Should I be concerned about having earthquake insurance for my rental properties?
Unless the lender required earthquake insurance, each property owner must assess the risks of going without the coverage vs. the cost of the coverage. The risk of earthquake damage depends on the location of the property, the type of property, date of construction, and the improvements made after construction specific to reduction of damages.
It should be obvious that earthquakes can have different magnitudes and occur at different distances from a property. In general, as either the magnitude goes up or the distance decreases, the severity of shaking increases. Those residences that are relatively close to an active fault are more likely to suffer damage, although there can be exceptions due to numerous reasons. For a well-built wood-frame house or other building, the deductible will generally exceed the structural loss for most moderate earthquakes. Due to good design, in recent earthquakes the damage to structures is a smaller part of the total loss than the damage to contents.
There are various possible improvements that will prevent or at least reduce impact of certain types of potential damages. Many improvements are relatively inexpensive compared to the protections afforded. For example, about $25 will greatly reduce the chance of an earthquake causing the hot water heater to tip over and both irreparably damaging the heater and damaging pipes, resulting in also extensive water damage.
Earthquake insurance is catastrophic insurance and therefore deductibles are relatively high. Deductibles are generally in the form of a percentage rather than a dollar amount. Deductibles may range anywhere from 2 percent to 25 percent of the replacement value of the structure. It may be possible that owners can get even higher deductibles to save money on earthquake premiums.
The insurance pays only for damages that exceed the deductible. Some earthquake policies treat contents and structures separately. This means the deductible amount applies separately to the:
- Total amount of the loss for contents
- Total amount of the loss for the structure
- Total amount of the loss for unattached structures like garages, sheds, driveways or retaining walls
Not all policies are alike. You should compare the coverage differences between companies to get the coverage that best meets your needs.
Premiums vary widely by location, insurer, the type of structure that is covered, and, of course, the deductible amount. Generally, older buildings cost more to insure than new ones. Wood frame structures generally benefit from significantly lower rates than brick buildings because they tend to withstand quake stresses better. Regions are graded on a scale of 1 to 5 for likelihood of quakes, and this may be reflected in insurance rates offered in those areas.
Although an earthquake is the first thing that comes to mind when someone mentions earth movement, this very broad category also includes landslide, mudslide, mudflow, sinkhole, or any other movement that involves movement of earth. Loss caused by these hazards may be covered if the damage resulted from an earthquake. An earthquake endorsement generally excludes damages or losses from floods and tidal waves – even when caused or compounded by an earthquake.