The recent earthquakes in Nepal got me thinking about a couple of things. The first was how I might be able to help such poor people so far away. The second was what would happen here at home if (when?) we were to be hit by the proverbial “Big One.” Unlike a lot of people, I do actually pony up for earthquake coverage. It’s not that I’m especially concerned that a big quake is around the corner, but I tend to think about this coverage a little bit differently than many people.
In the event of a significant earthquake, Federal disaster assistance may be available through the Federal Emergency Management Agency (FEMA) and Small Business Administration (SBA), but FEMA grants are typically limited to $32,900 in 2015 and SBA loans must be paid back. That won’t be much help in San Diego, so you need to understand your other options.
Furthermore, basic homeowners insurance policies specifically exclude earthquakes, so you really need to understand what your earthquake insurance coverage provides.
Earthquake insurance has three main components:
- Dwelling coverage is the amount of coverage you have to help you repair or replace your home if it is damaged or destroyed in an earthquake. This is based on the dwelling coverage of your homeowners insurance policy, so if you are underinsured for fire, you are also underinsured for an earthquake.
- Personal Property coverage protects the contents of your home, including furniture, televisions, clothing, etc.
- Loss of Use coverage pays you for the increase in your living expenses if you are unable to occupy your home due to an earthquake. It can also help to make up part of your rental income for income properties.
The downsides of earthquake insurance include the large (10-15%) deductible and the relatively high premiums. Many people see how little is covered for such a large premium and decide not to purchase an earthquake policy. They also tend to think of the value of their home as the amount they paid for their property (including dirt and structures), whereas the dwelling coverage is really designed to cover the cost to rebuild the structure of your home.
Think of it this way: if you have any equity in your property, that is what’s being covered by your dwelling coverage (whether it’s the homeowners policy or the earthquake policy). The more equity you have, the more important it is for you to purchase earthquake insurance.
If your house were completely destroyed, a large part of your equity would be destroyed with it. The dirt will still have value, but without the home, it’s not much use to you. Depending on your situation, there might not be much value left to cover a mortgage.
Speaking of the dirt under your home, it’s important to know what this dirt is made of. Is your home built on sand, fill or bedrock? Are you near a fault zone? These factors are important considerations in whether or not you purchase earthquake insurance.
The next question is how to find earthquake insurance. Many insurance agents offer the basic earthquake insurance policy from the California Earthquake Authority (CEA), which can only be issued as a part of a homeowners insurance policy. The caveat to this is that the CEA insures a LOT of homes in California, and a big earthquake in a city like San Francisco or Los Angeles could really stretch their resources.
Some insurance companies offer private earthquake insurance policies, but you should verify that a private company has the resources to pay claims stemming from a large and widespread disaster. Check with your insurance agent to ensure that your insurance company is financially sound, or do a little digging on your own on the internet.
You can learn more at http://www.earthquakeauthority.com, or by consulting with your Certified Financial Planner® practitioner. Your advisers at Blankinship & Foster are here to help with this, and all your financial, decisions.