The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: mulescent on June 14, 2013, 10:25:59 AM
-
Hello fellow mustachians,
I have an home insurance question for y'all. I carry a pretty standard policy on my house with a reasonable deductible ($1000). I live in an extremely earthquake prone city on the West coast of the USA in an old (1916) house. It has none of the upgrades you'd need to make to ensure it would survive an earthquake (e.g. bolting the house to the foundation, etc). The cost of these upgrades is about $5,000. Of course, they wouldn't guarantee the house would survive an earthquake of any magnitude.
An alternative is to carry earthquake insurance. I got a quote from a major, nationwide insurer (e.g. one that could conceivably pay claims even for a big event) for $500/yr to insure the place. The deductible is reasonable (5% of the structure value, or about 10k in this case).
I'm wondering what is the mustachian thing to do. I can't self-insure against a 200k+ loss. However, it's pretty unlikely I'd need the insurance since earthquakes are relatively rare.
Thoughts?
-
Insurances are for the rare, but very expensive events. I'd count among those the partial or complete destruction of a house. So yes, that would be an insurance I get, even at that price.
-
Okay, maybe this is a dumb/naive question: Wouldn't standard homeowners insurance cover earthquake damage? Is it common to be excluded? Or would that only be true in earthquake-prone areas?
-
Insurance.......... It's a gamble if you do and a gamble if you don't. Suffice it to say the decision would be based on ones belief of how likely the "Big One" was to hit. I live in California too and had earthquake insurance for little while. I decided to get ride of it for a number of reasons.
1. I personally believe that insurance is like a casino. The house always wins. So all risk taken into consideration, as long as I'm not terribly unlucky, I'm better off without it.
2. I self insure this one with my family. I have family on the east coast that would happily take me in if the ground opened up and my house sank into a hole. I wouldn't have my own place for a while but I'd indeed be healthy and move on. Well assuming I didn't go in the hole with the house. But that's a moot point.
3. I'm somewhat skeptical that if a significantly large earthquake happened that the insurance authority would be able to handle it. Earthquakes can happen on epic scales and could generate losses in the hundreds of billions. I don't think the insurance industry is solvent enough to handle it. Again that's a personal belief.
So I suppose my recommendation would be a no on the insurance. But that's based on my own life. I hope this brings a little insight that you can apply to yours.
-
Okay, maybe this is a dumb/naive question: Wouldn't standard homeowners insurance cover earthquake damage? Is it common to be excluded? Or would that only be true in earthquake-prone areas?
Nah sadly home owners insurance excludes things like earthquakes, floods, acts of war, and some others that I can't think of off the top of my head.
-
Insurance.......... It's a gamble if you do and a gamble if you don't. Suffice it to say the decision would be based on ones belief of how likely the "Big One" was to hit. I live in California too and had earthquake insurance for little while. I decided to get ride of it for a number of reasons.
1. I personally believe that insurance is like a casino. The house always wins. So all risk taken into consideration, as long as I'm not terribly unlucky, I'm better off without it.
That sounds like an overly simplistic view of it to me. Insurance transactions can benefit both parties -- the house winning doesn't mean you lose. The whole idea of insurance is that, for example, for the average person, a 0.25% chance of losing $200k is worse than a 100% chance of losing $500, whereas an adequately large insurance company is much closer to being indifferent between these two scenarios. There exists a price point for insurance at which both you and the insurance company are better off.
3. I'm somewhat skeptical that if a significantly large earthquake happened that the insurance authority would be able to handle it. Earthquakes can happen on epic scales and could generate losses in the hundreds of billions. I don't think the insurance industry is solvent enough to handle it. Again that's a personal belief.
While there is certainly some counterparty risk, companies generally purchase reinsurance and in an event that manages wipe out well capitalized insurance companies I think recent history provides strong evidence that the government would intervene.
All that being said, I'm not sure I personally would purchase earthquake insurance in this case either. That's mostly because I'm at a stage in my life where I can be extremely risk tolerant.
-
$500/yr seems like a pretty good deal to me. The best quote I could find was almost $300/yr to insure my apartment's contents. Not the apartment itself mind you, just my stuff. Obviously I declined that one, but I'd have trouble not paying the $500/yr to insure myself against a $200K+ loss.
