Factors That
Affect Your Financing
Earthquake
Insurance
For many people
their home is the largest investment they will make in their
lifetime. For this reason, homeowners should be careful to
purchase adequate property insurance. Mortgage lenders require
borrowers to have homeowners insurance in order to protect their
investment to finance the home. Unfortunately homebuyers often
assume the basic policy required by lenders will be sufficient,
but the policy limits and coverages may be inadequate.
Homebuyers should consider supplemental coverage for the natural
disasters (flood and earthquake) generally excluded under the
standard homeowners policy.
Flood insurance is
sold as a separate policy. Mortgage companies (for all Federally
funded, backed, or insured loans) require the purchase of flood
insurance for properties located within special flood hazard
areas (SFHA).
Earthquake insurance
is provided by private carriers and is most commonly added as an
endorsement to your homeowners (or renters) policy, rather than
as a separate policy. Since earthquake insurance is catastrophic
coverage, it has a high deductible, which typically ranges from
5% to 15% of the value of the home. Generally, there is no
requirement to purchase this earthquake insurance and the
majority of U.S. homeowners have chosen not to obtain this
additional coverage.
Many people in
considering their exposure to earthquake damages limit their
decision to whether their home is in a high quake prone area
(near a fault). However, most people are not aware of the extent
of earthquake activity. For example since 1900, earthquakes have
occurred in 39 states and nearly 90% of the U.S. population
lives in seismically active areas.
An extensive and
costly amount of damage can be done to a home in the event of an
earthquake. A common cause of damage occurs when homes slide off
their foundations. Prior to 1940, newly constructed homes were
placed on the foundations with no permanent attachments, versus
homes built since the 1940's have been required to be bolted to
the foundations. Owners of the older homes can remedy this
situation and have the homes secured to the foundation .
Some additional
corrections that homeowners should consider are:
- Secure the water heater and
gas appliances to the wall studs.
- Limit exposure of falling
objects by securing the objects and top heavy furniture to
the wall studs.
- High chimneys should be braced
or replaced.
A seismic risk
assessment firm can perform a complete analysis of a home's risk
assessment and provide recommendations for reducing the risk or
improving the seismic safety.
In the last several
years, there have been some changes in the way homeowners
insurance is structured in high-risk catastrophe states. The
1994 Northridge quake near Los Angeles caused approximately $9
billion in insured losses. As a result, many carriers in the
state either placed strict limits on writing new policies or
stopped writing policies altogether which created an insurance
crisis. This situation prompted the California Senate to pass
legislation creating the California Earthquake Authority (CEA)
in the fall of '96, a state-run privately funded authority which
will sell earthquake insurance coverage.
The excessive losses
caused by natural disasters in the U.S. since 1989 (Hurricane
Inike, Hurricane Andrew, Northridge Earthquake, etc.) have
overwhelmed the capacity of private insurers and local
governments. It has become apparent a national program is needed
and various proposals have been submitted to develop national
insurance for disaster relief. Congress is currently considering
legislation on the following bills:
- H.R. 219, the Homeowners
Insurance Availability Act, creates a Federal program to
provide reinsurance for State disaster insurance programs
(such as the California Earthquake Authority).
- H.R. 230, the Natural Disaster
Protection and Insurance Act, creates a Federal program to
sell reinsurance to private insurers and focus on hazard
mitigation such as safer building structure requirements and
upgrading existing buildings.
- H.R. 579, the Earthquake,
Volcanic Eruption and Hurricane Hazards Insurance Act, would
provide a Federal program of insurance for the listed
hazards .
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