As water began to drain from New Orleans in 2005, we learned that most homeowners in New Orleans do not suffer from flooding, since they are usually located in low-risk areas. More than 60% of homeowners will have to depend on their own savings and limited federal assistance to restore New Orleans - at an unpaid price for homeowners and taxpayers.
Can such a level of disaster, especially that level of an uninsured disaster, occur in California? Less than 15% of California homeowners currently have earthquake insurance, because of its high cost, the “cannot happen to me or my home” factor, and mortgage providers do not require coverage. The next major earthquake will cause billions of uninsured damage - but is earthquake insurance really worth the cost?
How did we get here?
The state of California requires that all homeowners insurance companies at least offer earthquake insurance (albeit at a high price). Until 1994, it was widely available, but the high costs of damage to the Northridge earthquake claim 97% of homeowners ’insurance companies are pulling out of the state of California. In response, the California Earthquake Agency was formed by the California legislature to provide earthquake insurance.
What is the administration of the California earthquake and how does it work?
The California Earthquake Agency provides two-thirds of the California earthquake policy, sold through its member suppliers, such as Allstate and State Farm. The homeowner buys the policy through his usual insurance agent, but the policy is the policy of CEA.
Currently, CEA has about $ 7.2 billion. US to pay claims that, according to him, are sufficient to cover foreseeable losses (Loma Prieta had a total loss of $ 6 billion in 1989). If claims for damage exceed 7.2 billion dollars. The United States, each claim would pay a proportional part of their losses - unlike the usual insurance company, which promises to pay the actual damage under the insurance policy. The state of California cannot fail to pay claims from common funds.
Politicians also have a high franchise - usually 15% of the cost of housing. In other words, your home must be damaged by more than 15% of its value before insurance is paid. Thus, this insurance is not for cracks in the driveway - this is for significant structural damage to your home. The policy also pays for limited maintenance (starting at $ 5,000) and loss of use (starting at $ 1,500).
Why earthquake insurance is so expensive?
Insurance premiums insurance premiums are calculated based on probabilities — the likelihood that a house like yours in your area, like yours, will catch fire or a driver like you get into an accident. Having data from millions of homes, these probabilities can be calculated with reasonable accuracy. But no one can reliably predict the likelihood that an earthquake will be strong enough to damage your home.
And, as you can imagine, damage from an earthquake, flood, or hurricane is widespread over potential thousands of square miles — instead of one or a few dozen houses, like in a fire. Thus, the insurer will have to pay either zero claims or billions of dollars in claims — a deviation too large to reasonably plan or estimate the price.
Are we really in danger here in San Jose?
According to the USGS, there is a 62% chance that an earthquake of 6.7 or higher will occur in the Gulf region in the next 30 years (for example, an earthquake in Northridge). In my postcode (San Jose 95126), the USGS calculates an 80% chance of an earthquake of 6.0 and a 20% chance of 7.0 in the next 30 years. Regardless of the fact that you believe that a high risk depends on your tolerance to earthquake risk - I believe that a high risk of a moderate earthquake and a small low risk of a terrible earthquake over the next 30 years.
But, like any real estate problem, it’s all local. Where your home is in fact, it significantly affects your risk — the root root, the reclaimed land from the bay, the type of soil, near the streams, the actual distance from the epicenter — all of which can affect potential damage.
But, of course, many earthquakes occur where the USGS is not even aware of the fault line - and we never know when and where it will happen until it happens.
Should I get earthquake insurance?
Factors to consider:
- Could you pay for rebuilding your home with your own savings and investments?
- Can you afford to pay the high cost of insurance for an indefinite period?
- Could you make payments on your current mortgage and on a new loan for rebuilding?
- Can you mitigate your potential losses, for example, by screwing a roof to walls and walls to the foundation?
- What is your tolerance for earthquake risk?
- What are the risks of your current housing construction (type, age, foundation)?
- What are the risks of your specific location (soil type, distance to known deficiencies)?
Suppose that you have a house that will cost 250 thousand dollars to restore, you will own a house for the next 30 years, and your shares for earthquakes will be $ 1,200 per year. Over the next 30 years, this will total a total of $ 36,000 in premiums (assuming your promotions are not increasing to simplify the calculations).
Instead of buying insurance, you invest premiums in a diversified mutual fund. With an annual income of 8%, you will have $ 135,000 (before taxes) in the year 30. * But, of course, you only have this amount in the 30th year, and not in the first year - this means that if an earthquake will happen tomorrow, & # 39; I have money.
The franchise is another big blackout for many homeowners. Insurance is paid only for large structural damage, and not for broken dishes or hacked tracks - this means that you are unlikely to use it. However, keep in mind that you do not need to come up with money for the franchise - you can either refuse these costs for repairs or restructuring, or you can apply for an SBA loan to pay for the franchise (subject to federal distress, the region is declared).
Why not just get federal help or “leave” and let the bank own the property?
The federal government is likely to provide access to SBA loans if the area is declared a federal disaster area (no small business is required). However, a $ 200,000 SBA loan may not be enough to rebuild your home — and this is a loan that you need to pay back (in addition to your current mortgage).
If you refinanced your mortgage, you have a mortgage loan, which means that the bank can not only buy out the property in case of non-payment, but also after your personal assets and future income the bank can receive in case of non-payment, So you can not just leave especially if you have a good income and some personal assets. The bank can help by delaying payments for several months, but you still have to repay the loan.
Last thoughts
We have earthquake insurance in our house. Our house has not yet been built in the earthquake of 1906 (so who knows if it will stand), it is 75+ years old and not tied to the foundation, and we have a refinanced mortgage. For my family, insurance premiums are calm in the event of a serious earthquake. What the insurance is for is “you never know.”
* calculations ignore inflation
