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Many American homeowners ignore earthquake insurance warnings

In New Zealand, where damages from a deadly earthquake could exceed $12 billion, about 90 percent of homeowners have earthquake insurance. By contrast, only about 10 percent of homeowners in California -- the state most at risk of being rattled by a major quake -- carry earthquake insurance.

That disparity underscores the fact that millions of Californians -- and millions of other Americans, for that matter -- are unprepared for the Big One in terms of insurance coverage.

Most homeowners may not realize it, but at least 39 states are considered at risk of being hit by a moderate to severe earthquake. As of Feb. 15, for example, at least five dozen small and moderate quakes had struck Arkansas during 2011.

Unlike damage from a fire, a hailstorm or a snowstorm, few homeowner's insurance policies cover damage from earthquakes. This means that if a temblor strikes and you don't have an earthquake insurance policy, you'll have nothing to cover your losses.

Home policies typically don't cover quakes

home insurance earthquake

While policies are fairly easy to obtain, they have extremely high deductibles, high premiums and offer relatively little coverage, leaving some to wonder whether earthquake insurance is actually worth the price.

“There is widespread belief among homeowners that earthquake insurance is included in their policy, but it almost never is. It’s an add-on that you have to buy. Most homeowners are just not covered,” says Rich Roesler, a spokesman for the Washington State Office of the Insurance Commissioner.

In California -- the mother of all U.S. quake zones -- 70 percent of all earthquake policies are underwritten by the California Earthquake Authority. As a nonprofit, tax-exempt organization, it was set up by the state when many insurers left the market after the 1994 Northridge Earthquake. That quake caused more than $15 billion worth of damage.

Glenn Pomeroy, CEO of the Earthquake Authority, says only about 10 percent of California homeowners have earthquake insurance.

"It is probably a little harder for people to realize earthquake risk because, unlike hurricanes, they don't happen every year. Part of our task is to make people aware," Pomeroy says.

Industry experts say many homeowners are not aware that their home insurance policies generally do not cover earthquakes. Away from the quake-prone West Coast, many Americans may not even realize they live in a seismic area.

According to the U.S. Geological Service, states where residents should worry most about quakes include California, Washington, Oregon, Arkansas, Alabama, Illinois, Missouri, Tennessee, Arizona, Montana, Nevada, New Mexico, Utah, South Carolina, Alaska and Hawaii. About 5,000 earthquakes hit the United States each year.

Although an earthquake can cause tremendous damage hundreds of miles from the epicenter, few homeowners in any of those states are financially prepared and protected.

The costs of earthquake insurance

Deductibles for earthquake insurance can range from 2 percent to 20 percent of a home's replacement value, according to the Insurance Information Institute. This means that if it costs $200,000 to rebuild a home and the policy has a 2 percent deductible, the policyholder would be responsible for paying the first $4,000.

Earthquake insurance covers the structure of a house, its contents and additional living expenses in the event of an earthquake. But because of the high deductibles, the insurance is viewed by many homeowners as too costly. The California Earthquake Authority has 811,000 policyholders in a state with roughly 37 million residents.

Cars and other vehicles are covered for earthquake damage under the optional comprehensive portion of an auto insurance policy, according to the Insurance Information Institute.

home insurance earthquakes

Outside California, earthquake insurance is offered by private insurers or by public co-ops like the California Earthquake Authority. Some of the country's main providers of quake insurance include GeoVera, State Farm, USAA and Liberty Mutual.

Earthquake insurance premiums can vary dramatically depending on home's location, age, construction type and other factors. Across the board, an average annual premium for earthquake insurance in California is $813, but it can be substantially lower or higher for homeowners. Insurers rely on data from seismic experts to develop computer models that predict when and where major quakes could happen, and how much damage could be caused.

Pomeroy notes that if you own a home along the earthquake fault line in the San Francisco area, insurance will cost considerably more than if you own a home in Sacramento, which does not lie near a fault.

Roesler, the Washington official, cautions that earthquake insurance may or may not cover other damage caused by earthquakes. This can include fires sparked by quakes or floods spawned by quake-related tsunamis or tidal waves.

In Washington state, the market for earthquake insurance is relatively minuscule. In 2009, direct premiums written in the state totaled only $113 million, compared with the $1.3 billion in homeowner's policies that were written. Regardless of whether one purchases earthquake insurance, Roesler recommends that people look into retrofitting their homes to shore them up in case of a quake. In fact, he says, retrofitting may be required before homeowners can buy earthquake insurance, especially those who live older houses.

When it comes to earthquake insurance, California's Pomeroy says, "people often view these policies as quite expensive with a high deductible. It's completely voluntary for a risk that is out of mind and does not happen very often."

Despite the expense, the Insurance Information Institute makes an observation that may make it worth considering earthquake insurance if you live in a quake-vulnerable state:

"The potential cost of U.S. earthquakes has been growing because of increasing urban development in seismically active areas and the vulnerability of older buildings, which may not have been built or upgraded to current building codes."

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