-
Okay, maybe this is a dumb/naive question: Wouldn't standard homeowners insurance cover earthquake damage? Is it common to be excluded? Or would that only be true in earthquake-prone areas?
Nah sadly home owners insurance excludes things like earthquakes, floods, acts of war, and some others that I can't think of off the top of my head.
I knew floods. I didn't know earthquakes. (And I know over time they've sort of expanded "flood" to be "anything that is damaged by water", which IMO makes little sense.)
-
Here is an interesting tool I used to estimate the damage to my house in the case of a large event in my area.
http://www.openhazards.com/response
I found as a result of using this that it was very unlikely that a large scale earthquake would damage our house enough to exceed the deductable. One reason for this was the insurance was for a fixed replacement cost (400K) and the deductible was 10% of that regardless of the actual replacement cost of the house. I decided that it was worth taking the risk in this case.
-
I'm a catastrophe modeler who works for a reinsurance company. Couple of things:
Your insurance company will stay solvent. As xocotl mentioned, insurance companies buy their own insurance - called reinsurance. Even in megacatastrophes, this spreads the risk around so no one is forced to fold. They barely even batted an eye at the Tohoku earthquake in Japan back in 2011, and that's a much worse event than anything predicted for California (higher magnitude, tsunami, etc.).
In earthquake-prone regions, your best options are either to retrofit or to buy insurance. Plenty of earthquake scientists in California don't buy earthquake insurance - but they also build their houses on good sites (hard bedrock, not too steep of a slope), and constructed like tanks. If you don't plan to do this (which sounds likely), you might consider insurance. You should especially consider insurance if your house is located on low, flat, squashy sediment - it's prone to liquefaction (see http://earthquake.usgs.gov/regional/nca/qmap/ (http://earthquake.usgs.gov/regional/nca/qmap/) for maps in a few regions around CA). Then it doesn't matter what you do to retrofit, your house will be seriously damaged in even moderately sized events, and you should definitely buy insurance. Look up the Darfield earthquake in New Zealand for a flavor of what that damage looks like - even if the house is left standing, a shift in the foundation can leave the whole building unsalvageable. Landslides are also a risk on steep slopes, so think about what's uphill from you.
Earthquakes will always happen in California. Insuring against a car accident or routine health care can be unnecessary - most of us have enough cash on hand to fill a prescription, or buy another car in a pinch. Buying another house, having just lost one of your biggest investments (your house) is much harder, and makes insurance worthwhile if you don't have the means or inclination to otherwise protect your house.
PS, pepper, that OpenHazards tool is awesome! Even if their research team is a total sausagefest.
-
Nah, if the place made it through 89, then it's probably pretty solid. Spend the cash on any retrofitting if it will significantly improve survivability. Especially if the bank owns much of the house, risk is theirs anyways.
Plus, earthquake insurance does not prevent you from dying in a collapsed house. More important to live somewhere you are comfortable will survive a big one.
-
It's not the insurance company that worries me, it's the California Earthquake Authority. They are the entity pooling the risk and (hopefully) purchasing reinsurance to spread the risk. I did not renew last year, and I will not purchase it this year. If the open hazards model is anywhere near correct, my 1989 built house bolted to the foundation on rocky soil in the foothills is in almost all cases going to suffer less damage than the deductible.
-
At $500 it's a tough call.
FWIW I have a claim for the 2010 Darfield, New Zealand earthquake. We are approaching 3 years since I filed my claim and it is not yet settled. And I count myself lucky as my house is at least liveable.
There is no incentive for insurance companies to settle claims quickly, and no penalties if they do not. Hopefully this is something other governments pick up on and regulate appropriately.
My biggest concern is no longer the quake damage, but the possibility of an electrical fire post quake.
Unfortunately I cannot separate out the earthquake cover from our policy, so Otis either pay for the whole lot or have no cover at all.
PS we had two insurance companies go bankrupt due to insufficient reinsurance. One was bailed out by the government. The other shut up shop and left many of their customers fucked.
