Earthquake Insurance

Earthquake insurance is coverage against loss or damage caused by earth movement, sold either as a standalone policy or as an endorsement onto a residential property policy, and always priced and underwritten separately from the homeowners coverage it sits alongside. It exists as its own product because the peril is excluded from standard policies: NAIC states that no standard insurance policy, including the homeowners policy, covers catastrophic earthquake damage, and that insurers offer an earthquake endorsement for an additional premium.

California's insurance code devotes an entire chapter to it, titled "Earthquake Insurance," which specifies the coverage in unusual detail: the offer, the wording of the notice, the minimum contents of the policy and the ceiling on its deductible are all set out in statute. Much of what follows uses that chapter as the worked illustration for that reason. It is one state's law, not a national rule, and whether other states impose a comparable obligation is a question for their own insurance departments.

The mandatory offer, and what "offer" means legally. California Insurance Code section 10081 provides that no policy of residential property insurance may be issued, delivered or initially renewed in the state unless the named insured is offered coverage for loss or damage caused by the peril of earthquake. The obligation is to offer, not to sell, and section 10085 makes the consequence of inaction precise: where the insurer establishes proof of mailing or delivery and the offer is not accepted within thirty days, there is a "conclusive presumption" that the insured elected not to take the coverage, binding on every other insured person and on anyone else with an insurable interest in the property. Section 10083 allows the offer to be made before, with, or within sixty days after issuance or renewal, and requires that where the offer is declined it be repeated on an every-other-year basis; section 10086.1 additionally requires the insurer to notify the insured that the policy provides no such coverage.

The statute also writes the wording. Section 10083 prescribes the language of the offer in at least ten-point boldface type, in two versions, one for an insurer participating in the California Earthquake Authority and one for an insurer that does not. Both open identically: "Your residential property insurance policy does not cover earthquake damage to your home or its contents," followed by the statement that the coverage provided by an earthquake policy "is different from, and typically more limited than," the coverage provided by the residential property policy, and the thirty-day presumption. Both then require the insurer to fill in five specific figures: the dwelling or building coverage limit, the deductible, the contents coverage limit, the additional living expenses limit, and the estimated annual premium. Statutes rarely dictate consumer disclosure this precisely, and the phrase "typically more limited than" is a legislature saying in advance what the next section then spells out.

What the statutory minimum actually contains, and what it leaves out. Section 10089 sets three required coverages. First, the dwelling, and here the exclusion list is the substance: the required coverage need not include outbuildings, appurtenant structures, swimming pools, masonry fences and walls not necessary for the structural integrity of the dwelling, walkways and patios not necessary for regular ingress or egress, awnings and other patio coverings, decorative or artistic features including plaster where another covering would be more cost-effective, landscaping, or masonry chimneys, provided that the policy covers replacing a damaged masonry chimney with a nonmasonry, earthquake-resistant one. Second, contents coverage, at the insurer's election made when it files its rates, either in an amount not less than 10 percent of the covered dwelling loss or in an amount not less than $5,000, and the insurer may exclude glassware, china, porcelain, ceramics, artwork and other decorative items. Third, additional living expenses of at least $1,500 while the dwelling is uninhabitable, which the statute permits an owner of a non-owner-occupied dwelling to waive in writing. Those dollar figures were set by a 1995 amendment that took effect at the start of 1996, and the statute does not index them.

The deductible rule, stated carefully because it is easy to overstate. Section 10089(b) provides that the dwelling and contents coverages in the statutory minimum offer "shall not contain a deductible of more than 15 percent of coverage provided for the dwelling." That binds the minimum offer. Section 10089(c) then allows the commissioner to approve rate applications letting an insurer offer coverage other than the coverage specified in the section, provided at least one coverage offered meets the section's criteria. So 15 percent is the ceiling on one specific statutory product, not a cap on every earthquake deductible sold in the state, and published material on insurance deductibles records the wider range regulators describe nationally. What California does impose across the board is disclosure: section 10087.5 requires any residential property policy providing earthquake coverage with a percentage deductible to disclose, on the declarations page in at least ten-point bold type, the basis on which the percentage is computed, and to make the same disclosure in advertising.

