U.S. Risk and Earthquake Insurance
A basic homeowner’s insurance policy in the U.S. does not cover earthquake related loss or damage. Although 90% of the country's population lives in seismically active areas, only a fraction are covered by earthquake insurance. Even in California, the majority of the state’s homeowners opt out. A common perception is that earthquake insurance costs too much and offers little coverage. But the problem of earthquake risk is national: 38 other states face substantial earthquake hazards, including 46 million people in metropolitan areas at moderate to high risk outside of California.
In 2006, FEMA updated its landmark study (FEMA 366) on Annualized Earthquake Losses (AEL) in the U.S. The updated analysis indicated that the AEL to the U.S. national building stock was $5.3 billion per year. While 77% of the computed average annual loss is in the West (California, Oregon, and Washington), the remaining 23% (over $1 billion per year) was reported to be distributed throughout the rest of the U.S. FEMA published a map that reflects its estimates.
While Californians buy the most earthquake insurance, earthquake insurance has been sold to residents of all 50 states. Earthquake insurance is a form of property insurance that pays the policyholder in the event of an earthquake that causes damage to the property. If you’re considering buying earthquake insurance, realize that most earthquake insurance policies feature a high deductible, which makes sense if your entire home is destroyed. But if the damage is repairable, it may not be worth owning an earthquake policy if the deductible only adds to the cost of repairs.
On the other hand, earthquake insurance can be relatively inexpensive, depending on where you live. Rates depend on location and the probability of an earthquake, and may be less expensive for wood-frame homes, for example, as opposed to adobe or unreinforced masonry (brick).
Earthquake risk management can be a complicated process, but emerging, online tools such as those on this site can offer new information that helps you make informed, rational financial decisions – especially with regard to earthquake insurance. With OpenHazards.com, you can assess your own risk and decide whether the cost of an earthquake insurance policy and a high deductible will be worth it.
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John Rundle is a Distinguished Professor of Physics and Geology at UC Davis and the Executive Director of the APEC Collaboration for Earthquake Simulations. He chaired the Board of Advisors for the Southern California Earthquake Center from 1994 to 1996. Read John's blog.