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Learning, Sharing, and Teaching => Real Estate and Landlording => Topic started by: Another Reader on July 14, 2012, 01:04:57 PM

Title: Earthquake Insurance in the SF Bay Area
Post by: Another Reader on July 14, 2012, 01:04:57 PM
I have had earthquake insurance for many years through the CEA and I am really questioning its cost to value ratio.  I have a 15 percent deductible policy with the minimum (insignificant) coverage for personal property and loss of use.  The deductible amounts to around $100,000, meaning I would have to sustain $100,000 in structural damage before any of the insurance kicks in.  For folks outside this area that think this is crazy, yes, it really does cost $250 per square foot to replace a mid-grade tract house here.

Proximity to faultlines and epicenters has less to do do with damages sustained in an earthquake than the type of soil underneath the structure and the specific shaking pattern (wave action) your property experiences.  I'm on solid soil over bedrock in the hills and suffered only minor sheetrock cracking and minimal fireplace settlement in the 1989 Loma Prieta earthquake.  Pricing of the insurance supposedly considers damage potential.

Only 10 percent of homes in California have earthquake insurance.  Some question the ability of the CEA to pay claims after a major earthquake in a densely populated area.

The premium has risen this year to $1,131.  To drop the deductible to 10 percent, another $33,000 in coverage, would cost an additional $500.

Has anyone in Northern California or a high-risk area in Southern California analyzed earthquake insurance and decided to add/continue/drop coverage recently?  I'm considering dropping the policy and I'm interested in how others in the same situation made their decisions.
Title: Re: Earthquake Insurance in the SF Bay Area
Post by: iwannaretire on July 14, 2012, 03:22:31 PM
I'm in SoCal and I still have earthquake insurance.  My house is by far my largest asset and even though the deductible is large, the coverage is worth it to me.   I feel this way because we know earthquakes will happen here.  It's not a question of "if", but "when."

However, I do not buy CEA insurance.  I get my insurance from Geovera, and they're at least half the cost of CEA.  Do some shopping online and see if you can find another carrier.
Title: Re: Earthquake Insurance in the SF Bay Area
Post by: Another Reader on July 14, 2012, 04:12:42 PM
I played with the Geovera website, but the only policy available cost twice as much as the CEA policy with a deductible of 10 percent on both.  Their single limit minimum was almost twice the CEA value, which is derived from the underlying homeowner's policy.  Looks like I should shop some brokers as well.  Thanks for the help!
Title: Re: Earthquake Insurance in the SF Bay Area
Post by: gooki on July 15, 2012, 05:20:12 PM
What's the value of your home, and more importantly, what would the likely rebuild cost be post earthquake in a market where building demand is high?

Even after the recent seismic activity in the city I live, the annual cost of my earthquake cover is only 0.15% of the value of my home. The excess is just 1%.

But like you alluded to, the ability of the insurer to pay up is a big deal. The company I was insured with, ended up essentially bankrupt (government took ownership). Then the length of time it take to settle a claim (realistically) we're looking at 5 years (minor damage).

If the figures were different. Excess at 30% of my homes value, and annual insurance cost was 1%, historic damage being minimal, with the time frame for settlement above and the risk of the insurer going bankrupt, I'd re-evaluate.
Title: Re: Earthquake Insurance in the SF Bay Area
Post by: Another Reader on July 15, 2012, 06:24:36 PM
The CEA, or California Earthquake Authority, is a state-sponsored pooled risk entity that was started after commercial carriers pulled out of the earthquake insurance market in California.  I'm always suspicious when a government entity is created to take over a product that commercial entities decided was unprofitable, and the claims-paying ability of the CEA in a catastrophic earthquake has been questioned since it was created.  I had no idea any commercial carriers would underwrite earthquake policies here until "iwannaretire" mentioned Geovera.

The cost of the insurance is location-dependent, similar to flood and fire insurance.  My homeowner's policy assumes a replacement cost of around $267 per square foot.  No marble bathrooms or granite countertops included at this level, just a mid-range tract house.  The CEA policy uses the replacement cost in the underlying homeowner's policy.  The policy cost for the standard CEA policy with a 15 percent deductible (what I think you call excess) is $1,131.  That's about 0.17 percent of what State Farm calculated as replacement cost. 

The standard policy for my house has a deductible of approximately $100,000.  My house was built in 1989, so the wood frame structure is bolted to the concrete perimeter foundation and there are no cripple walls.  In a major earthquake, I would expect to lose both masonry fireplaces and suffer additional damage to the structure as the result of their collapse.  Broken windows, sheet rock damage, and possible plumbing and gas leaks may occur.  As an aside, if the house is structurally sound after the earthquake but burns down because of an accidental gas fire, the loss is supposedly covered by the fire insurance.

Even with a massive increase in contractor prices after a major quake (I saw a lot of shortages and price gouging locally after the Oakland Hills fire in 1991 and I experienced it in Arizona replacing a roof that was damaged in a widespread hail storm), it would be tough to spend much more than $100,000 fixing these items and the extra cost would probably be worth self-insuring given the high deductible.  My bet is the government would suddenly be in the low cost construction loan business after the event, and I would take advantage if it were offered. 

The insurance available is not really for the major quake, it's for the catastrophic quake that badly damages or destroys the structure.  The 8.5 magnitude quake on the San Andreas fault we know is coming some time in the next 50 years or some nasty seismic wave amplification from a lesser but shallower quake on the San Andreas or Hayward fault.  Paying $1,131 annually for a promised pay out if the structure is badly damaged or destroyed is what I'm really debating.

Title: Re: Earthquake Insurance in the SF Bay Area
Post by: sol on July 15, 2012, 10:55:43 PM
As has been pointed out here before, the fundamental business model of all insurance companies is to charge more in premiums than they pay out in claims, and pocket the difference.  They hire a bunch of very smart people to run the numbers on the risks, figure out what they expect to have to pay, and then charge more than that so they can build a fancy headquarters building and print fancy letterhead.

From this perspective, insurance is always a losing investment in the long run.  In the short run, though, I can see it having value for people who don't have enough money to cover their losses any other way.  Consider it akin to taking out a loan; you know you're going to have to pay back more money than you got out, but that might be worth it if you need the money up front.  An insurance policy is just a reverse loan, you make the payments up front and (over a long enough time scale) you will get a lesser amount of money back. 

If your house is your only asset and you'd be wiped out without it, then you might sleep better if it's insured.  Just keep in mind that you're getting less protection than you're paying for, so this decision is hurting your financial goals.  Unless you think you know something about earthquake risks that the insurance company doesn't.