Do you need to buy separate flood insurance and earthquake insurance policies? If you live in California, you should probably be prepared for the possibility of earthquakes and floods. Depending on your location, it is not usually a matter of if, but when they will happen.
Typically, your homeowners, condo, or rental insurance policy will not include natural disasters, and unfortunately, many families are left without coverage when adversity strikes.
Consider the following questions to help you decide whether you should add these policies to your insurance portfolio:
- Do you live in a high risk area? Find out both the frequency and severity of quakes or floods in your location to help you determine the risk level. Are you close to a fault line – how close? Are you in a high chance of a flood plain – every 25 year flood, 50 year etc.?
- Have you considered the financial cost of repairing damage caused by an earthquake or flood? Keep in mind that if you live in an area that experiences fairly mild earthquakes, repairs may be minimal. However, if your home is located where you can expect moderate to severe quakes, you may be looking at considerable damage to your property. Similarly, it only takes a couple of inches of water to cause thousands of dollars in damage.
- Do you have the funds to repair or rebuild? Compare premium amounts and deductibles against the estimated cost of repairs. Are you able to cover any potential expenses out-of-pocket? Can you absorb these costs without experiencing financial ruin?
- Have you done everything possible to reduce your risk of damage? By improving your structure or securing your belongings can you lower the amount of potential damage that could be done to your home in the event of a flood or earthquake.
- Is your home built to withstand an earthquake? Newer homes are built according to different standards than older houses. How secure will yours be in a quake?
Natural disasters such as earthquakes and floods can cause considerable damage. But, it goes beyond just the repairs to your home. Where are you going to live while you are rebuilding? How will you replace your belongings? Where are you going to store the possessions you managed to salvage?
If you live in a high risk area or if a catastrophe will destroy you financially, then flood insurance and earthquake insurance is protection worth buying. Keep in mind that since these insurances are supplements to your original policy, you must have Homeowners insurance before you can purchase earthquake or flood coverage.
Earthquake insurance will help cover some of the losses and damage caused to your home, your belongings, or your property as a result of an earthquake.
Who Needs Earthquake Insurance?
Many people think that only homeowners need earthquake insurance. However, if you are located in a high risk area, you should consider purchasing a policy even if you live in a rental or condo.
You can buy insurance to cover damage to your possessions and to help pay for a place to live while your rental or condo is being repaired or rebuilt. Condo owners may also need additional insurance to help their homeowners association repair certain areas of the building. Before finalizing a policy, be sure to talk to your association to find out exactly what you will be responsible for in the event of an earthquake.
What Is The CEA?
The California Earthquake Authority, or the CEA, is a private-public partnership or organization that provides most of the earthquake insurance to California residents. You cannot purchase insurance directly from the CEA, but must buy your policies from an independent insurance company or broker.
The coverage offered by the CEA is basic, and the deductibles are very high. However, since July 2012, the Homeowners Choice Policy now offers more coverage options, including separate coverage for dwellings and personal belongings, different deductibles, various limits for loss of use expenses, and a $1,500 allowance for emergency repairs.
Some insurance companies offer non-CEA earthquake insurance. In many cases, you may be able to get broader coverage, especially if the carrier also holds your homeowners policy. Talk to your agent or broker about your options.
What Will A Earthquake Insurance Policy Cover?
Coverage can vary depending on the policy you purchase. However, there are typically three main areas that are included in most policies.
- Main Dwelling. Your policy will cover the cost of repairing or replacing your home, up to a specified amount. The limit will depend on the insured value of your property.
Most policies DO NOT cover landscaping, pools, fences, separate buildings, china, crystal, or patios.
- Personal Property and Belongings. Your policy will usually include a certain amount for replacing the contents of your home such as furniture and electronics.
- Loss of Use/Living Expenses. If your area has been evacuated or if you are unable to live in your home while it is being repaired or rebuilt, you will need someplace to stay. Most policies allot a certain amount for temporary living arrangements (hotel, rental, trailer) and for extras such as meals, storage facilities, and miscellaneous cost of living expenses.
What Premiums Can I Expect To Pay?
Like any insurance, rates vary depending on the insurance company. But, one thing is guaranteed – earthquake insurance is very expensive. Premiums generally depend on several factors including:
- Age of your home – older homes are more expensive to insure than newer homes
- Location – For insurance purposes, areas are rated on a scale ranging from 1-5 for the likelihood of earthquakes. You will pay more if you live near a major fault or high-risk area.
- Type of soil
- Construction of home – wood homes cost less to insure than brick/mortar homes. Two story houses are more expensive than single story homes.
