Let's Talk Earthquakes

from Neighbors Plus Insurance Services

by John Wilson on Oct 22, 2012

With two recent earthquakes centered in Yorba Linda with magnitudes over 4.0, without question, we have felt the effects of those quakes in Long Beach and Lakewood.  Ground shaking from earthquakes can collapse buildings and bridges as well as trigger landslides, avalanches, floods, fires, and tsunamis. Buildings with foundations resting on unconsolidated landfill and other unstable soil, and trailers and homes not tied to their foundations are at risk because they can be shaken off their mountings during an earthquake.

No part of California is immune from earthquakes; there is no “low risk” area in California for earthquakes.  In general terms, your home’s risk level depends on where you live in relation to earthquake faults, the age and type of dwelling you live in, and the soil types where you live.

Standard homeowners, renters and business insurance policies do not cover damage from earthquakes. Coverage is available either in the form of an endorsement or as a separate policy for homeowners, renters and small business owners.  In California, homeowners can also get coverage from the California Earthquake Authority (CEA), a privately funded, publicly managed organization.  The standard CEA policy includes a deductible that is 15 percent of the home’s replacement cost. The basic policy covers only the house (other structures such as garages, pools, etc. are not covered). Personal possessions are covered up to $5,000 and “loss of use” expenses, the additional cost of living elsewhere while home repairs are made, are covered up to $1,500. Recognizing that some people want more comprehensive coverage, the CEA also offers a 10 percent deductible, insurance for other structures, personal items coverage up to $100,000 and $15,000 in “loss of use” coverage.

Getting more people to buy earthquake insurance coverage is a challenge and the California Earthquake Authority says it has developed a new product line that attempts to do that.  With what the CEA is calling a “Homeowners Choice” product, residents will have a choice to select or decline coverage of personal property, which the CEA says will be more accessible through a new deductible structure.  With the new Choice policies, which debuted July 1, homeowners can cover:

- Dwelling only,

- Dwelling plus personal property/contents,

- Dwelling plus living expenses/loss of use,

- Dwelling, personal property and living expenses.

Homeowners cannot cover personal property or living expenses alone without covering the dwelling (although renters and condo owners can).

Despite these changes, nearly five out of six homeowners have no earthquake coverage.  Some people are wealthy enough to be able to walk away from the financial investment of a home, of course, and others have so little equity at stake that protecting it from earthquake damage may not make much sense.  But if your reasons for not having earthquake insurance include any of the following, you may wish to rethink your stance:

"My home survived the [fill in the blank] earthquake just fine." For anyone who knows anything about quakes, this is perhaps the silliest of all rationalizations.

Each earthquake is as individual as a fingerprint, with motion traveling through the ground in unique ways. In addition, new fault lines are being discovered all the time. The earthquake created by the fault under Northridge may not have touched your bungalow, but a shifting fault elsewhere in the Los Angeles area could leave it in splinters.

"My home is bolted to its foundation." This is a better argument than most; some respected earthquake researchers are themselves spending money on earthquake retrofitting rather than paying for insurance coverage.

But even they will admit that no amount of retrofitting can protect against a truly devastating shaker. Bolting seems to work best for one-story wood-frame homes; homes that are two or more stories or have big picture windows or other large gaps in the frames, are likely to suffer more damage even if bolted.

Of course, all the bolting in the world won't help much if the ground beneath the foundation gives way. In Anchorage, Alaska, a whole neighborhood of homes slipped out to sea when the massive 1964 earthquake liquefied the ground on which they sat.

"I'll get FEMA money to rebuild." Affected homeowners may qualify for low-interest loans offered by the Federal Emergency Management Agency through the Small Business Administration. But these loans are not free money; homeowners are obligated to pay them back, and they are entered in your personal net worth statement as a liability, offsetting an equal amount of assets.

Some observers question how much money will available after the next major earthquake; numerous disasters have soured many in Congress on the idea of handing cash to people who refuse to get insurance.

"I'll just hand over the keys to the bank." Homeowners who let their banks foreclose on earthquake-devastated homes not only lose all their equity, but also put their credit rating at risk. Depending on lenders' reactions, it may be difficult or impossible to borrow money for another home for several years.

For many of us, our homes represent our largest financial asset. We should think carefully before considering walking away as an option.

Of course, even people who do have insurance will probably suffer some loss of equity in a quake-hit area, at least temporarily. Just ask anyone who tried to sell a home in Northridge in the mid-1990s. A few intrepid souls snapped up these "distressed" properties, reasoning that the chances of another quake hitting the same area were especially remote, but many potential buyers stayed away.

Facing a temporary loss of equity is one thing; it's quite another to suffer such a huge loss from uninsured quake damage that you're saddled with a 10- to 30-year rebuilding loan, or that you lose your equity entirely by foreclosure.

Californians have a well-deserved reputation for being in denial. We build our homes on flood plains, on brushy mountainsides, in the path of mudslides and on or near earthquake faults. Most of the time, most of us avoid catastrophe. But we should acknowledge that someday our luck could run out-and consider whether it's worth taking precautions to protect against the unthinkable.

Speak with a Long Beach earthquake insurance specialist to help you select the right coverage. Visit www.NeighborsPlus.com or call (562) 627-1961 for a free consultation today.

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