Earthquake Insurance Considered Too Expensive for Most Homeowners

Published: Mon 12 Apr 2010

Lucas Eichmann

The earthquake that shook Southern California was a subtle reminder that not many California residents, nor San Diego residents, carry earthquake insurance. In fact, only 12 percent of homeowners carry earthquake insurance.

This might be a problem when the big quake finally comes. Of course, there are legitimate reasons why many residents have opted not to buy coverage.

The earthquake's epicenter felt on Sunday in San Diego was in a rural area of Baja California. And it caused some structural damage in El Centro and Mexicali, Calexico. On the other hand, it could have been far worse.

"California homeowners, in this most recent event, basically dodged the bullet," explained CEO Glenn Pomeroy of the California Earthquake Authority, a state-run non-profit that offers 70 percent of the earthquake insurance policies in California.

"Let's say the 7.2 that happened on Sunday happened under Los Angeles. We would see massive destruction. Homes destroyed. Infrastructure badly damaged," Pomeroy explained.

Earthquake Authority

The California Legislature established the earthquake authority after the expensive Northridge Earthquake in 1994 drove most private insurers out of the earthquake business. Pomeroy explained that the authority has the power to pay for billions of dollars of claims.

But homeowners won't get a dime unless they buy earthquake insurance policies.

Pomeroy emphasizes that the typical home insurance policy expressly omits coverage for earthquake-related damage. He explains that many homeowners do not realize that fact, or they think federal disaster aid will rescue them, should a large earthquake occur.

Pete Moraga, a California insurance industry spokesman, said Californians should not expect the government to restore their losses if their homes are destroyed by an earthquake.

"Keep in mind that FEMA grants usually top out at about $30,000," he commented. "And if you get or qualify for a low-interest loan, it's still a loan and you're going to have to pay it back."

To Buy or Not to Buy

Perhaps that is a compelling argument to buy earthquake insurance, but there are also many reasons why many people choose simply to take their chances. Those reasons come down to the rarity of large earthquakes, high deductibles, and the cost of insurance.

If your home is completely destroyed by an earthquake, insurance is a good thing. On the other hand, the average earthquake policy has a deductible of 15 percent. If you have an earthquake policy on a home that would cost $200,000 to replace, and an earthquake destroys your home, you are on the hook for $30,000 before you even see your first dollar of benefits. The quake that hit Calexico and El Centro this week will result in very few insurance-company payouts because of those high deductibles.