Earthquakes send tremors of fear through most of us. Impossible to predict, earthquakes can cause major damage to your home and personal property, not to mention the loss of human life that can occur in severe earthquakes. Earthquake insurance is one way to protect one of your most valuable assets: your home.
RATING AND UNDERWRITING
I. Actuarial Basis
There is more uncertainty attached to insuring against the peril of earthquake than almost any other peril addressed by property and casualty insurers. Less is known about the causes, locations, and magnitudes of earthquakes than other more predictable perils like fire. Primary factors that are considered and weighed when developing rates are the environment, historical results, building construction, etc.
II. Rating Territories
There are two approaches to earthquake rating. One divides the state into geological territories that generally follow the zones assigned by the U.S. Geological Survey. The second establishes one statewide rate. Individual company decisions to follow one method over the other are based on various factors unique to each company.
III. Deductibles
The deductible is an important consideration in earthquake insurance. It is a percentage of the amount of insurance, or limit of liability, rather than a percentage of the amount of the loss. For example, a 5% deductible on a $100,000 policy would mean a deductible of $5,000 regardless of whether the loss was $20,000 or $100,000. In most cases, the base deductible is 5%, 10% or 20%. Some insurers offer higher deductible percentages for a reduction in premium.
Another unique element of the earthquake deductible is that, in most cases, it applies to each coverage separately. For example, a 5% deductible on a $100,000 policy would be applied as follows (per the HO-3 standard homeowners coverage form):
| Coverage | Limit | Deductible |
|---|---|---|
| A – Dwelling | $100,000 | $5,000 |
| B – Other structures (10% of A) | $10,000 | $500 |
| C – Personal property (50% of A) | $50,000 | $2,500 |
| D – Loss of use (20% of A) | $20,000 | $1,000 |
One reason for the high deductible is that insurers cannot spread earthquake risks across the nation, or even across an individual state, as they spread fire and other property risks. This is because the exposure to earthquake is based on where an individual lives unlike the exposure to fire that can occur anywhere. As a result, only those who live in an area where the exposure for earthquake is high purchase it. This is also the reason for high premiums.
IV. Waiting Periods
Another unique element of earthquake insurance is that most insurers require a waiting period, usually from 10 to 30 days, before they will bind coverage for a new applicant. Furthermore, most insurers place a moratorium on writing new earthquake coverage when there has been a recent earthquake in the location in question. When there has been recent seismic activity, individuals rush to add earthquake coverage. After the panic dies down, they cancel the coverage. The exposure to risk and the expense to insurers are usually greater than the premium earned, so insurers choose not to bind coverage in this circumstance.
V. Premiums
Pricing for earthquake insurance varies from insurance company to insurance company. To arrive at the premium an insurance company will consider various factors, including the construction of the building, its location and the amount of coverage desired.
COVERAGES
Endorsements: In almost all cases, earthquake insurance is provided by means of an endorsement to a standard homeowners or business insurance policy. However, it can be provided as a stand-alone contract.
72 Hours: One element common to all coverage forms surveyed is the provision that one or more earthquake shocks that occur within a seventy-two hour period are considered to be a single earthquake. Aftershocks are common with earthquakes. This provision makes an earthquake and its aftershocks one occurrence. This prevents an insured being charged a separate deductible for each earthquake or aftershock.
Flood or Tidal Wave: Another common element is that coverage is excluded for flood or tidal wave of any nature, whether caused by, resulting from, contributed to, or aggravated by an earthquake.
MARKETING
Though most insurers will provide earthquake insurance, few of them actively market the coverage. It is usually provided only at the request of the insured. You can find out who the top 20 companies are that market this coverage in Utah by going to our Earthquake Report found in the Market Share Reports.
SPECIAL PROGRAMS FOR HOMEOWNERS
In Utah, there are a couple of options other than endorsing a homeowners policy available to insureds. These policies are actually Difference in Conditions (DIC) policies. They provide catastrophe coverages not normally included in a basic homeowners policy and include earthquake and flood coverages. These programs are offered through many licensees.
As always it is important to understand the policy and coverage it affords. To do so you may want to review a sample policy prior to purchase.
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