Earth Quake Planning Basics

 *** We do NOT sell insurance or receive commissions from any products discussed in this forum ***

 We strongly encourage you to insure against catastrophic risks. Katrina was a recent example of a catastrophic risk as would be a category 7.0 earthquake. The best way to prepare is to plan for both your physical and financial safety.

We address earthquake planning with our AIKAPA Managed clients and AIKAPA Guided clients usually consult with us as they need. If you’d like us to provide more specific and personal discussion feel free to call us. You may also find value in the links provided in the AIKAPA resource page (www.aikapa.com/links.htm).
Here are answers to your most frequent questions on earthquake risk planning:

  1. Can I be denied earthquake insurance? It is mandatory, inCalifornia, that home insurance providers make available earthquake endorsement to all home policies sold in this state. The CEA (California Earthquake Authority) was created after the last major earthquake to assist home insurance companies so that they would be able to offer home insurance inCalifornia. I encourage you to call California Board of Insurance directly if your agent states that you can’t get earthquake insurance but you have your home insurance with them (1-800-927-HELP). The laws to protect you are under the California Insurance Code at section 790.03(h) of the California Code of Regulations at Title 10, Chapter 5, and in judicial decisions.
  2. What is likely to be my premium? This year we’ve found that premiums are more expensive – some as much as 75% more. The actual policy premiums, in the Bay Area, can vary dramatically depending on your home’s location, cost of recovery, and deductible. Insurance rates are calculated based on your zip code and the current cost of rebuilding your home. If you login to the CEA website (link provided via www.aikapa.com/links.htm) you can use their premium calculator to estimate your likely policy premium. Most of our clients have policies in the range of $1,200 to $4,500 per year. These policies do give you credit for retrofitting which you’ll likely want to implement to increase your physical safety.
  3. How much of a deductible should I get? This type of insurance only comes with a fairly large deductible. It is usually in the range of 10-20%. A home that costs $600K to rebuild could have a premium around $1,500 and a deductible around $60 to $120K. This means that you need to self insure the first $60 to $120K in earthquake damage. These funds need to be inflation protected but accessible as part of your ability to self-fund earthquake damage below this level.
  4. What is the risk of earthquake damage? No one can yet predict this with any certainty how your home will fare during the next earthquake. You can review your county and city disaster recovery (earthquake) planning to have a local view of how to plan for your safety and also visit the ABAG and USGS website to find out more about your home and business location with regards to the fault lines and shake areas (see our resource page at www.aikapa.com/links.htm). It is your closeness to the actual fault line and the type of soil (how much shaking and aftershock you experience) that determine the damage you experience.
  5. What is the likelihood of a quake? The probabilities quoted appear to rise each year. The 2008 USGS survey states that there is a 62% chance of a 6.7 quake in the next 30 years. It is also believed that the next quake will strike further north of the Loma Pietra (1989) 6.7 quake. Those who use frequency analysis to make quake predictions rather favor the prediction that we have entered a higher quake activity period resembling that seen around 1911. You can read more about Geologist’s view at the USGS website. (See the AIKAPA resource webpage www.aikapa.com/links.htm)
  6. Should I buy this insurance from my current home insurance provider? You should do a thorough review of many providers. This is a pretty expensive premium that you need to feel sure will be available when and if you need it. First, get quotes from large insurance providers including CEA-backed providers (these are easy to find). Second, get a contractor or structural engineer to review your home’s structural condition in case of an earthquake and secure your home (see www.aikapa.com/links.htm for several useful links). You’ll next need to carefully review each policy – this is not as straight forward as choosing the least expensive policy. You will need to compare the limits and be aware of exclusions. Make sure that when comparing costs you are comparing the same type of coverage, from companies that are either backed by the CEA or are able to withstand the cost of the next big quake.
  7. When does it make sense to self insure? When you are covering risks that are not catastrophic it is our belief that you should consider self funding. You should also consider self funding a large deductible thus allowing you to have enough cash flow to pay for needed catastrophic insurance and also provide for other cash flow needs. Using your current financial statement, cash flow and home equity you can quantitate your risk and life style exposures.

*** We do NOT sell insurance or receive commissions from any products discussed in this forum ***

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

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