Take a chance on quake insurance?

A cost-benefit analysis

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted Jan. 7, 2010

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A cost-benefit analysis

Bill and Kevin Burnett
Inman News

Q: I was recently offered earthquake insurance from my carrier. My thoughts are that it would make more sense to retrofit the house, as you mentioned in a recent article, rather than pay a monthly premium for insurance. What are your thoughts on this? I live about 45 minutes north of San Francisco.

A: The answer of whether to buy earthquake insurance lies in a cost-benefit analysis and your tolerance for risk. A rider covering earthquake damage on a homeowner's insurance policy can double the cost of the coverage and typically comes with a whopping 15 percent deductible.

Considering there have been two major quakes in the San Francisco Bay Area in the 20th century causing significant damage (San Francisco in 1906 and Loma Prieta in 1989), one might conclude the cost is not worth it.

We've owned residential real estate in the Bay Area since the early 1970s. Although our carriers offered us earthquake insurance, we never bought it. We weighed the cost against the risk and opted out. Somehow, protecting against the Big One that never came wasn't a high-priority place for us to put our hard-earned money. In the back of our minds, we supposed the Federal Emergency Management Agency would come to the rescue if a catastrophe happened.

We almost didn't skate, though. We both lived in Alameda in October 1989 during Loma Prieta -- Kevin in his 1879 Italianate and Bill a few blocks away in his 1920s Craftsman bungalow. We'd have thought neither structure would survive a major quake.

Being lifelong residents of the East Bay, we'd experienced quakes before, but nothing like 5:04 p.m. on Oct. 17, 1989. Surprisingly, our homes came through unscathed. The same couldn't be said for the parts of Alameda built on fill, the Marina District in San Francisco, the San Francisco-Oakland Bay Bridge or the Cypress freeway in Oakland.

If there were ever a time that we'd have opted for earthquake insurance, October 1989 would have been it. Instead we decided to take some measures to strengthen our homes against quakes. Bill replaced his foundation with an up-to-code, concrete-bolted version. He tied the cripple wall to the mudsill with plywood that served the dual roles of backing for the shingle exterior and a shear wall. Kevin installed plywood shear walls to the base of the balloon-framed Victorian.

Your choice is a tough one. We recommend that you do a cold-hearted cost-benefit-versus-risk analysis to make your decision.

How earthquake insurance works

Each insurance company determines earthquake insurance rates differently. Generally, older homes cost more to insure than new homes because newer homes have been built to more modern building codes with better defenses against earthquakes. Wood homes get better rates than brick ones because wood tends to withstand quake stresses better. Simply said: Wood bends, brick doesn't.

Location is also a factor. Areas are graded on a scale of 1 to 5 for likelihood of quakes.

Earthquake insurance is a type of catastrophic coverage. It pays off only if the damage is severe. California residents have the option to get insurance through the California Earthquake Authority or CEA. The CEA is a state-sponsored private-public partnership providing earthquake insurance to California homeowners, renters and condominium owners. Insurance companies that belong to CEA offer a standard earthquake insurance policy with a 15 percent deductible.

The deductible works like this: The 15 percent deductible on the California Earthquake Authority policy applies to the coverage amount on the home, not the amount of loss.

The CEA Web site has a tool to calculate your estimated annual premium. Californians can also buy earthquake policies outside the CEA.

Whether forgoing coverage is a prudent financial decision or a risky bet depends on such factors as where the home is located, when it was built and the number of stories it has. It stands to reason that single-story homes built in the past 15 years on bedrock are much less at risk than taller structures built on landfill.

According to a report by the UC Berkeley National Information Service for Earthquake Engineering, many people whose homes were damaged in the Loma Prieta quake sustained damage that was less than the level of their deductibles, rendering their insurance policies essentially irrelevant. While more than 43,000 housing units sustained some damage during the earthquake, only about a quarter of those units were destroyed or significantly damaged.

We've hemmed and hawed long enough. It's time for an answer.

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