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Should Homeowners Purchase Earthquake Insurance?

Try doing the math on your house and loan before the shakeout levels your options.

As a local State Farm Insurance agent for the past 26 years, I often get asked if I recommend earthquake insurance. Not all of my clients purchase earthquake coverage, but I certainly recommend they do. Here’s why:

Paul Cashman

The chances of seeing a major earthquake in my lifetime are nearly 100 percent. On April 14, the Southern California Earthquake Center released a report called Uniform California Earthquake Rupture Forecast (UCERF). According to the new forecast, California has a 99.7 percent chance of having a magnitude 6.7 or larger earthquake during the next 30 years. The likelihood of an even more powerful quake of magnitude 7.5 or greater in the next 30 years is 46 percent. Such a quake is more likely to occur in Southern California than in Northern California (15 percent chance in 30 years). To give some perspective, the 1994 Northridge earthquake was a 6.7-magnitude quake.

Further, the earthquake faults do exist right here in Santa Barbara. In a 2007 interview, UCSB seismologist Ralph Archuleta stated, “Santa Barbara is the third most hazardous earthquake area in the nation.” Hey, if it’s likely to happen, it could happen locally and the results could be devastating, I’m going to insure for that risk.

Most earthquake polices have a 15 percent deductible. On a $600,000 home some would argue that a lot of stucco can be repaired before one exceeds the $90,000 deductible. Let’s take a closer look. Let’s also assume the home’s market value is $1.5 million and the owner has a $700,000 loan against the property. If an earthquake destroys the home (there were hundreds of homes in Northridge that were total losses) would the owner still owe the $700,000 to the bank? You bet. Would it be difficult to get an additional loan for $700,000 for a total loan of $1.3 million? Well, given your home is on the ground, it could be problematic. Even if you could get the loan, do you really want, or can you afford a $1.3 million note? Many people lost their homes after the Northridge disaster because they chose not to carry earthquake insurance.

Even if your home is paid for, after 40 years of hard work and monthly payments, would you want to get a new loan at that point in your retirement? Could you afford to? Even if you had the cash, would you want to build a new home out of cash?

The 15 percent deductible is significant. Who wants to go out of pocket $90,000? If history is any indicator, the federal government will make low-interest loans available, but it’s still a loan. In my case I would borrow $90,000 to cover the deductible and use the earthquake insurance to rebuild the remainder of the home.

Earthquake insurance is a choice. No one is requiring you to carry it. Like many of my clients, my home is my largest asset and I don’t want to risk losing it. For those of us who do have earthquake insurance, it’s the peace of mind knowing I won’t lose my home when the big one hits.

Paul Cashman has been a local State Farm agent in Santa Barbara for the past 26 years. State Farm is the largest writer of auto and home insurance in California.

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