Should I Have Earthquake Insurance?

If you live in Oregon or Washington, you’ve undoubtedly heard of the Cascadia subduction zone, the fault line stretching 700 miles from northern California to Vancouver Island.

Longtime Oregon residents might remember the Scotts Mills earthquake of 1993. At magnitude 5.6, Scotts Mills rocked Oregon’s Willamette Valley, the Portland metro area, and was felt even as far north as Seattle. Damage totaled about $28 million, mostly from fallen chimneys and cracked or crumbling walls.

Knowing what a moderate quake such as Scotts Mills can do, is it advisable for homeowners to invest in earthquake insurance to hedge against loss if the Big One hits?

What’s the Risk?

Scientists say a major quake hits the Pacific Northwest every 243 years. The last Big One was in 1700—319 years ago.

If the Big One—defined as magnitude 8.0 or greater—were to occur, scientists predict it could cause more than $80 billion in damage.

The trouble is, there’s no way to know when a major quake might hit. While researchers have discovered clues as to where a Cascadia subduction zone earthquake might start, they are unable to predict when.

Am I Already Covered?

This brings us back to the question of earthquake insurance.

First, damage to your home from an earthquake is not covered under a standard homeowner’s policy. Homeowners must add an earthquake endorsement to a current policy or purchase a separate earthquake policy from a specialized carrier.

Second, homeowners who choose not to purchase earthquake insurance may plan to rely on FEMA for assistance in the event of a disaster. But remember that most federal disaster assistance comes in the form of low-interest disaster loans that must be repaid, in addition to your original mortgage.

Premiums and Deductibles

Insurance premiums are based on a variety of factors, including geography, home construction type, and the deductible you select.

Deductibles are based on a percentage of your home’s replacement value, a current estimate of the cost to rebuild the structure.

Deductibles typically range from 5% to 20%. Let’s say your home’s replacement value is $400,000, and you opted for a 20% deductible to keep premiums as low as possible. This means the first $80,000 in repair costs will come out of your pocket, with the insurance company stepping in to cover the rest.

A higher deductible means that earthquake insurance will help cover catastrophic damage to your home, but you may opt not to file a claim for damage sustained from a smaller earthquake.

Special Considerations

Insurance—whether it’s auto, disability, or earthquake insurance—is a way to protect against financial loss. The risk of a loss occurring and the financial capacity to absorb it is unique to each individual or family.

As you think about your own situation, here are some factors to consider:

  • Do you live in a high-risk area where earthquakes are more frequent and powerful, such as Oregon, Washington, or California?
  • How is your home constructed? Brick, wood frame, and multistory homes are more likely to be damaged in an earthquake.
  • Who “owns” your home—you or the bank? A home owned outright is arguably an asset worth protecting. If the bank owns much of your home and you are comfortable forfeiting your equity (and living with several years of bad credit), would you be able to walk away from a damaged home?
  • Can you afford the cost of rebuilding or repairing your home, as well as the expense of temporary housing, while continuing to pay your original mortgage?
  • Can you afford to replace your personal belongings if they are damaged or destroyed?

One last note: For those with homes on the coast, it’s important to know that most earthquake insurance policies will not cover tsunami damage, even though the tsunami may technically be the result of an earthquake. The only way to insure against floodwater damage is through an insurer participating in the National Flood Insurance Program, or NFIP.

An Individual Decision

Whether the Big One occurs in our lifetime is anyone’s guess, but that doesn’t mean we should ignore the potential financial risks.

For some, forgoing earthquake insurance and instead investing in home retrofitting may make sense. For others, the peace of mind earthquake insurance provides is all it takes to justify the cost.

If you are unsure what’s best for your situation, please reach out to Vista—we’re happy to help.

 

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