Earthquake Insurance for homeowners:
Earthquake Insurance is a form of property insurance that pays homeowners in the event of an earthquake that causes property damage to the property. Earthquake Insurance for homeowners is one of the least utilized coverage endorsements to protect homeowners from a real peril that everyone has exposure.
I get disappointed by home lenders and insurance agents that they don’t do a better job mandating or encouraging the purchase of this important coverage.
Homeowners and renters insurance does not cover earth quake damage on the traditional coverage form. However, earthquake coverage is available in the form of a separate policy or an endorsement form from most private insurers. If you live in California, you can also buy from the California Earthquake Authority.
Premiums for earth quake insurance range from $800-$5,000 annually, and normally require a deductible. These deductibles are based upon a value of the home. The deductibles can range from 10-20% of the home value, but typically are 15%. Given the rising value of many homes across the country, these deductibles are quite large (when compared to auto insurance deductible).
But if your home is totaled by an earthquake, you’ll be glad you purchased – even with a large deductible. This is catastrophe insurance in the purest sense of the word. But when you are in this situation, again you will be happy you have coverage.
See also...What is a Deductible?
Determining whether it is worth it for earthquake insurance is a good example of why it pays to have an agent or adviser. But for those of you with extensive modeling experience you can try the following:
Sample simple Expected value calculation:
Depending on where you live you can calculate the probability of an earthquake, earthquake maps are online
then estimate the probability of the damage to your home (based upon various sizes), there are severity models online
then subtract your deductible from that value, and divide by the expected occurrence period (how often you expect to have an earthquake).
Compare that value to your Insurance premium/quote.
Many people assume it is not worth the money. I would argue it’s worth the time to calculate the expected value of every purchase, especially one that you have risk associated. You might find after an event that the loss didn’t exceed the deductible, in that example, it’s important to not view the purchase as a waste.
If you are buying based upon good expected value and using probabilities, you will still be winning even if you never use the coverage.
Please comment below with your thoughts or comments.