TITLE: Earthquake Insurance: Considerations for Every Californian Homeowner – and Condo Owner

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All Californians with equity in their homes should consider how they protect that asset from the devastation of a major earthquake.  Condo owners, who are particularly vulnerable to earthquakes, should examine the coverage they have at the HOA level – if any – and potentially consider a new alternative available to them.

Natural disasters are one of the most feared, but compelling ideas in society. Think of the countless movies starring The Rock; where he comes face to face with volcanoes, snow storms, hurricanes, and yes, you guessed it: earthquakes. Why? Because they are scary, other worldly and can do some damage to life as we know it. But most of us think we will never have to jump an open chasm as the ground splits in front of our only escape route. And you know what, we are probably right.

However, I can still remember being violently shaken awake in 1994 as books fell off shelves, pictures were overturned and household items broke free from their restraints during the Northridge quake. It seemed to last forever. And while it was nowhere near the San Andres fault breaking all of California apart, living here makes us well accustomed to minor quakes every so often. We Southern California residents have been pretty lucky that we haven’t seen an earthquake of that magnitude and destruction in a while. Or are we?

The likelihood of a major earthquake striking California in the coming decades is significant, bordering on inevitable.  According to a 2015 report from the U.S. Geological Survey, there is a 94% chance that an earthquake of at least a 6.7 magnitude will occur in Southern California in the next 25 years, and a 95% chance that one strikes Northern California over the same timeframe.  If you focus on just the most developed metropolitan areas, the likelihood is still very high: the Los Angeles region has a 60% chance of a 6.7 or greater earthquake, and the Bay Area has a 72% chance.

Isn’t that insane? It’s basically a matter of when the “big one” hits, more than if; yet citizens are not required to have earthquake insurance! (In an interesting piece of structural hypocrisy, if your home has a greater than 25% chance of a flood over a 30-year timeframe, flood insurance is mandatory.  Earthquake insurance, despite the above probabilities, remains optional).

Meaning, if you have equity in your home, you have a valuable asset that is worth protecting, the question is:  how much is that protection worth?  Whether or not the inevitable earthquake hits, if you have equity in your home, earthquake insurance makes sense. It just does. 

For Californians who have owned their homes for 30 years or so, they are living in this home effectively rent-free besides yearly property taxes. Consider the loss of this home due to earthquake: that small annual property tax payment would be replaced by rent of 10-20x that amount – a difficult change for anyone, but particularly for those on a fixed income.

Even if that home “only” has $200,000-$300,000 of equity (which, in California, many have built up simply through appreciation over the past 5-10 years), earthquake insurance is still the smart move.

Even in the highest risk earthquake zones, you can generally purchase insurance coverage for under $2,000 per year.  Which means for that small amount, your home can be protected! Think about this:

The only way a Californian loses all their hard work and equity in their largest asset is by not purchasing earthquake insurance.  

The residential structures most vulnerable to an earthquake are multifamily residential structures; like condos, co-ops, townhouses, etc. 

In 1994, the Northridge earthquake devastated the San Fernando Valley, causing roughly $20 billion in damage to residential structures alone. Detached homes fared much better than multifamily structures. Although multifamily dwellings accounted for only 22% of the area’s housing, they were 84% of the damaged properties and nearly 72% of the “red-tagged” homes (homes too dangerous to live in).  In the last 25 years, there has been a large increase in condos as a percentage of homes, meaning the number of homeowners at risk has gone up as well.

Professional investors regularly protect themselves against extreme but unlikely events through financial hedges.  Earthquake insurance, by contrast, is effectively a hedge on an extreme, likely event. Which means, it makes sense to protect one’s self when the inevitable earthquake likely hits. Because again:

The only way to lose money in an earthquake is by not having earthquake insurance.

I am sure you are thinking in the unlikely likely event that Southern California is hit by a large natural disaster that the government will step in and take care of us?

Ummmm… think again.

To put it simply: the US Government will not step in to save the equity in your home.  Funds distributed through the Federal Emergency Management Administration (loans or grants) are only for health and safety only. After past earthquakes, FEMA has capped individual assistance at $5,000, however that figure has increased to $33,000 after recent flood and windstorm events. So, even at this higher level, government assistance will help an owner find alternative housing or take proactive steps to stop further damage, but it won’t rebuild a lost home, and in most cases, must be paid back over time.

In short: homeowners need to be proactive and protect themselves and what is likely their most valuable asset by exploring earthquake insurance.

What should you look for when getting insurance?

The biggest exclusions to look for when considering earthquake insurance are: damage to foundations, underground pipes and detached/underground garages. For those living in any sort of Common Interest Development (like: condos, townhouses, co-ops, etc.), damage to common areas like a clubhouse or pool is frequently excluded from condo policies, so that should always be examined carefully.  Earthquake products do exist that will cover these important exposures.

Personal Property Coverage also comes with several notable exceptions and sublimits that owners should be aware of:

• Glassware and other “breakables” are generally excluded
• Anything that can’t be commercially replaced – like fine art – is excluded as well
• Sublimits for certain classes of goods are standard (for example, most policies include a $1,000 sublimit on computers and other data processing equipment – meaning the most you can recover for lost computers is $1,000, no matter how much personal property coverage you purchase)
• Your personal insurance broker can help with specialized coverage for items that standard personal property coverage is not designed to protect. Which I would definitely recommend looking into!

Your personal insurance agent should always be your first stop to better understand your options for protecting your home.  However, if you live in an homeowners association (condo, townhouse, co-op, etc.) you will need to take the additional steps: 

1. Find out if your association has a master earthquake policy from your manager or board (less than 10% of associations have a master earthquake policy)
2. If there is a master earthquake policy how much coverage is there and what it excludes
3. With this information, a unit owner can make an informed decision about what earthquake they will need to supplement the master earthquake policy or fully insurance themselves in the absence of a master earthquake policy.

Motus’ new direct-to-consumer earthquake insurance program allows all condo owners to fully protect their homes from earthquake damage while taking advantage of the same great rates available for master earthquake insurance policies. Motus is able to bring this solution to consumers because it worked with the California Department of Insurance to remove the barriers that prevented individual owners from buying into the same insurance coverage available to homeowners’ associations, which offers far more comprehensive coverage at significantly reduced rates relative to other individual options available.

“We identified an urgent need in the condo community and worked to design a new insurance product that allows all owners to access the quality coverage and lower prices of a master policy,” said Dan Wallis, CEO and founder of Motus. “Boards benefit too, as the Motus program allows them to fulfill their obligation to consider earthquake insurance. In fact, they are going a step further: They are offering tailored coverage to all owners and doing so without the burden a traditional master policy puts on an association budget.”

So, be sure to protect yourself, your family and your valuable assets. Don’t let the quakes shake things up unnecessarily. And while the sky is not falling, you should be asking yourself: if it did, am I ready?

For more information, call Motus today at (833) MOTUS-IN / (833) 668-8746, or visit Motus at www.motusins.com