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Debating Earthquake Insurance

Uploaded: Jan 5, 2015
Whenever we receive a renewal statement for earthquake coverage it's a cause for wrestling whether or not to renew ? damned if I do and damned if I don't. I've been skeptical of the California Earthquake Authority, which in my mind is a CALPERS-like bureaucracy, wondering whether it could meet its obligations in the event of a tragedy.

Amongst all the types of insurance we routinely need ? health, automobile, house ? the importance and likelihood of need wasn't in the same primary category. For example, lenders require fire insurance on the house ? but not earthquake.

High deductibles on top of high premiums really limit benefit.

As a side note to my discussion of our remodel, when the city required some additional earthquake retrofitting as a consequence of extending a portion of a wall, this led to a discussion with our contractor on whether it not it was worth continuing earthquake insurance coverage. His feelings were that as a single-story house, given all the modifications whose stability was hydraulically tested, that the house wasn't going anyplace. But still.

So my questions for comment are:

Do you purchase earthquake coverage?
What are the considerations in your decision?
Have you ever needed to make a claim for coverage?
Local Journalism.
What is it worth to you?

Comments

Posted by Menlo Voter, a resident of Menlo Park: other,
on Jan 5, 2015 at 2:06 pm
Menlo Voter is a registered user.

I am a contractor and I agree with your contractor. Unless you have a really old house that has never had any remodeling or retrofitting done, in my opinion, earthquake insurance is a waste of money. Even in a large earthquake a single story structure that has been properly built and especially anything in the last ten to fifteen years is not going to sustain major damage. It may sustain a lot of cosmetic damage, cracked drywall mainly, but the cost of repairing that kind of damage typical falls well below the deductible of earthquake coverage. So you end up spending a lot of money on premiums for little to no benefit.

So, I've never had it and I've never needed it.


Posted by Peter Carpenter, a resident of Atherton: Lindenwood,
on Jan 5, 2015 at 2:38 pm
Peter Carpenter is a registered user.

The best earthquake "insurance" you can buy is to install an automatic gas cut-off valve that is activated by ground movement. By cutting off the gas flow to your home the moment an earthquake occurs such a valve substantially reduces the risk of a post earthquake fire. Resetting the valve is easy but remember to first shut off an gas powered devices that have pilots lights including those with electrically activated pilot lights ( which may be inoperative if the electricity goes off).


Posted by Peter Carpenter, a resident of Atherton: Lindenwood,
on Jan 5, 2015 at 2:38 pm
Peter Carpenter is a registered user.

The best earthquake "insurance" you can buy is to install an automatic gas cut-off valve that is activated by ground movement. By cutting off the gas flow to your home the moment an earthquake occurs such a valve substantially reduces the risk of a post earthquake fire. Resetting the valve is easy but remember to first shut off an gas powered devices that have pilots lights including those with electrically activated pilot lights ( which may be inoperative if the electricity goes off).


Posted by Stu Soffer, a resident of Menlo Park: Linfield Oaks,
on Jan 5, 2015 at 3:28 pm
Stu Soffer is a registered user.

Thanks Peter.


Posted by Peter Carpenter, a resident of Atherton: Lindenwood,
on Jan 5, 2015 at 4:13 pm
Peter Carpenter is a registered user.

Here is an excellent article on earthquake gas shut off valves:

Web Link


Posted by Stu Soffer, a resident of Menlo Park: Linfield Oaks,
on Jan 5, 2015 at 4:19 pm
Stu Soffer is a registered user.

To put that into perspective... the cost of installing the automatic shutoff valve is a fraction of one year earthquake coverage premium.


Posted by Joan, a resident of Atherton: West of Alameda,
on Jan 6, 2015 at 4:24 pm

For me, the high cost of the deductible and the high premium cost have been significant reasons I don't buy earthquake insurance. I doubt whether people even get adequate money to rebuild since, in my experience, insurance companies resist paying out fairly. Additionally, when the last major earthquake struck, only one picture fell and it was not damaged. In my opinion, if the cost and deductible were lowered, more people would insure thus putting more money into the fund.


