Earthquake insurance is a form of property insurance that pays the policyholder in the event of an earthquake that causes damage to the property. Most ordinary homeowners’ insurance policies do not cover earthquake damage.

Most earthquake insurance policies feature a deductible of between 10% up to 25% typically, which makes this type of insurance useful if the entire home is destroyed, but not so useful if the home merely sustains minor damaged.

Earthquake insurance rates typically depend on location, soil tests, and the probability of an earthquake in the property’s zip code. Rates may also be cheaper for homes made of wood, which withstand earthquakes much better than homes made of brick.

As with other types of disaster insurance, or damages caused by a large-scale disaster like floods, wild fires or hurricanes, insurance companies must be careful when assigning this type of insurance, because an earthquake strong enough to destroy one home will probably destroy dozens of homes in the same area. If one company has written insurance policies on a large number of homes in a particular city, then a devastating earthquake will quickly drain all the company's resources. Insurance companies devote much study and effort toward risk management to avoid such cases. Therefore it is extra important to be sure the insurance company covering you for such disasters as earthquakes, be financially large enough to sustain such catastrophic disasters.

California

Earthquake insurance has become a hotly debated political issue in California, whose residents purchase more earthquake insurance than residents of any other state in the U.S. After the 1994 Northridge earthquake, nearly all insurance companies completely stopped writing homeowners' insurance policies altogether in the state, because under California law (the "mandatory offer law"), companies offering homeowners' insurance in California must also offer earthquake insurance. Eventually the legislature created a "mini policy" that could be sold by any insurer to comply with the mandatory offer law: only structural damage need be covered, with a 15% deductible. Claims on personal property losses and "loss of use" are limited. The legislature also created a quasi-public (privately funded, publicly managed) agency called the CEA (California Earthquake Authority). Membership in the CEA by insurers is voluntary and member companies satisfy the mandatory offer law by selling the CEA mini policy. Premiums are paid to the insurer, and then pooled in the CEA to cover claims from homeowners with a CEA policy from member insurers. The State of California specifically states that it does not back up CEA earthquake insurance, in the event that claims from a major earthquake were to drain all CEA funds, nor will it cover claims from non-CEA insurers if they were to become insolvent due to earthquake losses.

For more information on Earthquake Insurance, visit the following informative links:

California Earthquake Authority Application
http://www.insurance.ca.gov/CSD/Brochure/Residential/Earthquake.htm
http://www.iii.org/media/hottopics/insurance/earthquake/
http://www.insurance.wa.gov/factsheets/factsheet_detail.asp?FctShtRcdNum=20


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