While friends and relatives post their images of frozen, snowbound misery from the Midwest and East Coast, the Bay Area continues to enjoy the advantages of a mild winter with the occasional, though not enough, rain shower. The test of California’s weather courage has always been a running punch line. It is hard to complain about February days in the 70s, only breaking out the sweaters and jackets in evening when the mercury dips into the high 40s and low 50s and it’s why people flock to the area in search of tract homes in the half-million dollar range and higher.
But California isn’t without its faults. Literally. While residents of the Golden State continue to pray for even more rain, it isn’t dangerous weather on the minds of homeowners and building managers. It’s earthquakes. Recent natural catastrophes in the east like hurricanes Sandy and Katrina, flooding in the Midwest and ice storms in the east remind of the need for vigilance as Mother Nature doles our her wares. But one cannot prepare for earthquakes, though the California Earthquake Authority is trying.
Homeowners and building owners can purchase earthquake insurance. But like all things in the insurance industry, the question isn’t one of the total protection, it’s about the cost benefit analysis.
“It would have to be an enormously destructive earthquake to be of benefit to the homeowner,” Insurance Agency LLC in Scotts Valley. “We sell a lot of earthquake insurance here through our agency and every story is different.” Cassidy said he does not carry earthquake insurance for his own property.
“When my wife and I decided to spend some money allaying our earthquake paranoia, we decided to spend some money having a contractor put in cripple walls and additional bolting of things,” he said. Cripple walls are small wall structures built between the first floor and the foundation of a structure, allowing them to bear the seismic weight of the load of the structure.
“It really does depend on what the cost benefit analysis is,” said Cassidy. “With a 10 or 15 percent deductible, which is what most policies offer, if you have a million dollar home, then your deductible is $100,000.” That’s a lot of money to lay out in the event of an earthquake powerful enough to do that much damage to your home.
“When you’re dealing with high rise rise condominiums, multi-level home or if you’re in an area where there is geographic liquefaction or serious catastrophic risk, then I would highly recommend earthquake insurance,” said Melinda Gedryn (cq) of Coldwell Banker San Jose. “Replacing your structure is not cheap with severe damage and so in that sense, it may well be worth having, again depending on your situation.”
But insurance and real estate professionals also think that after a natural disaster so destructive, the question arises as to what the Federal Emergency Management Agency would do. After Katrina, for example, FEMA worked with homeowners to help them get back on their feet. Would they do the same after a destructive earthquake?
And it’s not as if buying earthquake insurance is a simple matter of buying a policy. The annual cost can be equal to or greater than what homeowners pay for their regular homeowners insurance, doubling their annual premiums.
“Private carriers and the Earthquake Authority run some pretty sophisticated mapping models based on address of a house. They know what type of soil it’s sitting on, what the last earthquake did in damage and what the probabilities are,” said Cassidy. “So the deductible will be the same, but the pricing will be based on the actual exposure.” Thus, a house sitting along the Loma Prieta fault line is going to be more expensive to insure than a house located in a more stable area.
“Nuances affect the price,” Cassidy continued. “What kind of construction is it? Is it on a slab or not? So, the quote that a company offers will have a 10, a 20 or a 25 percent deductible, or they may make the decision to offer only one deductible based on their risk analysis.”
But earthquakes aren’t really predictable in any way. On the California Earthquake Authority’s webpage, the organization points out that the 1994 Northridge Earthquake in Southern California, which registered 6.8 on the Richter scale, occurred along a previously unknown fault line. Even the science can only reach so far. California is also home to two-thirds of the earthquakes in the U.S. registering more than 100 every day along more than 2,000 known fault lines.
“Each person is going to have different preferences,” said Demi Chizgi (cq) of Keller-Williams in Cupertino. “We should all have earthquake kits and prepare for emergencies and be ready. But reality sets in. An earthquake feels so far away and if someone is in the middle of buying a house and doing all of those details, it just seems like something that’s not important.” Chizgi said that every homeowner needs to do their own personal risk tolerance, just like they would when they’re investing money.
“Spending $1,000 a year on a policy you’re not sure you’re ever going to use is not something people warm too very well. Fires, floods- they happen all the time and we see that,” said Chizgi. “But earthquakes that do such extreme danger don’t feel like something real that they need to prepare for.”
Chizgi said the one thing that would make earthquake insurance a more appealing commodity is a lower price. “If people hear they’re going to pay another $900 annually on a homeowner policy, they’re not as likely to buy it. If it were offered for another $200 per year, it might be easier to make that purchase,” she said.
Cassidy said he can imagine being in a phase of life where spending $1,000 to $2,000 a year on earthquake insurance might be worth it. “But personally, I can’t imagine it right now unless I had 100 percent equity and it was my primary asset. Then I could see doing that.”