Few know the risk of living in earthquake country quite like Susan Hough. The 46 year old seismologiest heads the U.S. Geological Survey's Pasadena office, which monitors earthquakes statewide. She also has written a book about Charles Richter, who invented the scale for measuring the magnitude of quakes.
She has lived through a few big ones too, including the 1992 Landers quake and the catastrophic 1994 Northridge quake. And yet, Hough doesn't carry quake insurance on her vintage 1926 South Pasadena bungalow. Instead, she has spent thousands of dollars bracing her chimney, strapping down her water heater and using plywood to shore up her home's cripple walls, the short stud walls that lie between the foundation and the floor of some houses.
Despite dire warnings that Southern California is long overdue for the 'Big One', only about 1 in 8 Southland homeowners has quake insurance down from 1 in 3 homeowners in the mid 1990s according to the California Earthquake Authority (CEA).
Cost is one reason; high deductibles are another. For a relatively new two story home in Northridge, for example buying $250,000 in coverage would cost a homeowner $625 a year through the CEA, the quasi public agency created in 1996 to ensure the availability of quake insurance. But a homeowners has to suffer more than $37,500 in structural losses before the policy will pay a penny. That's because the standard policy has a 15% deductible. And many items, including dishes and decorative objects; are not covered at all.
If you don't have much equity in your home or if it is worth less than you paid for it, there is less value to protect. People in this situation simply may decide to walk away if their homes are destroyed in a quake and let their property fall into foreclosure. However, if you have a lot of equity in your home, you stand to lose much more in a catastrophic quake.
For many families, their home is their single biggest asset, the question they need to ask is: "How do we manage our risk?" This is the same basic question asked continuously by underwriting managers for insurance carriers who have the same responsibility on a much larger scale!
Those who have plenty of other assets can choose to in effect self insure, including setting aside some money each year to cover repairs. But they also have to be prepared to borrow against their hom in the event of a disaster that exceeds the size of their repair fund. For those avoiding insurance due to the common 15% deductible; this is a much smaller share than 100% which would otherwise be their responsibility if they choose to go uninsured.
Deciding whether to buy quake insurance is similar to deciding whether to buy long term care insurance. It's extremely difficult to handicap your chance of using it, yet it's expensive enough to worry about throwing money down the drain. It would be reasonable to say that intelligent people may go either way with their decision.