Ask Phyllis!

  Is Earthquake Insurance Worth The Expense?

 Dear Phyllis,

  Because earthquake insurance is so costly, my wife and I have always opted to not purchase the additional coverage. But after recent quakes, I am wondering whether this is a wise decision. What are your thoughts?   

Penny Pincher

Dear Penny Pincher,

  Recent studies indicate that less than 20% of California homeowners have earthquake insurance.

  Homeowners without a mortgage, or who have substantial equity, have a lot to lose if “the big one” hits.  For them, purchasing earthquake insurance is the only rational option.

  The case for earthquake insurance is much less clear for homeowners with large mortgages.  Those with little equity share the exposure (risk) with their lender and in many cases, when uninsured these homeowners just walk away in the event of a disaster.

  So should you or shouldn’t you purchase earthquake insurance?   Let’s look at the numbers to help you decide.

  Assume your home is insured for $1,000,000 and you have a $700,000 mortgage.  Your 10% percent deductible amounts to $100,000 (deductibles range from 10 to 15%).  If your home suffers $100,000 worth of damage – you receive nothing (because of the deductible).

   If your home experiences $800,000 in damage, again the first $100,000 is not covered.  Any payment for damages will need to be signed off by the lender. You will not get to walk away with a check. In this instance you will receive enough money to pay off the mortgage and/or hopefully to rebuild.

  The cost of earthquake insurance depends on numerous factors, such as location, number of stories, age of the home, cost to rebuild and the amount of coverage you have for personal property.  One caveat when shopping for earthquake insurance is to be sure the cost to rebuild makes sense.  My insurance company believes I can rebuild my home for $150 a square foot and that’s laughable.  The cost to rebuild a modest home is likely around $285 per square foot.  If you do opt for earthquake insurance make sure your coverage is adequate (and this applies to your homeowner’s policy as well).

  Phyllis Harb