It’s my personal passion to greatly increase the number of people and businesses in California that have earthquake insurance. Why? I’m not an insurance agent. I don’t make more money if you buy more insurance. I’m passionate about this because I want to spend the rest of my life in Sonoma County. Currently 8% of all businesses in California carry earthquake insurance and 10% of all Sonoma County homeowners have it. If this remains true when the inevitable big earthquake strikes our area, it won’t be possible for me to stay here, because the county’s economy will collapse.
After the 2017 fires, the North Bay saw what under-insurance looks like. A majority of 5,000 homeowners who lost their homes had not kept their coverages up to date with increases in supply and labor costs. They were forced to either leave the area, empty their savings, go into more debt, or become renters. With so much wealth gone up in smoke, local businesses suffered greatly, many of them closing. Try to imagine what will happen when most of the homes and businesses in the area need to be repaired or replaced and 90% of them have no insurance coverage.
So why do so few people and businesses have earthquake insurance? Most people don’t buy earthquake insurance because it seems really expensive. There’s a reason for that. Insurance pricing is a careful mathematical calculation of how likely the covered event is to occur and how severe the damage will be. A high premium is a simple, clear message that the covered event is highly likely to happen and the resulting damage will be catastrophic. In other words, if the premium is high, it’s coverage you really need.
People become even more reluctant to buy earthquake insurance when they figure out how the deductible works. More on that in a minute. But just recently, I’ve learned something that has brought me from thinking that earthquake insurance is a high-cost, low-benefit proposition to seeing it as an incredible bargain. Here’s why.
People who lost their homes in the North Bay Fires and insurance nerds like me have learned that homeowner policies, including earthquake policies, have three critical coverages. Coverage A is your dwelling repair or replacement. And while I refer to it as dwelling coverage, all the same information applies to a business property that you own.
The policy limit is the estimated cost to replace your home. The deductible is typically 15%, though you can choose to make it higher or lower. The thing that’s different about earthquake insurance is that deductible is not 15% of your loss, but 15% of the entire policy limit. So to use round numbers, if your policy limit is $1 million and your home or business is a total loss, your deductible is $150,000. If you have only minor damage, say $40,000 worth, your deductible is $150,000.
Using my home policy as an example, for a premium of around $1800-$2,000, I wouldn’t see a dime unless I had more than $100,000 damage to my home. It was hard to see it as a worthwhile investment.
That’s because I was looking only at the dwelling coverage.
But there are two other critical coverages in an earthquake policy: personal property and loss of use. The standard California Earthquake Authority policy set the limits on those coverages so low ($5,000 for personal property and $1,500 for loss of use) that they don’t change the calculus on the value of the investment much.
But I just learned that you can choose your limits for Premium Calculations2personal property and loss of use. AND those coverages have no deductibles. So you can set a realistic personal property limit and be reimbursed for your actual losses from dollar one.
More importantly, you can choose your own limit for loss of use coverage with no deductible.
I’m writing this 2.25 years after the Tubbs fire destroyed 3,043 homes in the City of Santa Rosa. Just 31% of those homes have been rebuilt, with another 36% under construction. As homeowners have waited for those rebuilds, they’ve had to continue to pay the mortgage on the destroyed home and pay for temporary housing. That’s what loss of use coverage is for: that temporary housing and all the expenses related to it.
Given how long it’s taking to rebuild after a fire that destroyed 5% of the city’s housing stock, think how long it will take to rebuild after a major earthquake, when 10 or 20 times as many homes and businesses are damaged.
So now I look at my earthquake policy this way: I’ve chosen a $100,000 loss of use limit. That would cover renting a similar home for three years. A large earthquake in my lifetime is pretty much a certainty; the only thing that’s uncertain is exactly when it will happen. So we will use that $100,000 in loss of use coverage. Even without considering the dwelling and personal property coverage, $2,000 a year for $100,000 in coverage that I know I will use in the next 30 years is a return on investment of 166%.
If your home was built before 1980, you can also get a substantial discount on the premium – up to 25% — if you have an engineer inspect the home and verify that it meets current seismic building code standards.
If you live in California and do not have earthquake insurance, call your broker today. If your broker tells you that you can’t set your own limits for personal property and loss of use coverage, get a better broker. Your broker may not be appointed by the carriers that offer this option. You can get a full range of options and great service from Vince Ginocchio at Sadler & Co. (707-595-1182, Vince@SadlerInc.com).
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