care of all their financial needs if their home and/or home contents suffer losses from earthquake damage which is not true. In fact, the federal disaster assistance is only available after the US President signs a major disaster declaration. Once issued, the Federal Emergency Management Agency (FEMA) activates a disaster relief program named “Assistance for Individuals and Households Program”, which is designed to help Americans get partly back on their feet but not to replace everything they lose. The primary form of this federal disaster relief is low-interest loans to eligible individuals, homeowners, and businesses available through the Small Business Administration (SBA). SBA loans have a maximum of $40,000 for damaged personal possessions and $200,000 to repair or replace a damaged primary home while a second home is not eligible.

For individuals and households who do not qualify for SBA loans, FEMA disaster grants would be available for emergency home repairs and temporary rental assistance including: 1) Home repair cash of $26,200 maximum and $15,000 average which may not be enough to rebuild or repair a damaged home, 2) Housing assistance reimbursement for short-term lodging expenses at a hotel/motel, 3) Rental assistance cash for a temporary rental unit for a maximum of 18 months, and 4) Mobile homes to be provided by FEMA in case of no other housing available.

On the other hand, the American Red Cross will offer immediate emergency assistance with housing needs and shelter operations even before the presidential declaration of a federal disaster. Emergency assistance include: opening and operating emergency shelters providing blood, first aid supplies, survival food, emergency drinking water, baby supplies, blankets, as well as basic health needs including mental health. It also helps with limited financial assistance for disaster recovery.

California Home Insurance

Mortgage lenders require homeowners including condominium owners to maintain home insurance to secure their investments. However, homeowners insurance and condo insurance do not cover earthquake damage to the structure of the home, its contents, and personal possessions. In California, all insurance companies that sell home insurance are required by law to offer earthquake insurance to homeowners when the policy is first sold and then every two years thereafter. Homeowners can decide to purchase it, purchase a policy from another insurance company, or decline it altogether. In case of declining earthquake insurance, all of the property damage caused by an earthquake will end up being handled and paid for by the homeowner. In addition, the homeowner is still responsible for any existing personal debt such as mortgage, auto loans, and credit card payments even if the home is completely destroyed. On the other hand, renters insurance is usually not a requirement for tenants who may not be aware of the benefits of earthquake insurance in protecting their investments in personal belongings inside their apartments. However, renters can also purchase an earthquake insurance policy to cover losses to their personal possessions.

Do You Really Need Earthquake Insurance?

If you own your home, it is probably your biggest financial asset. You have worked hard to secure your piece of the American Dream to become a homeowner or a condominium owner. In seconds, your dream can become a nightmare when an earthquake strikes and causes damages to your home and its contents. Your assets and investments made in personal possessions may be at risk even if you seismic retrofit the structure and/or performed a risk mitigation of home contents, because it is likely that you will still have some level of nonstructural and/or structural damage. How do you plan to protect these assets and investments from the costs of destructive earthquakes? Earthquake insurance is an effective option for managing these potential costs. The answers to the following questions may help you decide if earthquake insurance is right for you:

1. Is your home within 30 miles from an active fault line? If yes, then your home is at risk and earthquake damage would probably occur.
2. How much would it cost to repair/rebuild your home?
3. Can you afford mortgage payments while also paying to repair/rebuild your home?
4. Can you afford losing your home equity?
5. How much would it cost to replace your household expensive personal possessions if destroyed?
6. How much would temporary accommodations cost if you cannot live in your home after an earthquake?

The USGS earthquake map shows the peak ground acceleration (PGA) with 2% probability of exceedance in 50 years as a ratio of the acceleration due to gravity (g) at the elevation of the base rock, which will probably be amplified to the ground surface during an earthquake. Earthquake insurance would be beneficial at seismic zones exceeding 0.35g.

