Dec 28, 2009

Is Buying California Earthquake Insurance Worth the Money?

It's that time of year again -- when homeowners' insurance is up for renewal. And for Californians, that means it's also time to reconsider whether to pay around a thousand bucks in order to buy earthquake insurance. (It's a question for people in many other states, too, but for reasons discussed below, a more troubling issue here in California.)

Given that a major earthquake is expected anytime in the Golden State, and that an earthquake is capable of rattling a home into rubble within a few short minutes, you'd think buying insurance would be a no-brainer -- especially for me, whose level of risk tolerance extends no further than penny slot machines.

But I've noticed a curious trend. People I talk to within the real estate and construction industries -- the very industries I thought would insist on such coverage -- often tell me they haven't bought it.  In fact, fewer than 15% of Californians buy quake coverage. What's going on?

There are, in fact, two rational arguments against buying such coverage in California:

  • The deductibles are very high, usually 10% to 15% of the insured value of your home.  So if your home is insured for up to $300,000, you could be on the hook for $45,000. In a medium sized earthquake, you might sustain that much damage and have to pay it all yourself.
  • The California Earthquake Authority (CEA), which is the only source for such insurance, is not government-backed. In a major earthquake, it might just run out of money. So an earthquake that's big enough to get a homeowner past the deductible will probably have done a lot of damage to surrounding homes , and we'll all be running after the same dollars. (Well, maybe not all, given how few people are insured these days. But plenty of people nonetheless.)
Coincidentally, I've been getting bids for some foundation work recently. It's not cheap, but making sure that one's home has a solid foundation is an eminently practical way of dealing with earthquake risk. One of the contractors told me, in essence, "I replaced my own home's foundation so that it's as solid as they come, and now I don't buy earthquake insurance. I figure any quake that's big enough to damage my home will have completely destroyed all the homes around me, in which case there really won't be any insurance money left."

So there we have it. Me, I haven't decided about the insurance yet -- but I will be getting that foundation dealt with.