Posted by Nancy, a resident of Menlo Park: Linfield Oaks,
on Jan 7, 2015 at 10:28 am

This topic is one of contention between my husband and I. I say keep the insurance because the house is our only sizable asset. He thinks it's a waste of money. So far we're keeping the insurance. But it may not be my most rational decision.......


Posted by Peter Carpenter, a resident of Atherton: Lindenwood,
on Jan 7, 2015 at 10:40 am
Peter Carpenter is a registered user.

Nancy,
Unless you have a brick home you would be much better off spending the money on:
1 - a structural assessment of your house's attachment to its foundation and amount of shear bracing

2 - remedying any noted structural problems

3 - properly securing your water heater to prevent it from tearing loose

4 - installing a gas earthquake valve

Here is a great resource on the issue:

Web Link


Posted by Peter Carpenter, a resident of Atherton: Lindenwood,
on Jan 7, 2015 at 11:06 am
Peter Carpenter is a registered user.

Here is a very pertinent case study excerpt from the superb Yanoff book cited above:
"Phase 1
Using the steps outlined on page 12 and the information given later in this book, you learn that, although your property is deep in earthquake country, you are 6 miles away from the nearest known active fault. You also learn that although your new home is on a hill, it does not suffer a significant threat of landslide, nor is it built on liquefiable soil. You do, however, learn that, due to the date of construction, the structure was never adequately anchored to the foundation and that there are vulnerable basement (?cripple?) walls in the crawl space. You also realize that that nice room on top of the garage that was added in the 1960s may pose a significant risk because the garage does not have strong enough walls to support it in an earthquake. You consult a structural engineer, who confirms that indeed you must do some strengthening in the garage to alleviate this risk. You also realize that the water and gas heaters are not braced appropriately and may pose a fire risk in an earthquake. The brick chimney, too, might be a collapse hazard.

Phase 2
Through what you learn in this book, you decide that the earthquake risk to your home is manageable, and you decide to purchase the home. You should now develop a risk management plan. First, you determine what must be done to make the home safe for you and your family. You decide to anchor the house to the foundation, strengthen the basement walls, put a new steel frame in the garage, and retrofit the chimney. The cost of this work is estimated to be $35,000.

You then assess whether you should obtain earthquake insurance or implement additional strengthening that would further protect your family against financial hardship. Through consultation with your structural engineer, you learn that additional work, including strengthening the first-story walls with plywood to prevent expensive structural damage, would cost you an additional $10,000.

Your home insurance provider offers you the option of earthquake insurance. It is a member of the California Earthquake Authority (CEA), so you first consult the CEA Web site to investigate various policy options. You realize that the CEA protects against structural damage only. You look at the 15 percent deductible option ($75,000 in your case). Because of the work that you will do to keep your family safe, you are eligible for a ?retrofit discount? (reducing the premium by 5 percent or about $100). Your premium is calculated by the CEA at $2,000 per year. After reading this book and consulting your structural engineer, you realize that with the $35,000 of necessary strengthening that you plan to do, your economic loss would probably not be more than 20 percent of the replacement cost of your home (or $100,000). In this case, with your deductible, you would be liable for $75,000 for structural repair. If you implement the $10,000 of additional strengthening, your loss probably would be no greater than 10 percent of the replacement cost (or $50,000). In this case, your loss would not exceed your deductible. You now have four options, as described in the table on page 14.

After discussing the various options with your family, structural engineer, and insurance provider, you decide on option C because you feel that the $10,000 of additional strengthening will reduce your financial exposure and provide a safer home for your family, and because of the high deductible and low estimate of loss, insurance does not seem to be a cost-effective option."

Yanev's excellent book replaces our usually emotional approach to earthquake insurance with an objective cost-based approach.


