Guide to Earthquake Insurance

Guide to Earthquake Insurance
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Guide to Earthquake Insurance

Guide to Earthquake Insurance
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The typical homeowners insurance policy isn't enough to protect you from certain natural disasters, including earthquakes. If you live in an area where earthquakes are common, you'll definitely want earthquake insurance as a crucial addition to your insurance policy. But what if earthquakes rarely occur in your area? Why should you get earthquake insurance? Here's what you need to know and how to determine if you need it.

What Is Earthquake Insurance?

An earthquake insurance policy covers your home and belongings should an earthquake damage your property. Some earthquake insurance policies even cover living expenses if you need to live somewhere else temporarily due to damage caused by the earthquake. 

Most homeowners insurance policies don't cover damage caused by an earthquake, but you may be able to add it to your current policy. You can also purchase earthquake insurance as a completely separate policy, which gives you the option to shop around for the best rate. PolicyScout can help you find earthquake insurance that fits your budget.

What Does Earthquake Insurance Cover?

Generally, earthquake coverage is broken down into three components:

  • Damage to your "dwelling" (your home).

  • Damage to your personal property.

  • Additional living expenses (ALE).

Here's an example scenario showing how each of these components would help protect you:

A severe earthquake could damage your home's interior walls and destroy your living room furniture. Because of the earthquake, you must evacuate the area and stay four nights in a hotel. The dwelling component would pay to repair your walls, the personal property component would cover the replacement of your furniture, and the ALE component would reimburse you for the hotel stay.

Your policy may require you to submit a claim for each separate component. You may also have to pay a separate deductible for each component depending on the insurance company.

What Doesn't Earthquake Insurance Cover?

You should always check the limits of your policy to understand its coverage restrictions. For instance, personal property may not apply to fine art or collectibles, and the ALE coverage may not cover travel or other expenses you incur as a result of the earthquake.

In most cases, earthquake insurance does not cover belongings outside of your home such as your vehicle, pool, or fence. Damage to your land, like gardens or landscaping, are also excluded in most cases. If covering items like these is important to you, look for a policy that offers "engineering cost" as an option.

Lastly, earthquake insurance rarely covers damage that an earthquake causes indirectly. For instance, an earthquake might lead to a fire that damages your home. In general, earthquake insurance would not cover the fire damage, and you would need to turn to your homeowners insurance policy. Likewise, a flood caused by an earthquake that leads to flood damage in your home would only be covered by flood insurance.

Do I Need Earthquake Insurance?

Earthquakes can occur in almost any state in the country, which is why earthquake insurance is much more common than you might think. Minor earthquakes rarely cause damage, but severe earthquakes can lead to catastrophic outcomes, which is why it's important to weigh the risks.

Examine Your Existing Policies

In general, homeowners insurance does not cover damage caused by an earthquake. However, before you purchase additional coverage, it's important to examine your existing policy. If it offers earthquake coverage you're satisfied with, you don't need to purchase a separate policy.

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Consider Your Location

In the U.S., 42 states are considered at risk for earthquakes, and 16 of those states are at high risk. The highest risk states include

  • Alaska

  • California

  • Hawaii

  • Idaho

  • Kentucky

  • Missouri

  • Montana

  • Oregon

  • South Carolina

  • Tennessee

  • Washington

  • Wyoming

Even if you don't live in a high-risk area, earthquake insurance may nevertheless be worth purchasing. The tremors that result from an earthquake can spread for miles, and even a weak earthquake can cause damage.

Measure Your Financial Security

Earthquakes can lead to catastrophic damage to your home, which is why it's essential to make sure you protect your interests. If you don't live in a high-risk area, and you're on the fence about earthquake insurance, it's important to evaluate your financial security to determine how an earthquake could affect your ability to rebuild your life if you don't have coverage.

With that in mind, consider the cost of replacing your personal belongings. Can you afford it? Next, consider the cost of repairing or rebuilding your home following an earthquake. How would you finance it? Remember that disaster can strike at any time, and you should always be prepared. Do you have enough savings to cover the cost of temporary housing if your home is uninhabitable or you need to evacuate the area?

If you can't answer an honest and confident "yes" to all these questions, earthquake insurance is likely a wise investment.

How Much Does Earthquake Insurance Cost?

As with other types of insurance, how much you pay for earthquake insurance will depend on the carrier, the policy, and the policyholder — you. If you're in a high-risk area you'll pay more for coverage than those in a low-risk area.

