Should I get earthquake insurance for my home?

Most Washingtonians know that we sit on a bit of a geological hot spot. But many do not realize that two common risks that are likely not covered in their homeowners policies are earthquake and floods. In fact Washington’s Office of the Insurance Commissioner estimates that less than 15% of Washington homes are covered for earthquakes. Why is that?

As we mentioned initially, many do not have coverage because they assume they are covered. However, in Washington that is almost never the case. So it pays to periodically review your policy with your insurance agent. Aside from the items listed above, there may be other limits to your policy that you may not know about so it’s always a good practice to periodically review your policy with your insurance agent.

Another reason people may not be covered may have to do with the relatively small pool of insurers willing to insure for earthquakes in Washington. So even when someone knows they are not covered, they are unsure where to go for insurance and how reputable the company is that they will be dealing with. The fact is, a large number of insurers have discontinued offering this coverage due to their risk of exposure in case the Big One hits. This creates a two-edged sword. On the one hand fewer insurers means less competition which may drive up costs. On the other hand, if insurance companies see a large loss as inevitable is it really a good idea to go without it?

Some people feel that if there was a large loss the federal government would be able to provide assistance. In cases of emergency the assistance the federal government will give is generally in the forms of low interest loans that need to be repaid. And these would be on top of any mortgages that you currently have. For most people that is not really an appealing option.

Others may ask: if a large loss occurs will the companies who offer coverage be able to cover the losses? This, of course, is where it pays to do research or to have a trusted broker to guide you in the selection process, because some companies are more solid than others. However regulated companies in Washington State have a safety net to provide protection to consumers in case the company became insolvent. Notice we said “regulated”. These would be in contrast to a “surplus” broker, so again, do your research or contact a good agent.

So how do most Washington earthquake policies work? Two important considerations in the policy are A). What kind of deductible is right for you and B). What exactly do you want covered? As you weigh these factors it is critical that you consider what would actually happen in the event of a claim. And remember, earthquake coverage was really designed for a catastrophic loss, it is not designed for minor claims. Let me give you an example.

Let’s talk about deductibles first. Typically the deductibles are a percentage of the coverage amount. These can run from 5% – 25%. This is a percentage of the amount of coverage you put on your home. So if you have a policy with a limit of $500,000 and a 10% deductible, you will be responsible for the first $50,000 of repairs or replacment on the claim. If you have the same $500,000 limit with a 20% deductible, you will be responsible for the first $100,000 of repairs or replacement on the claim.

Now let’s talk about what you will cover. Many policies can either cover just the home, or the home and personal belongings. What should you choose? Let’s say your policy estimates the value of your home at $500,000 and your personal belongings at $150,000. Most carriers will give you a choice: do you want to insure just the home? Or the home and contents?

When making the decision it’s important to factor in the deductible. If there was a loss and it causes partial damage to the home, and you selected a 10% deductible for the home only you would be responsible for the first $50,000 of damages. ($500,000 home value x 10% deductible). But if you select coverage for your home and belongings you would be responsible for the first $65,000 (($500,000 home + $150,000 belongings) x 10% deductible). So until the claim surpassed $65,000 you would not get any payment from the insurance company. Either choice could be correct for you, but you need to factor the deductible into your decision making process. Ask yourself: if there was a major event what could I realistically come up with on my own to cover the repair of my home and the replacement of personal belongings?

What if you are a renter? Can you still get coverage? Yes you can. In the case of a renter you would design the policy around the cost to replace your personal belongings. This would be a relatively inexpensive policy.

What about a condo owner? Again, the policy could cover personal belongings, but as to the interior of the condo you would have to do a little digging with the condo association. For instance, do they have a master earthquake policy to replace the shell of the building? Without this policy, if there was a major event the condo could elect to simply not rebuild. Without the building structure, how could you replace the interior of your condo? So it really wouldn’t make sense to pay for the cost of replacing the interior walls, floors, fixtures, etc. without clarifying if there will be a building to inhabit.

How at risk are we in the Pacific Northwest? There are more than 2 dozen fault lines that criss-cross the state, making us the second highest state at risk for earthquakes. For example there’s the Cascadia fault, which has been dubbed “the Big One”. It has the potential to reach 9.0 and to shake for 4 minutes or longer. There are numerous articles that have been printed on the dangers of this earthquake and it’s potential for destruction such as this famous article from the New Yorker. The same article argues that the potential for an earthquake along the Cascadia fault in the next 50 years can be as high as one in three.

Of course there are other fault lines that pose other dangers. For example the Seattle fault runs beneath Seattle and has tremendous potential for property damage. The Seattle Times did an excellent series on the potential danger of both the Cascadia fault and the Seattle fault. The series carefully analyzed the potential for loss in our area and their conclusions were sobering. The bottom line is: the potential for loss is great, there is a significant chance it can happen in our life time and while many businesses have insured against this risk, far too few homeowners have.

Those are some observations on homeowners insurance. I would be happy to answer any questions you have for me. Leave me a comment in the section below or feel free to call the agency for more information.

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