Many of JMAC’s brokers live in earthquake-prone areas, which typically leads to borrowers asking, “Should I have earthquake insurance?” Well, as someone who has lived his entire life in California, I can say it’s always better to be in possession of it before you’re watching your light fixtures swaying back and forth. But it is not cheap.
In the Golden State, individual companies no longer write earthquake policies. Instead, they provide policies under the California Earthquake Authority (CEA). Established in September 1996 by California’s Legislature, the CEA is a privately funded, publicly managed organization that sells earthquake policies through participating insurance companies. The CEA provides the coverage and determines the premiums for coverage and deductible options available to home owners.
With respect to coverage, our brokers can inform borrowers that three questions should be addressed.
- What is being covered and how much equity is being protected? The answer, of course, is a function of the outstanding balance on your home.
- How much is the deductible? The CEA has a few deductible options: from 5 up to 10, 15, 20, and 25 percent of your dwelling’s coverage. Other factors will determine coverage amounts. If a house is insured for $500,000, for example, with a 5 percent deductible ($25,000), and an earthquake causes $80,000 in covered damage, your claim payment would be $55,000 (the difference between the covered damage and the deductible).
- What is the cost to insure? Premiums are based upon a multitude of factors: type of home, zip code, and deductible. The analysis of premium comes down to how much it is worth to a homeowner per year to insure how much equity versus how much of a deductible?
Ultimately, deciding to obtain earthquake insurance is a risk-benefit analysis that only the individual home owner can answer, with the assistance of an insurance professional providing the costs and deductibles.