-
There is no incentive for insurance companies to settle claims quickly, and no penalties if they do not. Hopefully this is something other governments pick up on and regulate appropriately.
This is not true in the United States. We have bad faith claim laws. If an insurer fails to pay on a claim for no good reason and it creates an undue hardship on the claimant, the insurance company can get seriously hit.
As an example, there is a well known case involving a $50k policy limit car crash in Kentucky. It was a clear cut auto crash with significant medical bills. Instead of cutting a check and walking away, the Allstate rep / his manager / his manager decided to drag ass on it for 6 months and then tried to deny the claim for a statute issue. Final verdict for bad faith - $16 million, which was upheld on appeal.
There is another one involving a death claim with a $25k limit that happened in VA (I think, I don't remember the state nor the insurance company). For whatever reason, there was a single guy with the authority to cut the check. He explicitly wrote something along the lines of "I am waiting on year end numbers for bonus purposes" in the claim notes, which got subpoena'ed during the tort trial. They cut the $25k check DURING THE TRIAL, and ended up getting hit for $40 million, which was also upheld. So at least in the US, they take feet-dragging seriously.
-
Nah, if the place made it through 89, then it's probably pretty solid.
'89 was small potatoes. If I could be guaranteed nothing bigger than Loma Prieta, no way I'd get EQ insurance. But if something as big as '06 happens on the Peninsula segment of the San Andreas... yeah, better get EQ insurance.
It's irksome, though. Outrageously expensive, even with a huge deductible (20% replacement cost).
-
Binkley:
Run your property through the open hazards model and see with an 8.0 on the closest section of the San Andreas, how much the estimated damage would exceed the deductible on your policy. I would have to have an 8.0 on the Calaveras fault to exceed the deductible. The Hayward/Calaveras fault system is expected to produce a possible 7.5 magnitude quake well north, not next door. I have no idea how predictive the model is, but the result argues against me buying earthquake insurance.
I had no damage here from Loma Prieta. In 1984, I had no damage at the other house from the Morgan Hill earthquake, which was in the mid-6's and did cause some damage on the valley floor.
I am not confident in the ability of the California Earthquake Authority to pay all the claims in the event of a catastrophic earthquake. The claims paying ability is not transparent and I have no idea how the risk is spread through re-insurance. I expect to get a fair amount of damage and then get some sort of government assistance, such as an interest free loan, to repair the house, if a catastrophic earthquake happens in my lifetime.
-
Funny, I was just re-evaluating our own need for earthquake insurance, and I ended up deciding that, yes, we will keep it. (We've had it for a few years, but I re-evaluate everything every few years!)
Here was my thinking. We live in the greater LA area. A few years ago, I got CERT trained, and in that training, everyone emphasized that we are "10 months pregnant with The Big One." It's not a matter of if, but when, we have an earthquake greater than 7.0. Our annual premium is about $850, for $650,000 of coverage. That covers the house, the garage, personal property, and loss of use. The catch is that the deductible is 15%, or $97,500.
We kept it because earthquake insurance is for the kind of catastrophic damage that would make the house unsafe and uninhabitable. Of course, I don't have a good idea how likely THAT is, but the way I see it, saving and even investing that $850/year will never grow to a sum that would save us financially, in the event of catastrophic damage. With the insurance, we'd be able to rebuild. Without it, we could be financially ruined: on the hook for a mortgage on a house no one will buy, and we wouldn't be able to afford to repair. I know some people around here say, "Well, if it's that big of a disaster, FEMA will save us!" Maybe, maybe not. I'd rather not count on that "just" to save premium.
-
Without it, we could be financially ruined: on the hook for a mortgage on a house no one will buy, and we wouldn't be able to afford to repair.
Jingle mail. Use the lowest down payment possible and move when it gets too high.
-
Okay, maybe this is a dumb/naive question: Wouldn't standard homeowners insurance cover earthquake damage? Is it common to be excluded? Or would that only be true in earthquake-prone areas?
Nah sadly home owners insurance excludes things like earthquakes, floods, acts of war, and some others that I can't think of off the top of my head.
