Should You Have Earthquake Insurance in Los Angeles?
by Shawn Carvin, Senior Mortgage Banker
Although California — and the Los Angeles area in particular — is famous for earthquakes, lenders generally do not require homeowners to carry earthquake insurance. And most homeowners—more than 80%—don’t have earthquake insurance on their properties. However, homeowners should consider all of the financial repercussions before deciding not to purchase earthquake insurance simply because lenders don’t require it.
The cost of earthquake insurance
Many people just don’t want to pay for earthquake insurance. At upwards of a thousand dollars per year, based on the value of the home, it can put a significant dent in the average household budget. Most plans have a deductible of about 15% of the value of the home. If the house is valued at $500,000, the homeowner will get only $425,000 if the house is a total loss.
Out of sight, out of mind
It’s been more than 20 years since the Northridge earthquake cost insurers over $12 billion. The passage of time makes events seem more abstract. People don’t think it can happen to them or happen to them again. Plus, a significant number of current Los Angeles residents arrived within the last 20 years and don’t really understand how much damage a serious earthquake can do.
Other ways to prepare for earthquakes
But many Angelenos are keenly aware of the costs associated with earthquake damage. Some of these homeowners have chosen to retrofit their homes to prevent or reduce major damage by bolting the frame to the foundation or by shoring up walls that are prone to collapse. But even these measures, which are wise moves for any homeowner in the Los Angeles area, aren’t going to completely protect a home located near the epicenter of a major quake.
Earthquake insurance is a good idea
There may not have been a significant earthquake in the area in quite some time, but science tells us there is a very high likelihood of another serious earthquake in California in our lifetime. It’s best to be prepared.
While you might be inclined to opt against coverage due to the significant annual premium and high deductible, not having earthquake insurance absolutely will not save you money if a major earthquake impacts your neighborhood. You may be able to physically walk away from the damage, but you won’t be able to walk away financially. Without earthquake insurance, you will still have to pay the mortgage, but your payments may only be bringing you closer to full ownership of a condemned home. And defaulting on a mortgage will devastate your credit. It will cost more to borrow in order to rebuild after a total loss of your home than it will to borrow enough to pay for the deductible.
An earthquake could be financially damaging, even disastrous, for a homeowner, but having earthquake insurance can help prevent it from being a catastrophe. To see how much earthquake insurance might cost, check the California Earthquake Authority’s premium calculator.