Should you buy California EarthQuake Insurance?

In California, the only option for earthquake insurance is a State of California government policy. It's a "public option," since insurance companies are unwilling to underwrite earthquake damage.

I live in Southern California, and we have a smilir sitatuton fire insurance. The insurance to live in these areas are outrageous, even though the property costs are cheaper.

If your home is full of earthquake vulnerabilities, $400 to $1000 extra a year to spend on Earthquake insurance may be a wise gamble. Are you living directly above known earthquake fault line? Does your home have walls with lots of openings for windows and doors, making them weak? Living spaces over a garage tends to collapse. Does your home have an automatic seismic shut-off valve on your gas line? Does your wood-frame house have many bolts from the walls to foundation? Are there any un reinforced (no rebar) concrete buildings? Once you determine your home is not earthquake resistant, you can make improvements, shop different earthquake insurance plans, or both!

Earthquake insurance policies have some of the lowest loss rates for insurance carriers. In California, the loss ratio is around 9% for carriers. This means for every $100 the insurer takes in from earthquake insurance premiums, they pay out $9. Compare that with auto or homeowners insurance, where loss rates are much higher, typically 80-90%.

Earthquake damage is not included in your standard homeowners policies. Earthquake coverage in most states can be purchased from your homeowners insurance company. The majority of earthquake policies sold in California are through the state-run insurance pool, the California Earthquake Authority (CEA). Several insurance companies also sell earthquake plans. Earthquake insurance usually excludes claims from floods and tidal waves, even if they are caused by earthquakes. Landslides, sinkholes, mudflows, or other earth movement may be covered by earthquake insurance it resulted from an earthquake.

The risk of a major earthquake damage is fairly remote. The deductibles are typically has 10% to 15% for earthquake insurance. That means you have to pay the first $40,000 to $60,000 of damage on a home insured for $400,000 before your insurance carrier would pay.

CEA earthquake policies cover only $5,000 in damage for all the contents of your home and do not cover swimming pools, landscaping or non attached structures. But more extensive coverage can be purchased for an additional premium.

After a major disaster, the Federal Emergency Management Agency (FEMA) provides grants for emergency repairs and temporary housing, while the Small Business Administration (SBA) offers low-interest loans for rebuilding. But if you have earthquake insurance, your ability to get government help may be limited. Grants are usually reserved for those who are uninsured, and loans are restricted to amounts that your insurance doesn't cover.

In the next large earthquake, The government might not step in. The president has to declare a major disaster before FEMA and SBA can step in to help. If the damage is limited, that might not happen -- regardless of if your home is damaged.

The help might not be enough. FEMA grants may be limited, and SBA loans only up to $200,000 for home repairs. Repair costs typically skyrocket after a disaster, because local contractor become in high demand.

If you get an SBA loan, you are required to pay the money back. With your mortgage debt and your SBA loan, you could end up owing more than your property is worth.

If you have a lot of cash saved, you may decide to self insure in case of an earthquake. But most people can't pay for a new house out of pocket. If you attempt to get a home-equity line of credit in to help pay for earthquake repairs, they will only loan based on the current value of the (damaged) home. How's your credit? After the Northridge quake in 1994, many homeowners took out loans covering just the deductibles on their earthquake insurance plans.

Many people decide to take the money they would have spent on premiums for earthquake insurance, and invest in reinforcing and earthquake proofing their home.

If a major earthquake does hit, are you prepared to walk away from your home? If you don't have much equity, and you have no ethical issues about not paying your mortgage, simply mail hand your house keys back to your lender. That's what many homeowners did in Northridge foreclosures spiked in the area after 1994. If you have lots of equity in your home, consider paying extra for earthquake insurance coverage.