Perhaps an earthquake rider from your existing home insurance provider would be cheaper than a separate eq policy? That's what we do. I think it added $10 - 20 / year to our RENTERS insurance (i.e. it'll probably add more to an actual homeowners policy).
-
As an example, there is a well known case involving a $50k policy limit car crash in Kentucky. It was a clear cut auto crash with significant medical bills. Instead of cutting a check and walking away, the Allstate rep / his manager / his manager decided to drag ass on it for 6 months and then tried to deny the claim for a statute issue. Final verdict for bad faith - $16 million, which was upheld on appeal.
There is another one involving a death claim with a $25k limit that happened in VA (I think, I don't remember the state nor the insurance company). For whatever reason, there was a single guy with the authority to cut the check. He explicitly wrote something along the lines of "I am waiting on year end numbers for bonus purposes" in the claim notes, which got subpoena'ed during the tort trial. They cut the $25k check DURING THE TRIAL, and ended up getting hit for $40 million, which was also upheld. So at least in the US, they take feet-dragging seriously.
Do you have sources for that? It sounds very interesting.
-
Without it, we could be financially ruined: on the hook for a mortgage on a house no one will buy, and we wouldn't be able to afford to repair.
Jingle mail. Use the lowest down payment possible and move when it gets too high.
Jingle mail? I confess I have NO idea what you're talking about. The house we own now is our forever-house, so barring financial ruin (which in this case, seems somewhat avoidable) we wouldn't want to have to sell it or walk away. Enter catastrophic earthquake coverage.
-
Run your property through the open hazards model and see with an 8.0 on the closest section of the San Andreas, how much the estimated damage would exceed the deductible on your policy.
It exceeds the deductible by $120-$130K, depending on whether I call our hard clay "soft/sandy" or "hard/rocky". We're on ancient alluvial fan with "moderate" liquefaction risk -- not as bad as fill, but not expected to fare well if the worst happens, based on other models I've seen.
I have no love for or great confidence in the CA Earthquake Authority either, and I vacillate between feeling like a chump and grudgingly accepting the necessity of the insurance.
-
Binkley:
If that result is what the model gave me, I would make the same choice. I'm in the foothills in the southeast side of the valley, with rocky clay soil purportedly over bedrock. The model results seem to support that soil designation.
-
As an example, there is a well known case involving a $50k policy limit car crash in Kentucky. It was a clear cut auto crash with significant medical bills. Instead of cutting a check and walking away, the Allstate rep / his manager / his manager decided to drag ass on it for 6 months and then tried to deny the claim for a statute issue. Final verdict for bad faith - $16 million, which was upheld on appeal.
There is another one involving a death claim with a $25k limit that happened in VA (I think, I don't remember the state nor the insurance company). For whatever reason, there was a single guy with the authority to cut the check. He explicitly wrote something along the lines of "I am waiting on year end numbers for bonus purposes" in the claim notes, which got subpoena'ed during the tort trial. They cut the $25k check DURING THE TRIAL, and ended up getting hit for $40 million, which was also upheld. So at least in the US, they take feet-dragging seriously.
Do you have sources for that? It sounds very interesting.
So I mixed up some data, this is the one I was thinking about that was huge - Campbell v. State Farm. It ended up being a $145 million settlement that did in fact get reversed down to mid $20M's. The $16M is either Davis V. Allstate or Johnson V. Allstate.
Kind of amusing to read. I handle claims (work comp not auto) and this kind of behavior would get you fired well before you had a chance to lose at trial with a non-shady company.
-
Without it, we could be financially ruined: on the hook for a mortgage on a house no one will buy, and we wouldn't be able to afford to repair.
Jingle mail. Use the lowest down payment possible and move when it gets too high.
Jingle mail? I confess I have NO idea what you're talking about. The house we own now is our forever-house, so barring financial ruin (which in this case, seems somewhat avoidable) we wouldn't want to have to sell it or walk away. Enter catastrophic earthquake coverage.
"Jingle mail" is a slang term for a strategic default, named after the sound the keys make when you mail them back to the bank and say "so long!"
http://en.wikipedia.org/wiki/Strategic_default