eathquake insurance: expensive but necessary?

Question

Question to all investors that have properties in earthquake-prone zones of US: it's REALLY expensive to get your property covered under earthquake insurance... But I am assuming its a necessity. Am I right?

Mike G. · Answer

I recently spoke with a representative at GeoVera, a company that provides earthquake insurance in a few states (including California), and she said that the policy would cover a vacant house as long as business is not actually conducted inside the residence.  Whether that's what they'd be saying after an earthquake, I don't know.

Brian Levredge · Answer

The decision to insure needs to be weighed against the equity position you have in the property.  Imo, what you would spend on the deductible would increase your basis in the property.  What is more concerning to me is the time.  If there is a big one and you sustain damage, the odds are high that you will be waiting a long time to get your place fixed up.  I was doing insurance remediation after the Northridge EQ in 94 and we had jobs we didn't get to for two to three years after the EQ.  To my knowledge there is no insurance company out there that has a loss of use provision that long, assuming there are any companies left after the next big quake.  So whether you have the coverage or not, you are more than likely screwed either way.

The property types that would most be affected are "soft story" dwellings and single families or small multis built on un-reinforced cripple walls.  Soft story dwellings are where the second floor cantilevers out over the first and is supported by posts.  The posts don't hold in the shaking and the second floor (and what's above) come tumbling down.  Cripple walls tend to act as a hinge and when they "close" whatever is on top (the whole structure) comes crashing in on itself.  There are literally tens of thousands of these unit types that still haven't been retrofitted across SoCal.

Jeff S. · Answer

I know of no one who either buys nor requires earthquake insurance for flips.  The premiums and deductibles are outrageous and if you’re flipping homes, you must buy a commercial policy (see the CEA website).  Earthquakes are a risk everyone reluctantly accepts, including 88% of all CA homeowners who also don’t insure for it.  Of course, this is an excuse.

We only lend to flippers, and only in southern California, so this is a particularly sensitive topic and something I think about frequently.  We require the normal lender, liability, and fire insurance and earthquakes are always on my mind. With no insurance, it’s probably our biggest risk, but nothing we could insist on and remain competitive.  Nor could we afford to buy policies on our own, thought I will admit it’s something I still consider.  I’ve specifically asked one insurance broker if there is such a thing as a blanket earthquake policy and there doesn’t appear to be.  I’m curious what the large HML’s require.

All of our borrowers could probably afford minimal damage to all their homes, even if we had to step in and help with the repairs.  My fear is that, as lenders, we could end up owning what would amount to condemned buildings on soon to be vacant lots when our borrowers either walked or went bankrupt after the “Big One” hit.

While I also wonder about the solvency of the CEA, we’re in the process of re-evaluating our personal and business insurance and this thread motivates me to dig a bit deeper into it.  Thanks.

Jeff

Stephen Vanvliet · Answer

It's not as bad as john broussard asking for 580k insurance on a metal building with terrorism insurance.    Called around for 3 days and had to pay a 800$ broker fee for him to put wrong address 7000 a year insurance.    Before buyout less than 3k

Jeff S. · Answer

Absolutely carry it. With lots of equity I'd rather sell than not have it. We have a big fault line here with quakes every 300 yrs. and it has been about 300 yrs.

If highly leveraged then no.

Older properties not bolted down so the sliding around would be bad news.

Michael D. · Answer

"That's what I hear about all the time."
A dangerous line of thinking.

I don't have the right answer, and I think there are a lot of complicated variables to consider - not the least of which are the likelihood of the insurance company going bankrupt and of politicians pouring money on "victims" who don't have insurance.

I keep thinking about whether to buy it for my home, but I still haven't.

Brian Levredge · Answer

The San Andreas in not the one you need to worry about in SoCal.  That is far enough removed from the major population centers in SoCal that the damage wouldn't be as extensive as it would be elsewhere.  There are faults however that run right under L.A., such as the Newport Inglewood that are capable of ripping off a 7.5 and causing extensive property damage.  Fires aren't really an issue unless you live in the sticks.

Joel Owens · Answer

I am not an expert but I remember many documentaries on the big fault line there.

They predicted when the big one hit after the fault line those properties would literally be reclaimed by the sea and be underwater. Before the fault line would sustain damage but be above water still and re-buildable.

Of course the scientists predicted the mega fault quake could happen in the next 10 years or 1,000 years from now.

Aren't fires the bigger concern in California than the quakes?? That's what I hear about all the time.

Kyle Meyers · Answer

I had earthquake insurance before for my rentals, but when I changed to a commercial blanket policy, that coverage was not maintained. I have discussed it with my insurance agent and he tells me the earthquake insurance for commercial policies in Indiana is way to expensive right now to be practical, he says there are changes to how those policies are done coming in August so we will be reviewing my policies then.

Andrew Jones · Answer

I have a few properties and I don't have earthquake insurance on any of them.  The premiums and deductibles are too high.

eathquake insurance: expensive but necessary?

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