I am asked all the time for my opinion regarding the purchase of earthquake insurance. The lawyer in me always wants to hedge my answer because the decision whether to purchase earthquake insurance is a difficult one – a homeowner must choose between an expensive policy or having no coverage for a catastrophic event. Empirical evidence suggests that most homeowners agree: 7 out of 8 Californians have no earthquake coverage even though there is a better than 50% chance of a significant magnitude earthquake striking in the next half-century. Given the values of homes in California, the decision to purchase earthquake insurance is one to be appropriately considered.
Homeowners typically refuse earthquake coverage for several reasons. First, there are a large number of owners who believe that their regular homeowner’s policy will cover any losses resulting from an earthquake. In almost every case, this simply isn’t true, as earthquake and earth movement are specifically excluded from coverage. Second, is the cost. Many homeowners have made the conscious decision not to purchase this additional coverage because they feel the cost of the coverage plus the standard high deductible (typically 10% to 15% of the policy limits) makes the coverage unaffordable. Third, there are still others who mistakenly believe that if there is a disaster, the government will be there to help make them whole and help them rebuild their house. With government finances the way they are, it is simply not prudent to rely on government to help in the event of disaster.
So what to do? Do you save the money or do you spend it on a policy? An earthquake has the potential to totally destroy your home. Is that a risk you are willing to take without having insurance to help rebuild? By choosing to forego earthquake coverage, you are saving a lot of money, but you are also gambling that the “Big One” will never come. Remember, "no coverage” means that in a devastating event you will possibly have to raise enough money to pay the full cost of rebuilding while still paying the mortgage on a home you cannot live in, as well as the costs of living elsewhere. That’s a difficult triple whammy. There is no right decision, only the need to carefully evaluate which risk you can afford to take.