- Deductible – As with any other type of insurance, if you want to have a lower deductible, you will pay a higher premium.
- Cost to rebuild – The value of your property will impact your insurance costs.
How High Are Deductibles?
Most insurance policies have a dollar amount deductible. For example, your fire insurance policy may have a $500 or $1,000 deductible per claim. However, for earthquake insurance, you will pay a percentage of the policy limit. And, that percentage is usually very high. The typical deductible is 15%, however, you can sometimes lower it to 10% by raising your premium significantly.
There are some states that offer lower deductibles (sometimes as little as 2%), however, these are usually very low-risk areas. California residents can expect to pay higher rates and deductibles due to the frequency and severity of earthquake activity.
Are There Any Additional Exclusions?
The purpose of earthquake insurance is to help you repair or rebuild your damaged home. While you can sometimes add additional coverage to some policies, you should be very aware of what your coverage does – or does not – include. Many policies exclude:
- Fire. Your homeowners policy covers fire damage, even if the fire was a result of an earthquake. Earthquake insurance does not cover anything that is included in your HO policy, so therefore, fire damage is an expected exclusion.
- Vehicles. Earthquake insurance does not usually cover damage to your vehicles, even if they are parked inside your garage. If you live in a high-risk area, check with your auto insurance provider to see if your vehicles are protected.
- Land. Sometimes earthquakes can cause damage to your land such as sinkholes, landslides, or erosion. You may be able to get additional coverage that will help you stabilize your land, but for the most part, this type of damage is not covered.
- Flood. Earthquakes can cause floods, especially if you live near the ocean. Moving land can also lead to burst pipes or backed-up sewers. Unfortunately, most earthquake insurance policies will not cover flooding, even if it was a direct result of the quake. If this is a concern for you, you will need to purchase a separate flood insurance policy.
Earthquakes, storms, tsunamis, or even a heavy rainy season can lead to high water levels and damaging flooding. Just a few inches of water can cost you thousands of dollars in repairs.
Many communities in California experience serious flooding, and the state contains some of the highest risk areas in the country. Flood insurance can provide protection for your home and your belongings.
What Is The NFIP?
The National Flood Insurance Program, or the NFIP, is a government program that offers flood insurance to property owners who live in participating communities. It is overseen by the Federal Emergency Management Agency (FEMA) and is designed to help people who live in high risk flood areas.
You cannot buy flood insurance directly from the government so policies must be purchased through an insurance agent.
Who Needs Flood Insurance?
If you are a homeowner, flood insurance is a good idea. According to statistics, a lot of recent flooding has occurred in low risk areas, so it may be something you want to consider.
If you live in a rental house or own a condo, flood insurance is also available to protect the contents of your home. Things like furniture and electronics are especially vulnerable to water damage, and as previously mentioned, you regular policy does not cover losses due to flooding.
How Do I Buy Flood Insurance?
When it comes to buying flood insurance, there are two sources:
- Insurance agents or brokers who are licenced by the state to work with FEMA and sell policies offered by the NFIP.
- Private Insurance companies who sell flood insurance policies under their own company name. These are often referred to as “Write Your Own” policies.
When buying coverage, you will be asked to choose between a:
- Building-only policy
- Contents-only policy
- Building-and-Contents policy
What Premiums Can I Expect To Pay?
Flood insurance rates are set by the Federal Government, however your rates may vary depending on factors such as:
- Age of your home
- Type of construction
- Value of policy – amount of insurance
- What the policy covers – building only, contents only, building and contents
- Risk level – coastal property, high-risk area, previous claims, etc.
- Lower rates are available based on low-risk areas.
How High Are Deductibles?
Flood insurance policies usually have two separate deductibles – one for the structure and one for your personal contents. Deductible amounts can be quite high. Higher deductibles will lower your premiums but, remember, this will also lower your payout amount when you make a claim.
How Much Coverage Can I Purchase?
The NFIP maximum coverage is $250,000 for your home or main structure and $100,000 for your contents and/or belongings. “Excess Coverage” can also be purchased if you need to be insured for higher amounts. “Write Your Own” coverage limits will depend on the provider, so talk to your insurance agent about your options.
What Is Excluded?
Most flood insurance policies exclude damage caused by landslides, sink holes, erosion, or unstable ground.
What is Next?
Since flood insurance and earthquake insurance are expensive and may not be the right choice for every situation, it is important to understand what your risk of loss and the potential cost of loss is for your area. I recommended that you speak to an insurance professional who has a good understanding of the risks and can advise you based on your personal needs and budget.