Homeowners Insurance - Six Commonly Held Misconceptions about Earthquake Coverage

Many people think of earthquakes as random events that rarely occur in the United States. On the contrary, hundreds of earthquakes strong enough to feel and in some cases cause damage strike every year. The damage, when it occurs, can be massive. On average, earthquakes cause $4.4 billion a year, according to the Federal Emergency Management Agency (FEMA). This puts earthquakes fourth among the most costly disasters, trailing fires (at $8.6 billion per year), hurricanes (at $5.4 billion a year), and floods (at $5.2 billion a year). Despite the frequency and cost of earthquakes, there are several common misconceptions about them.

1. It can"t happen here. Many people, especially east of the Rocky Mountains, think they are immune from earthquakes. According to the United States Geological Survey, however, in the past three years earthquakes powerful enough to be felt have occurred in forty of the fifty states. California with 357 earthquakes and Alaska with 241 lead the nation. Hawaii (76) is also high on the list, but so are states east of the Rocky Mountains, including New York (25), Maine (12), and Tennessee (10). One of the most powerful earthquakes in the nation"s history occurred on the New Madrid fault line in the Mississippi Valley in 1812. Estimated at a magnitude 8.0 on the Richter Scale, it was felt as far away as Boston, where its shockwaves caused church bells to ring across the city. Two magnitude 5.3 earthquakes struck New York City, one in 1737 and in 1884. Charleston, South Carolina, was the site of a massive magnitude 7.6 earthquake that hit in 1886, killing sixty people.

2. Structural damage caused by an earthquake is covered by standard homeowner insurance. Many people think standard homeowners insurance covers damage caused by earthquake tremors. This is false. Shaking damage is excluded from homeowners insurance. The cost of repairing toppled chimneys, cracked fireplaces, warped or crumbling walls, or even broken foundations would not be paid by standard homeowners insurance. In a worst-case scenario, a home could be condemned as unsafe and ordered demolished, and the cost of rebuilding would not be covered by homeowners insurance.

3. Personal property damage caused by shaking is covered by standard homeowners insurance. A powerful earthquake can wreak havoc with the contents of a home. Electronics can be thrown to the floor or crushed in collapsing cabinetry. Fine art can be dislodged from walls and crash to the floor, sustaining serious damage. Sculptures, antiques, and other delicate objects can fall and break. No damage to personal property caused by the shaking of the earth is covered by a standard home owner insurance policy.

4. Regular homeowners insurance does not cover fire or water damage caused by an earthquake. Only half the damage caused by earthquakes is from shaking; the other half occurs in the aftermath of the quake, when systems damaged by the shaking fail. For example, extreme ground motion can bend pipes to the breaking point. If a natural gas line ruptures, the released gas can cause an explosion or fire. Similarly, if a water line bursts, it can cause flooding inside a home, destroying walls, flooring, carpeting, bedding, clothing, books, artwork, electronics, and more. This kind of indirect damage to a structure or personal property is covered by traditional homeowners insurance.

5. Earthquake insurance is not available in some states, such as California. It is possible to insure your home against damage cause by an earthquake in most states, but it requires buying a separate earthquake insurance policy or an earthquake endorsement to an existing policy. In California, limited dwelling protection is available through "mini-policies" backed the California Earthquake Authority (CEA), a governmental agency. The cost of earthquake insurance varies, depending on several factors, including where you live, the age of your home, and the materials used to build it. Rates are higher in active earthquake regions, of course. Older homes cost more to insure than newer ones are, in part because they often were built to less stringent earthquake building codes and in part because the materials used to build them have become less supple with age and less able to withstand shaking. Brick and block homes cost more to insure than wood-framed homes, because they are less flexible and more prone to structural damage.

6. Earthquake deductibles are set amounts. Unlike other standard homeowners insurance, earthquake insurance does not have deductibles of set amounts. Instead the deductibles are based on a percentage of the replacement cost of the home. They can range from as little as 2 percent of the home"s replacement cost to as high as 20 percent, depending on the location of the home and its construction materials. Some homeowners opt to pay a higher deductible to keep their premiums low. This practice can be risky, however. If you have a 20 percent deductible on a home costing $200,000 to rebuild, you would have to pay $40,000 of the costs. No problem, provided you have $40,000 in the bank. If, however, you plan to borrow against your home equity, you face an obvious problem: Your home will not be worth what is was before it incurred $40,000 or more worth of damage. When the dust settles, your home equity may be gone.

Homeowners without earthquake insurance will lose more than the equity in their homes. They will lose the ability to rebuild. One thing they will not lose, however, is their mortgages. Home loans have to be paid, no matter what shape the property is in. The likelihood of sustaining earthquake damage may be very small, but the financial risks of being uninsured are enormous. It is worth a call to an insurance agent or broker to find out how much a little peace of mind will cost.