Earthquake Insurance California

Earthquake insurance policies feature a high deductible, which makes this type of insurance very useful if the entire home is destroyed or has moderate-to-severe earthquake damage, but would not be useful if the home is merely damaged. Earthquake insurance coverage is available either in the form of an endorsement or as a separate policy. Coverage for other kinds of damage that may result from earthquakes, such as fire and water damage due to burst gas and water pipes, is provided by standard homeowners insurance. Vehicles are covered against earthquake damage only under the comprehensive part of the auto insurance policy. Homeowners, mobile home owners, condominium owners, and renters can get coverage from the participating earthquake insurance companies that are members of CEA. Only 12% of California residents currently have earthquake coverage, down from 33% in 1996, when the devastating Northridge Earthquake was still fresh in people’s minds. To encourage more Californians to buy earthquake insurance, CEA approved an average 22% rate cut, which went into effect on 07/01/2006, due to the sharp drop in the cost of reinsurance and several years without a major earthquake, allowing to buildup reserves. The standard earthquake insurance policy from CEA is designed to provide basic protection (or enhanced protection of the homeowner choice) against earthquake damage, which covers the home structure, home contents, and personal possessions but subject to a 15% standard deductible with the exclusion of some items listed below. Keep in mind that earthquake insurance does not cover tsunamis as a result of earthquakes. More details on this issue can be found at the end of this article.

Earthquake Insurance Premiums

Insurance premiums in California vary widely based on factors listed below. Average insurance rates of CEA basic policy range $3.91-$5.25 per $1,000 of coverage. Higher rates are associated with:

• Proximity of the home with respect to active fault lines because buildings within 30 miles (if not retrofitted) would probably experience earthquake damage and even collapse from moderate-to-strong ground shaking.
• The home is located in an area prone to soil liquefaction or landslides as the likelihood of earthquake damage would be higher in such area.
• Predominantly poor soil conditions beneath the concrete foundations of the building because the ground shaking will most likely be amplified.
• Year built where older homes cost more to insure than newer ones because houses built before the 1980’s (if not retrofitted) lack earthquake-resisting system in their structural design and are not constructed per the seismic recommendations of current building codes.
• Number of stories where multi-story houses are more vulnerable to earthquake ground shaking and structural damage than single-story houses.
• Unreinforced masonry construction and nonductile reinforced concrete construction both have higher rates among all other construction materials (especially timber frame houses), because of their well-known poor structural performance during earthquakes.
• The insured value of the home and the optional coverage selected by the homeowner.

Basic Coverage

• Up to the insured value of the home as stated on the homeowners insurance policy.
• $5,000 in personal possessions coverage.
• $1,500 for additional living expenses due to “loss of use” if the home is uninhabitable while being repaired.
• Emergency repairs up to 5% of the insured value of the home.
• Up to $10,000 to replace, stabilize, or restore the soil that supports the home foundations including engineering costs.

Optional Coverage

• 10% deductible on home and home contents instead of 15% standard deductible.
• Up to $100,000 in home contents coverage.
• Up to $15,000 for “loss of use”.
• Insurance for other structures.
• Up to $25,000 for personal possessions coverage.
• Additional $10,000 in building code upgrade.
• Up to 5% of the insured value of the home for debris-removal costs.

Exclusions

• Detached garages, motor vehicles, boats, and trailers.
• Swimming pools, fences, patios, decks, walkways, and driveways.
• Exterior masonry veneer except stucco.
• Landscaping and irrigation systems.
• Antennas and satellite dishes.
• Mirrors, chandeliers, stained glass, or mosaics.
• Certain personal property including glassware, crystal, porcelain, and artwork.

Limitations

• $5,000 to repair or replace all chimneys.
• $250 for money, bank notes, coins, and medals.
• $300 for business property.
• $1,000 for damage to computers and printers.

Tsunamis

Standard homeowners insurance view tsunamis as an act of God most often generated by earthquake-induced movement of the ocean floor, and therefore exclude them from insurance coverage. All tsunamis are potentially dangerous where the United States’ coastlines are vulnerable, but tsunamis are infrequent and a mega tsunami as the one that followed the 2011 Japan Earthquake is very rare. Areas at greatest risk in the West Coast are those less than 25 feet above the ocean level and within several miles of the shoreline in case of a mega tsunami. Homeowners living near the shoreline shall check if historical tsunamis occurred in their area by contacting the local emergency management office, the National Weather Service office, or the American Red Cross chapter. If the home is located within a tsunami risk area, the homeowner can get tsunami insurance through the National Flood Insurance Program (NFIP) by purchasing flood insurance that specifically include losses due to tsunamis.