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Earthquake insurance basics

Read the Spanish version: Conceptos básicos sobre seguros contra terremotos

earthquake insuranceThe Aug. 23 earthquake that struck the East Coast was a jolt to many, reminding people that earthquakes aren't just California's problem.

But generally Californians bear the brunt of earthquakes. The probability that one or more 6.7 magnitude or greater earthquakes will strike California in the next 30 years is 99 percent, according to an April 2008 study released by experts from the U.S. Geological Survey (USGS), USC's Southern California Earthquake Center and the California Geological Survey. The chance of a 6.7 magnitude quake hitting the San Francisco Bay area is 63 percent, and the probability that an earthquake of that size or greater will strike the Los Angeles area is 67 percent by 2028.

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For comparison, a magnitude 6.7 earthquake is equivalent to the 1994 Northridge, Calif., earthquake that resulted in 57 deaths and than $40 billion in property damage, according to FEMA.

Home insurance, condo and renters insurance policies generally do not cover damage caused by an earthquake, but coverage can be purchased as an endorsement to your home insurance or a separate earthquake policy. The cost of earthquake insurance varies from state to state. Contact your home insurance agent to find out what the costs would be for your home.

Not surprisingly, Californians buy the most earthquake insurance, but you don't have to live hear a fault line to buy earthquake insurance.

How much earthquake insurance coverage should I buy?

If you decide to purchase earthquake insurance, buy enough to cover the costs of rebuilding your house and replacing damaged possessions. The amount of insurance you buy should be based on replacement and reconstruction costs, not the market value of your property and possessions.

You should also find out the policy's rules for filing claims before you sign any earthquake insurance policy. For example, it's important to know how much time you have to file a claim following a quake. In some cases, damage from earthquakes is not immediately apparent.

The New Madrid seismic zone, which stretches from just west of Memphis into southern Illinois, also has insurers worried. For those who don't remember, which would include anyone not alive in 1811, an earthquake struck the New Madrid area with enough force to change the course of the Mississippi river and ring church bells on the east coast.

Scientists from the USGS estimate that the chance of a magnitude 6.0 earthquake or higher occurring in the New Madrid seismic zone is 25 to 40 percent in the next 50 years, and an earthquake with an 8.0 magnitude — which would cause catastrophic damage — could hit areas affected by the New Madrid seismic zone in the next 50 years.

Earthquake insurance costs

Ideally, your earthquake insurance policy should cover the cost to replace or repair your damaged property. To select the right plan for you, consider the following:

  • Does the policy cover only your dwelling? Are accessory structures, such as garages, also included?
  • Will your policy pay for the contents of your home and for additional living expenses if your home is destroyed or too badly damaged for you to live there before repairs are made?
  • Are there any exclusions or limitations to coverage?
  • What deductible must you pay before the insurance kicks in?

Earthquake insurance rates are determined differently by each insurance company and can vary widely depending on several factors. Generally, older homes cost more to insure. Wood homes get better rates than brick buildings because wood tends to withstand quake stresses better. The Insurance Information Institute notes that premiums are also based on the nature of the soil and your house's proximity to recognized fault lines.

In addition, areas are graded on a scale of 1 to 5 for likelihood of quakes, and this is reflected in earthquake insurance rates. Because earthquake insurance is a type of catastrophic coverage, most policies carry a high deductible — anywhere from 2 to 20 percent of the replacement cost of the structure. For instance, if the cost to rebuild your house after a quake is $100,000 and your policy has a 2 percent deductible, you would be responsible for the first $2,000.

Residents of California can buy insurance from the California Earthquake Authority (CEA) through participating insurance companies. The CEA is a state-sponsored private-public partnership providing earthquake insurance to California homeowners, renters and condominium owners. The 17 insurance companies that participate in the CEA offer a standard earthquake insurance policy with a 10 percent or 15 percent deductible.

Currently, only 12 percent of Californians who carry fire insurance also buy earthquake insurance. For more, we look at why won't Californians buy earthquake insurance?

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