Before You Buy Geico Earthquake Insurance

Before You Buy Geico Earthquake Insurance

When water began draining from New Orleans in 2005, we learned that the majority of homeowners in New Orleans did not have flood insurance, as they were supposedly in "low risk" areas. More than 60% of homeowners will need to rely on their own savings and limited federal assistance to rebuild New Orleans, at an uncalculated cost to homeowners and taxpayers.

Could that level of disaster, especially that level of uninsured disaster, happen in California? Less than 15% of California homeowners currently have Geico earthquake house insurance, due to its high cost, the "it can't happen to me or my house" factor, and mortgage providers don't require coverage. The next big earthquake will cause billions of uninsured damage, but is the high cost of earthquake insurance really worth it?

Before You Buy Geico Earthquake Insurance

How do we get here?

The state of California requires that all homeowners insurance providers offer at least earthquake insurance (albeit at a high cost). Until 1994, it was widely available, but the high damage costs from the Northridge earthquake resulted in 97% of homeowners insurance providers pulling out of the state of California. In response, the California Earthquake Authority was formed by the California legislator to provide earthquake insurance.

What is the California Earthquake Authority and how does it work?

The California Earthquake Authority provides two-thirds of the earthquake policies in California, sold through its member providers, such as Allstate and State Farm. An owner purchases the policy through their regular insurance agent, but the policy is actually a CEA policy.

The CEA currently has about $ 7.2 billion to pay claims, which it claims is enough to pay for foreseeable damages (Loma Prieta in 1989 had $ 6 billion in total damages). If the damage claims exceed $ 7.2 billion, each claim would be paid a prorated portion of your losses, unlike a regular insurance company, which promises to pay the actual damages based on the insurance policy. The state of California cannot help pay claims out of general funds.

Policies also have a high deductible, usually 15% of the home's value. In other words, your home must be damaged by more than 15% of its value before insurance begins to pay. Therefore, this insurance is not for driveway cracks, it is for significant structural damage to your home. The policy also pays for limited content (starting at $ 5K) and loss of use (starting at $ 1500).

Why is earthquake insurance so expensive?

Insurance policy premiums are calculated based on probabilities - the probability that a home like yours in a neighborhood like yours will catch fire or that a driver like you will have an accident. With data from millions of households, these probabilities can be calculated with reasonable precision. But no one can reliably predict the likelihood of an earthquake strong enough to damage your home.

And, as you can imagine, damage from an earthquake, flood, or hurricane is widespread, potentially over thousands of square miles, rather than one or a few dozen homes, as in a fire. As such, the insurer would have to pay zero claims or billions of dollars in claims - too much variance to plan reasonably or price accurately.

Are we really at risk here in San José?

According to the USGS, there is a 62% chance that there will be a 6.7 or higher earthquake (such as the Northridge earthquake) in the Bay Area in the next 30 years. In my zip code (San José 95126), the USGS calculates an 80% probability of a 6.0 earthquake and a 20% probability of a 7.0 earthquake, in the next 30 years. Whether you consider it a high risk depends on your tolerance for earthquake risk; I consider it to be a high risk of a moderate earthquake and a somewhat low risk of a terrible earthquake in the next 30 years.

But like any problem related to real estate, everything is local. The actual location of your home significantly affects your risk: bedrock, soil reclaimed from the bay, soil type, nearby streams, actual distance from the epicenter - all can affect potential damage.

But of course, many earthquakes occur where the USGS was not even aware of a fault, and we never know when or where it will happen, until it does.

Should I Get Earthquake Insurance?

Factors to consider:

1. Could you afford to pay for your home rebuild with your own savings and investments?

2. Can you afford to pay the high cost of insurance indefinitely?

3. Could you make your current mortgage payments and a new rebuild loan?

4. Can you mitigate your potential losses by bolting your roof to the walls and walls to the foundation, for example?

5. What is your tolerance for the risk of an earthquake?

6. What are the risks of the current construction of your house (type, age, foundation)?

7. What are the risks for your specific location (soil type, distance to known faults)?

Are they worth the costs?

Let's say you have a home that would cost $ 250K to rebuild, you will own the home for the next 30 years, and your earthquake premiums are $ 1,200 per year. Over the next 30 years, that would be a total of $ 36,000 in premiums (assuming your premiums don't increase, to simplify the calculations).

Instead of buying insurance, invest your premiums in a diversified mutual fund. With an 8% annual return, you would have $ 135,000 (before tax) in year 30. * But of course, you only have that total in year 30, not year one, which means if the earthquake occurs tomorrow, I don't have the money.

The deductible is another big drawback for many homeowners. The insurance pays only for large structural damage, not broken plates or cracked driveways, which means you're less likely to use it.

However, keep in mind that you will not need to contribute the cash for the deductible; You can choose not to bear those repair or rebuild costs, or you can apply for an SBA loan to pay the deductible (assuming a federal disaster declared area).

Why not get federal aid or "walk away" and let the bank keep the property?

The federal government would likely provide access to SBA loans, if the area is declared a federal disaster area (no small businesses required). However, the SBA maximum loan of $ 200K may not be enough to rebuild your home, and it is a loan that you must repay (in addition to your current mortgage).

If you have refinanced your mortgage, you have a recourse mortgage, which means that the bank can not only foreclose on the property in the event of default, but can also go after your personal assets and your future income in the event of default. . .

Therefore, you cannot just walk away, especially if you have a good income and some personal assets. The bank can help by deferring payments for a few months, but you still have to pay the loan back.

Last thoughts

We have earthquake insurance at our home. Our house was not yet built in the 1906 earthquake (so who knows if it will stand), it is over 75 years old and not bolted to the foundation, and we have a refinanced mortgage.

For my family, insurance premiums deserve peace of mind in the event of a major earthquake. That's exactly what insurance is for: "you never know.". Visit our website to learn more about earthquake insurance and its benefits.

Before You Buy Geico Earthquake Insurance