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Should You Purchase Earthquake Insurance?

Earthquakes in Southern California

During the first week of July, Southern California experienced two very large earthquakes; the largest in over two decades.  One registered a magnitude of 6.4 and the other 7.1 with the damage caused by estimated to be over $100 million.  The epicenter was over 100 miles east from the city of Los Angeles.  If the quakes occurred within the Los Angeles city limits, experts estimate it would have caused over $200 billion in damage.   Because only about 10% of California residents have earthquake insurance it is no surprise that the those whose homes were damaged by last week’s earthquakes have been impacted financially as a result of having to pay for repairs or rebuilding themselves.   Sadly, some residents have been forced to walk away from their homes because they cannot afford to rebuild.

Why Don't Many People Have Earthquake Insurance? 

Knowing that the damage caused by an earthquake can be devastating, why is it that so few people have earthquake insurance in California?   The first and biggest reason is the cost of coverage.  Earthquake policy premiums can cost anywhere from $1,000 to $5,000 and possibly more per year depending on the size and quality of your home.   The second reason is the perceived notion that while “the big one” will happen someday, it won’t happen tomorrow and possibly not even in my lifetime.  The largest earthquake to happen along the San Andreas Fault (California’s largest Faultline) was in 1906 and that registered a magnitude 7.9.  The largest earthquake that occurred in recent memory happened 30 years ago along the Loma Prieta Faultline and that one registered a magnitude 6.9.  Because the cost of earthquake premiums are so high and the chance of a major earthquake occurring seems low, the popular thinking is why pay insurance for something that probably won’t happen.

When Should you Get Earthquake Insurance? 

In reality, according to the U.S. Geological Survey published in 2014, there is a 72% probability of a major earthquake with a magnitude of 6.7% or above occurring in the San Francisco region in the next 30 years.  The question we must ask ourselves when it comes to deciding whether or not to purchase earthquake insurance is:  If a major earthquake happened tomorrow and it caused major damage to my home, can I afford to rebuild it on my own?  If the answer is yes, then you are one of the lucky few and you probably do not need earthquake insurance.  If your answer is no or not entirely, then you should consider obtaining coverage.  The other important point to consider is that if your home is destroyed by an earthquake and you still have a mortgage on your home, your lender can still hold you responsible for your home loan.  You cannot simply walk away.    For most people, having to pay for the cost of repairing or rebuilding a home, temporary living arrangements, and a mortgage will be difficult or impossible to manage financially.  While the burden of paying for earthquake insurance seems high, when it is compared with the emotional and financial cost of having to bear the full burden of rebuilding on your own, the annual premium might not seem that unreasonable when compared to the alternative.

What are the Risks of Not Getting Insurance? 

When deciding to purchase any type of insurance including earthquake insurance, one has to weigh the risks of the event happening against the cost of insuring against that event.  For some, the cost of earthquake coverage is just too high and are willing to accept that risk; especially if you believe “the big one” will not happen anytime soon.   Even if it does happen, some believe the chance of their home being destroyed is remote.

However, because both the cost of rebuilding and the size of home mortgages have grown so much in recent years, especially in the San Francisco Bay Area, obtaining earthquake insurance is something more and more Californians should seriously consider.  Contact your agent and / or go to the California Earthquake Authority website for more information about earthquakes and obtaining earthquake insurance.

Regardless of whether you have earthquake insurance or not, you and your family should be prepared in the event of an emergency.  If you don’t already have one, consider purchasing an Earthquake Emergency Kit for your home and auto.  You can go to the Centers for Disease Control and Prevention website for more information.

Purchasing insurance is a big step, so please feel free to reach out if you have any questions regarding this. 

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This content is developed from sources believed to be providing accurate information, and provided by Attune Financial Planning.  Please consult your financial, legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information only.