Updated for 2021
Whenever there’s an earthquake anywhere in the world, as a Los Angeles resident, it always gives me pause. I made it through the Northridge Quake in fine health, but I wasn’t a homeowner then, so any damage done to the structure of my rented home wouldn’t have been my responsibility anyway.
I am a homeowner now – have been since 1996 – and since it’s my biggest investment, I feel that insurance is an important way for me to protect that investment.
As a general rule, since our homes are often our biggest investment, and because an earthquake could potentially render your home uninhabitable, it’s worth every penny to get Earthquake Insurance and protect yourself.
I trusted that most homeowners felt the same way I did, especially when it comes to basic homeowners (also known as “Fire Insurance”), but it turns out that Earthquake insurance is another matter. While I personally carry Earthquake insurance on my home, not everyone does.
Angelenos are divided about whether earthquake insurance is of any value, given the relatively high premium cost and the high deductible. After my neighbors and I had a lively discussion – and disagreement – on the subject, I felt I needed to ask an expert.
Questions About Earthquake Insurance: Ask An Expert
I wanted to hear what an insurance broker had to say on the subject, so I contacted Craig Jaffe. A Los Angeles native, Mr. Jaffe is the third generation of his family to run Jaffe Insurance Agency.
As an agency, Jaffe Insurance offers insurance products for auto, home, business life and health from a wide range of Insurance companies. What follows are my questions and his answers.
Question: What are the benefits of carrying Earthquake Insurance?
Answer: A 6.0 magnitude earthquake struck Napa on August 24, 2014 at 3:20AM. Hundreds of people were injured and many buildings were damaged or destroyed. As is fairly typical, some homes, which were completely destroyed, appeared to have survived at first. Only later was it determined that they had slid on their foundations and were unsafe to occupy. This was the strongest quake in Northern California in 25 years, likely caused more than $1B in damage, but still isn’t considered a major quake. Even the Northridge earthquake in 1994 was “only” a 6.7 magnitude.
Unfortunately, we are overdue for a major earthquake, and according to the Uniform California Earthquake Rupture Forecast (UCERF), there is a 99.7% chance that California will experience a “major” earthquake in the next 30 years, with a 46% chance that it will be of a magnitude greater than 7.5 on the Richter scale. Unfortunately for Southern Californian’s, there is now a 67% chance that one with a magnitude 6.7 or greater will occur in the Los Angeles area sometime in the next 30 years.
At the time I help them secure the best value for their home and auto insurance, many clients choose to forego the expense of earthquake insurance and ask if they can add it “later.” Of course you can add it later, as long as it is before the earthquake. And, if you find out when and where the quake is going to occur, I’d like to know!
Earthquake insurance is known as a catastrophic coverage, and has a significant deductible in order to keep the premium somewhat affordable. The main benefit of having earthquake insurance is the peace of mind in knowing that if your home is destroyed, the insurance will help you to rebuild your home, replace your belongings, and help pay for your additional living expenses. If an earthquake causes cosmetic cracks in your wall or topples your brick chimney, consider yourself fortunate that these damages aren’t likely to be more than your deductible. If, however, your walls collapse or your home slides on the foundation and is red tagged. You’ll thank your lucky stars that you have earthquake insurance coverage. If you have a mortgage and an earthquake turns your home into a pile of rubble, you are still responsible for making all mortgage payments even though you have nowhere to live!
Question: Do I really need it? Won’t my Basic Homeowners policy cover me?
Answer: There are many areas of California where the risk of a major earthquake isn’t substantial, and it is estimated that only about 10% of California homeowners carry earthquake insurance. In Los Angeles, there is a high probability of a major earthquake, yet, still it is estimated that only about 30% of LA area homeowners currently have earthquake insurance. If a 7.5 magnitude earthquake strikes the Los Angeles area, many homes will be severely damaged or destroyed. We just don’t know which ones they’ll be next time. You need earthquake insurance if it helps you to sleep well at night, as your basic homeowners policy will DEFINITELY NOT provide coverage for damage caused by earthquake. In most other parts of the Country, earthquake is a covered peril which is automatically included in most homeowners policies. However, California homeowners policies specifically EXCLUDE earthquake.
Question: The deductible seems very high, is the price really worth it?