Factors Impacting Premiums

Geography will have the biggest impact on your premium since you're much more likely to make an earthquake insurance claim in a high-risk area than a low-risk area. However, your premiums are calculated by much more than geography. Other factors that an insurance company takes into account when setting your rates include:

  • Age of Home: Older homes may be more prone to earthquake damage due to the older materials and lack of modern building techniques. On the other hand, newer homes are typically built with earthquakes and other issues in mind, so they often cost less to insure. 

  • Number of Stories: If you have a basement, you can expect to pay more for earthquake insurance. Likewise, the more floors your home has, the more at risk it is of falling down in an earthquake. This means a single-level ranch home will cost less to insure than a two-story home with a basement and an attic. 

  • Frame Type: The materials used to frame your home will determine how resilient the structure of your house is. Subsequently, homes with wooden frames tend to cost less to insure because wood tends to be more resilient than other framing materials. 

  • Foundation Type: If your home sits on a raised foundation, it will be considered more resilient, which can lower your premiums. On the other hand, a home built on well-packed, sandy soil is considered more resilient compared to rock or clay, and that can also affect how much you pay for earthquake insurance.

If you want to lower your earthquake insurance premiums — and make your home more secure — consider making improvements to your home's structure. Examples include bolting your home to its foundation, bracing the water heater, installing automatic cut-off valves for natural gas, and reinforcing old walls with plywood. 

Coverage Limits and Deductibles

In general, earthquake insurance will have the same limit on dwelling coverage as your standard home insurance policy. The deductible for dwelling coverage is usually 10% to 20% of the set limit. 

For example, an earthquake policy may place a limit of $150,000 on dwelling coverage with a 10% deductible. If an earthquake were to render your home uninhabitable, and the company determines that your home must be completely rebuilt, you would submit a claim for 100% of the limit ($150,000). Your responsibility would be 10%, or $15,000, and your insurance company would cover the rest of the limit ($135,000). 

Finding The Right Earthquake Insurance Policy

Just as you shop around for car and home insurance, it's important to seek the best coverage and rate for earthquake insurance. Here's some advice to help you choose the right policy.

Understand Your Coverage Needs

Are you able to cover the cost of temporary housing if you need to evacuate your home during an earthquake? If so, you may not need a policy with ALE coverage. Likewise, if you are able to replace some or all of your belongings following an earthquake, you may want to set a lower coverage limit for your personal property coverage or opt out altogether.

It's important that you consider these coverage options as it gives you the chance to find a policy that best suits your needs so you don't end up paying for unnecessary coverage.

Considering your coverage options can also help you choose a more robust policy to protect your financial interests. For instance, if you have collectibles or a pool you want to insure, you'll need to look for a special policy that protects those items.

Build Out Your Protections

Aside from finding an earthquake insurance policy that covers the property most important to you, it's also important that you get the "complementary" policies that offer protection from other types of damage that often result from an earthquake.

For instance, earthquakes can lead to fires, but earthquake insurance will not cover fire damage. To make sure you're protected, check that your home insurance policy will cover your home adequately in the event of a fire.

In addition, earthquakes often lead to flooding which can result in flood damage, but earthquake insurance will not cover it. As such, you should consider purchasing flood insurance separately from your earthquake insurance policy. The typical homeowners insurance policy does not cover flood damage although it likely covers certain types of water damage.

Consider Your Limits and Deductible

It's not worth paying for earthquake insurance that doesn't adequately cover the cost of repairing or replacing your home or belongings. Likewise, it's not a good idea to pay for insurance that has a deductible so high you would struggle financially to make a claim. You'll need to strike a balance between coverage, deductibles, and premiums.

If deductibles would be a struggle for you in the event of an earthquake, consider your options. You can either pay a higher premium to get a lower deductible, making coverage more accessible if needed, or you can consider your ability to borrow the money if you need to make a claim. In any case, building an emergency savings account with a balance high enough to cover your insurance deductibles is a wise idea.

Compare Rates

Asking your neighbors what they pay for earthquake insurance may seem useful, but in reality, your rates could be entirely different even though you live in the same area. As explained above, your home's size, age, and structural materials are just some of the variables that factor into your plan's premium.

The best way to compare rates when shopping for a new insurance policy is to use a tool like PolicyScout. With PolicyScout, you can easily learn what various carriers charge for earthquake coverage so you can get the best rate. Shopping around with PolicyScout can save you hundreds annually, and it only takes a few minutes.

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