Earthquake Insurance: What Is It and How Does It Work?
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Earthquakes are unpredictable. They can be so small they’re imperceptible to most people, or large enough to devastate entire communities.
These natural disasters can cause expensive damage to homes and commercial businesses, but standard insurance policies don’t include earthquake coverage. If you’re unprepared, you could be left with thousands of dollars in damage to pay out of pocket.
Here’s what you need to know about earthquake insurance:
What is earthquake insurance?
Earthquake insurance is either a separate policy or an insurance rider you can purchase from an insurance provider to cover damages caused by an earthquake. Not all homeowners need earthquake insurance, but if you live in a high-risk area, you should add the coverage.
While insurance companies aren’t required to offer earthquake coverage as part of their standard homeowners insurance policies, some states require that carriers offer to sell additional earthquake coverage to their policyholders. In California, insurance providers must do this every other year.
Learn More: How to Buy Homeowners Insurance
What does earthquake insurance cover?
Earthquake insurance covers damage and loss resulting from an earthquake. Earthquake insurance won’t replace all your losses, but it can help reduce the cost of repairs and replace some of the items you lost. Your policy determines exactly what’s covered.
An earthquake insurance policy typically covers three main components:
- Your home: The limit on your earthquake coverage is typically equal to the limit on your standard homeowners insurance policy. Earthquake insurance may cover any expenses needed to bring your home up to building codes, reestablish the land under your home, and remove debris from your property. Policies also cover electrical, plumbing, structural, and cosmetic damage caused by the earthquake.
- Your personal property: Earthquake insurance covers some personal items (like furniture, electronics, and clothing). If you have jewelry, china, or other valuables, you may need to purchase an additional insurance rider to get enough coverage to replace them.
- Additional expenses if your home becomes uninhabitable: Many earthquake policies cover the cost of additional living expenses. Your policy will provide funds to cover temporary housing, moving, rental, storage, and laundry. Most policies have a time frame to use the funds, but you won’t have a deductible (out-of-pocket cost) before you receive this money.
Credible makes it easy to compare homeowners insurance quotes from top carriers.
How earthquake insurance works
You can choose from two types of earthquake insurance policies:
- Traditional earthquake insurance: This type of insurance covers “pure loss.” The insurance provider assesses the value of damaged or lost items and reimburses you that amount of money.
- Parametric insurance: This earthquake insurance policy allows you to set parameters that trigger insurance coverage. For example, your policy could let the coverage kick in if an earthquake registered as a 3.0 or higher. The parameters vary based on your needs and the carrier’s policies, and typically a third party must verify that the parameters were met.
Earthquake insurance policies may have a deductible that covers both your home and personal property, or separate deductibles for each. California Earthquake Authority offers deductibles from 5% to 25%. In the event of an earthquake, you’ll pay the deductible, and your insurance provider will cover the rest, up to your limits.
What doesn’t earthquake insurance cover?
An earthquake policy won’t cover everything. The policy’s primary goal is to ensure that you get back into a safe, healthy living situation as quickly as possible. Earthquake policies won’t cover the following:
- Separate buildings like sheds, barns, or detached garages
- Cars and vehicles (though your auto insurance may cover damage from an earthquake)
- Damages to land (unless your policy states otherwise)
A rule of thumb is that earthquake policies won’t cover anything your basic homeowners insurance plan already covers.
How much does earthquake insurance cost?
Earthquake insurance in the U.S. costs $800 per year on average, according to Lemonade. Of course, this varies depending on where you live. A home in California would have much higher premiums than a home in a place with a low risk of earthquakes.
Check Out: How Much Does Homeowners Insurance Cost?
Factors that affect the cost of earthquake insurance
Your insurance carrier will consider several factors when setting the price for an earthquake policy. Some of the most common determinants include:
- Property age: An older home may be more expensive to insure because it has a higher risk for damage and may use materials that are harder to find today.
- Property location: If you live in an area or state at a higher risk for earthquakes (like California), your premium will be higher to account for the more significant likelihood of a payout.
- Property construction: Your property value affects how much coverage you need. Your insurer will consider the size of your home, the type of materials used for your home’s structure, and the type of foundation when determining your rate.
- Rebuilding cost: If you opt to insure your home for replacement cost, the insurance provider will pay to rebuild or repair your home to its previous state with similar materials. If you insure it for actual cash value, your insurer will pay what your home would cost today, deducting for depreciation. The type of policy you choose will affect your monthly cost.
- Deductible: You can lower the cost of your earthquake insurance by choosing a higher deductible (the amount you need to pay before the insurance kicks in). However, you’ll be responsible for this amount in the event of an earthquake. A lower deductible will equal a higher premium.
Where you live is one of the most significant factors in determining the cost of your insurance. In the United States, Alaska and California are two states with the highest risk, and therefore have higher insurance premiums.
Earthquake insurance premiums are also calculated on a “per $1,000 basis.” For example, a home in California might cost $5 per $1,000. A $200,000 policy would then cost $1,000 per year.
Is earthquake insurance necessary?
It depends. There’s little to no risk of earthquakes in some states (like Wisconsin and Florida), so you may not need a policy. Other states, like Texas and Indiana, have a slightly higher risk for earthquakes, so some earthquake insurance will likely be beneficial.
Earthquakes are far more likely in western states like California, Oregon, and Washington. You should invest in an earthquake insurance policy if you own a home in one of these states.
How to buy earthquake insurance
When you’re ready to purchase earthquake insurance, you’ll need to do a few things, including:
- Determine how much coverage you need. Consider your budget when deciding on coverage limits and deductibles. If you opt for a high deductible, you’ll need to make sure you can afford to pay that amount out of pocket if necessary. Think about your location, too. Research the fault lines and level of risk in your area to see if you need to pay for a more expensive policy.
- Talk to your current homeowners insurance carrier. You may be able to get a better deal by working with the provider that already insures your home. Start by getting a quote from your current carrier.
- Compare rates from different insurance providers. If your current insurance carrier doesn’t offer earthquake insurance or you’re worried the cost is too high, compare rates from multiple insurance providers.
- Check with your state department of insurance. If you’re having difficulty finding an earthquake policy, your state department of insurance may be able to provide helpful resources.
- Purchase a policy. It’s important to note that many insurance carriers will not sell a new earthquake policy within 30 to 60 days of an earthquake in your area. You may need to wait to get coverage if you’ve recently experienced an earthquake.
Visit Credible to easily compare homeowners insurance quotes from top carriers.
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