Posted by Nancy, a resident of Menlo Park: Linfield Oaks,
on Jan 7, 2015 at 12:27 pm

Thanks, Peter.


Posted by fwiw, a resident of Woodside: other,
on Jan 7, 2015 at 4:57 pm

> To put that into perspective... the cost of installing the automatic shutoff valve is a fraction of one year earthquake coverage premium.

Well, yes. But in my case, at least, my homeowner's insurance covers fire damage even if the fire was initiated as a result of an earthquake.

That said, YMMV; check your policy.


Posted by Peter Carpenter, a resident of Atherton: Lindenwood,
on Jan 7, 2015 at 6:56 pm
Peter Carpenter is a registered user.

" But in my case, at least, my homeowner's insurance covers fire damage even if the fire was initiated as a result of an earthquake."

1 - Your insurance will not pay for the full cost of replacing your home and contents if they are destroyed by fire under your insurance, to say nothing of the time and inconvenience involved.

2 - The cost of avoiding an earthquake caused fire by installing an earthquake gas cutoff valve is probably less than your deductible.

Your choice.


Posted by fwiw, a resident of Woodside: other,
on Jan 7, 2015 at 8:42 pm

> 1 - Your insurance will not pay for the full cost of replacing your home and contents if they are destroyed by fire under your insurance....

I don't know why you would say that. I have replacement value coverage, so at least theoretically their contractual commitment is, in my case, sufficient to purchase an entirely new home and contents.

That said, installing a seismic shutoff valve seems like an entirely prudent and reasonable thing to do. However, my point is that the installation of said valve seems to me to be an entirely unrelated issue as to whether or not to purchase earthquake insurance since fire is already covered under my homeowner's insurance.


Posted by Peter Carpenter, a resident of Atherton: Lindenwood,
on Jan 7, 2015 at 9:06 pm
Peter Carpenter is a registered user.

Replacement cost is the actual cost to replace an item or structure at its pre-loss condition. Some insurance adjusters will claim that the pre-loss condition was the condition of the structure after the earthquake and before the fire. And replacement cost does not include bringing the former structure up to current code nor the cost of permits etc for the replacement construction.

Again, your choice.


Posted by fwiw, a resident of Woodside: other,
on Jan 8, 2015 at 4:49 pm

> Replacement cost is the actual cost to replace an item or structure at its pre-loss condition.

OK, I just got off the phone with my insurance agent and she says that this is simply wrong. A "cash value" policy would take into account the depreciation that existed in the property at the time of the loss, but a replacement value policy would cover you for the full replacement cost of the property with new like kind construction subject to the policy limits. She said that at one time they offered "guaranteed replacement cost" coverage which would assure that you had not set your policy limit toolow, but policies of this type in California were withdrawn in the 90's. These days you have to make sure that you have your coverage limit sufficiently high.

> Some insurance adjusters will claim that the pre-loss condition was the condition of the structure after the earthquake and before the fire.

My insurance agent (30 years in the business) strongly disagrees with you on this.

> And replacement cost does not include bringing the former structure up to current code nor the cost of permits etc for the replacement construction.

My insurance agent says that permits ARE included in replacement construction costs and that State Farm provides a 10% overage for permit upgrades standard in its policy, but that you can pay for a rider for up to 100% overage coverage.

If you're being told differently by your agent perhaps you need better insurance coverage, or we should get our agents together for a debate on the subject.



Posted by Peter Carpenter, a resident of Atherton: Lindenwood,
on Jan 8, 2015 at 5:07 pm
Peter Carpenter is a registered user.

I commend you for pursuing these details with your agent. Realize that in the event of a loss you will be dealing with an adjustor and not your agent - they have very different agendas.

A key phrase "These days you have to make sure that you have your coverage limit sufficiently high". I seriously doubt that many policy are updated to reflect today's cost per sq ft construction cost.