Answer: The deductible on an earthquake insurance policy ranges from 5% to 25% of the insured replacement value, with a majority of policies having either a 10% or 15% deductible. As an example, if your home has an insured replacement value of $350,000 and you have a 15% deductible, then the deductible is $52,500. So, you would need to suffer a loss greater than $52,500 in order to receive any claims settlement for the damage to your home. However, most earthquake policies provide limited funds for emergency repairs and to cover additional living expenses if your home is damaged, on a 1st dollar basis without application of any deductible. I carry earthquake insurance on my home, and definitely believe in it. And, I pay full price just like everyone else!
Question: Is the California Earthquake Authority the only way to buy Earthquake coverage? If so, why is that?
Answer: After the Northridge Earthquake, the California Department of Insurance mandated that every insurance company selling homeowners insurance in California MUST offer to sell earthquake insurance to their policyholders. This “rattled” the free market a majority of insurers at the time became extremely risk averse and weren’t willing or able to take on that catastrophic risk. Most major insurance companies decided instead to STOP selling new homeowners policies in order to avoid having to offer earthquake coverage, which made it increasingly difficult for real estate transactions to take place. The legislature created the California Earthquake Authority (CEA) to open up this roadblock and spread the risk enough so insurers felt comfortable coming back into the market. Companies were given the option to pay a substantial fee to become a member of the CEA, and the CEA then assumed the risk of the mandatory earthquake insurance offer for those participating carriers. The CEA has never been the ONLY option for earthquake insurance, and because companies have been able to reinsure as much of the risk as they desire throughout the world, there are now more companies than ever offering earthquake insurance policies. I have access to many different earthquake insurance carriers, and can help find the best one to fit each client’s needs.
Question: Lay out a scenario where it would have been better to have insurance.
Answer: “Walter Matthau, who told a Daily Variety columnist that he had suffered a $6 million loss, said he had canceled his earthquake insurance three months ago [before the Northridge quake] because “the deductible was outrageous.” In addition to structural damage to their house, Mr. Matthau and his wife, Carol, lost art works and sculptures, and their swimming pool slid down a hillside.” To read more, see this NYTimes article.
I have clients whose homes were destroyed in the Northridge earthquake, rebuilt with insurance, and wouldn’t ever consider dropping their earthquake insurance coverage. I know of one family who didn’t have earthquake insurance, couldn’t afford to rebuild, then subsequently lost their property to foreclosure and still haven’t entirely recovered from the experience.
Question: What would happen to a homeowner with no Earthquake Policy if another Northridge were to happen?
Answer: If their home sustains significant damage or is a total loss, they’d need to use their own funds from a bank or brokerage account to rebuild, or obtain a loan from FEMA/SBA and take on the burden of an additional monthly mortgage payment. In addition, they’d have substantial out of pocket costs to live somewhere else while their home is being rebuilt while simultaneously making their existing monthly mortgage payments. The only other option would be to stop paying their mortgage and face the loss of their property through foreclosure.
Question: I heard that, in the event of another big quake, FEMA said they would prioritize homeowners with Earthquake policies for assistance. Do you know if that’s true?
Answer: I’ve heard the same speculation, but haven’t been able to confirm whether it is true or not.
Question: What options would an uninsured homeowner have if their homes were destroyed by a quake?
Answer: If they do not have earthquake insurance, FEMA may give them a grant. Unfortunately, most grants distributed by FEMA after the Northridge earthquake were limited to $5,000 and only for emergency repairs or temporary living expenses. A homeowner would either have to pay for the construction out of their own available bank/brokerage funds, or obtain a loan from FEMA/SBA. Keep in mind, however, this new mortgage does not replace your existing one, it is an additional obligation and monthly payments would then need to be made to both mortgages for many years to come.
Question: Break down the numbers for us: (average) cost of insurance for a Los Angeles home vs. (average) cost of repairs after an earthquake like Northridge.
Answer: Many factors cause fluctuations in earthquake insurance rates, and an average home in Mar Vista, built in 1950 with an insured replacement limit of $350,000 earthquake insurance would typically have a premium of about $800/yr. In the Northridge earthquake, most homes sustained less than $50,000 in damage. However, there were at least 7,000 homes which were severely damaged, or destroyed. And, in a larger quake, that will likely seem like a proverbial drop in the bucket. It’s wise to ask a professional to review all of your insurance periodically to ensure that it properly protects your changing assets and risk profile, and we at Jaffe Insurance offer complimentary policy reviews and consultations.
This interview was conducted by Sarah Auerswald, co-Founder of MomsLA. It is not a sponsored post. Special thanks to Craig Jaffe, the third generation of his family to run Jaffe Insurance Agency, for answering our questions.