For me prevention remains the best insurance and the incredible effort of replacing a destroyed structure, alternative housing (even if paid for by insurance), trying to replace irreplaceable possessions and dealing with the insurance company is simply too high a price to pay for a preventable occurrence. Using this cost benefit analysis we even retrofitted our home with fire sprinklers. I sleep better at night.

You and others may have a different preference for risk.


Posted by fwiw, a resident of Woodside: other,
on Jan 8, 2015 at 6:26 pm

As I said, I'm not arguing against taking preventative fire measures. Proper hot water heater strapping is a no-brainer. I don't have a seismic shut off valve, and I appreciate your suggestion. It seems entirely prudent.

My point, however, is that properly mitigating fire risk seems to me to have little bearing upon the discussion of whether or not to purchase with earthquake insurance.


Posted by Peter Carpenter, a resident of Atherton: Lindenwood,
on Jan 8, 2015 at 6:56 pm
Peter Carpenter is a registered user.

"My point, however, is that properly mitigating fire risk seems to me to have little bearing upon the discussion of whether or not to purchase with earthquake insurance."

Then you have ignored the cogent analysis quoted above by Yanev regarding risk mitigation in lieu of earthquake insurance:

"After discussing the various options with your family, structural engineer, and insurance provider, you decide on option C because you feel that the $10,000 of additional strengthening will reduce your financial exposure and provide a safer home for your family, and because of the high deductible and low estimate of loss, insurance does not seem to be a cost-effective option."


Posted by JC, a resident of Menlo Park: The Willows,
on Jan 9, 2015 at 10:49 am

I have my home insurance renewal in front of me while I came across this discussion and I can see my figures. I'm definitely in the camp that it's not worth it and that you could more effectively spend the premium on preventative measures. Not only is the premium very high at about 1½× the premium for all other hazards combined, but the limitations are very unfavorable. The worst of these is the deductible, at 15% of the value of the structure. This isn't 15% of the loss, it is of the the value insured. That means I could have tens of thousands of dollars damage in an earthquake -- which is by far a more likely scenario than an outright loss -- and not get a penny from the insurance.

I have taken some preventative steps, primarily while remodelling, including improving the shear walls, bolting to the foundation and installing a tankless water heater (also for compactness and for energy efficiency). I haven't got a auto-shutoff on the gas, but that sounds like a good suggestion. I have braced the chimney and have laid particle board in the attic in case bricks or other objects come crashing through the roof. You can do quite a lot of this sort of thing over the years for the price of the premium. If you are in the throes of remodelling, I would have that conversation with your contractor.

One final argument for skipping the insurance. Around here, for a house such as you describe, a good ⅔ of the value of your property is in the land, and unless you are on a cliff edge or something, you'll still be left with that, whatever happens to what's on top of it!


Posted by maria lucy, a resident of Menlo Park: Stanford Hills,
on Jun 17, 2015 at 5:24 am

[Not relevant to topic and thread; advertising]


Posted by Dave Thompson, a resident of Woodside: Woodside Hills,
on Jul 2, 2015 at 1:47 pm

I think earthquake insurance is something you should definitely have depending on where you live. If you are in a place like California where there are a lot of earthquakes it is a most have.I am moving to a high earthquake area, so I will for sure be looking to get insurance to cover my home from earthquakes just in case. http://www.accreditedins.net


Posted by Robin, a resident of Atherton: Lindenwood,
on Jun 11, 2016 at 12:37 am

[Not relevant to topic and thread; advertising]


Posted by Johson, a resident of Atherton: Lindenwood,
on Jun 13, 2016 at 9:37 pm

[Not relevant to topic and thread; advertising]


Posted by Taylor Benefits, a resident of Atherton: Lindenwood,
on Jun 14, 2016 at 12:08 am

[Not relevant to topic and thread; advertising]


Posted by MenloJim, a resident of Menlo Park: The Willows,
on Jun 15, 2016 at 4:20 pm

Peter wrote: "I seriously doubt that many policy are updated to reflect today's cost per sq ft construction cost." What per sq ft construction cost is realistic for our area today?


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