Two causation rules that decide a great many claims. Section 10088 provides that, absent an endorsement or provision specifically covering earthquake, a policy that does not cover the peril provides no coverage for any loss where earthquake is a proximate cause, regardless of whether the loss also results from or is contributed to by any other cause, covered or not, concurrently or in any sequence. That is an anti-concurrent-causation rule, and it forecloses the argument that a covered peril somewhere in the chain rescues the claim. Section 10088.5 then carves out the case that matters most: nothing in section 10088 exempts an insurer from its obligation under a fire insurance policy to cover the losses of a fire caused by or following an earthquake. Shake damage is uncovered without earthquake insurance; the fire afterwards is a fire claim. Section 10088 also preserves an insurer's ability to cover direct loss from explosion, theft or glass breakage resulting from an earthquake.

The retrofit provisions, which are the part with money in them. Section 10082.5 provides that where an insurer charges an additional earthquake premium or deductible because a dwelling fails to comply with water-heater bracing, foundation anchor-bolt requirements or cripple-wall bracing, and the dwelling is subsequently brought into compliance with any one of them, the additional premium or deductible attributable to noncompliance may no longer be charged, with a refund prorated from the date the insurer receives the approved inspection record. Section 10089.1 separately requires insurers to offer $10,000 of optional coverage for reconstruction costs needed to bring a rebuilt dwelling up to current local building code, available only after the insured has completed and the insurer has verified retrofitting. And section 10086.5 protects the decision to buy: an insurer may not refuse to renew, reject or cancel a residential property policy solely because the insured accepted the earthquake offer.

The California Earthquake Authority is a statutory body, not an insurer that happened to specialize. It was created by the legislature in 1995 in the chapter immediately following the one above, and the insurance code classifies every insurer as either a participating insurer, meaning one that has elected to join the authority, or a nonparticipating insurer, meaning one that elects not to place any residential earthquake policies in it. Which category a homeowner's insurer falls into determines which version of the statutory notice they receive and where the policy is ultimately written.

The homeowner buys a separate policy or endorsement with its own dwelling limit, contents limit, additional living expenses limit and deductible. After an earthquake, the insurer values the damage to the covered property, applies the deductible, and pays the balance up to the limits, with the items on the statutory carve-out list excluded unless the policy specifically covers them.

A hypothetical, using California's statutory minimum structure. Suppose a dwelling is insured under an earthquake policy for $500,000 with a deductible of 15 percent, the maximum for the statutory minimum offer, and the insurer has elected the percentage form of contents coverage. The deductible is 15 percent of the $500,000 of dwelling coverage, which is $75,000, and note what that number is computed from: the coverage amount, not the loss. An earthquake causes $220,000 of covered damage to the dwelling. The insurer pays $220,000 minus $75,000, which is $145,000. Contents coverage under the percentage election is at least 10 percent of the covered dwelling loss, so at least $22,000. Additional living expenses are at least $1,500. The dollar amounts of the coverage and the loss are invented; the percentages and the $1,500 are the statute's.

Now shrink the loss and the structure of the deductible becomes the whole story. A $60,000 covered dwelling loss under the same policy produces no payment, because $60,000 is less than the $75,000 deductible. California's own prescribed notice tells buyers this in advance, in bold type: the deductible "represents the amount of damage your covered property must incur before the earthquake insurance coverage begins," and "if your covered loss is less than the applicable deductible, you may not receive any payment." That is why earthquake insurance is best understood as catastrophe cover rather than as repair cover, and why the deductible percentage matters more than the premium when comparing policies.

One more thing to check before buying. Because the statutory minimum can exclude outbuildings, pools, masonry fences, patios, landscaping and masonry chimneys, a property whose value sits substantially in those features is insured for less than the dwelling limit suggests. Whether a particular policy buys any of them back is a question for the declarations page.

Pros

• It covers the one peril that can destroy a house outright and is excluded from every standard homeowners policy.
• Where the offer is mandated, the buyer gets the price and the terms in writing on a prescribed form, with five specific figures filled in, which makes comparison unusually easy.
• Retrofitting can remove a surcharge or a higher deductible, and at least one state requires the reduction once compliance is verified, with a prorated refund.
• Optional building-code-upgrade coverage addresses a real gap, since rebuilding to current code can cost more than restoring what was there.

Cons

• The deductible is a percentage of the dwelling coverage, so it is far larger than any other deductible on a household's policies and small losses produce nothing.
• The statutory minimum coverage is narrower than the homeowners policy it sits beside, and the carve-out list reaches items people assume are covered.
• The contents minimum can be tied to the size of the dwelling loss rather than to the value of the contents, and can exclude glassware, china, ceramics and artwork.
• The living-expense minimum is a fixed statutory amount, unchanged since a 1995 amendment and not indexed.
• Declining the offer requires nothing: silence for thirty days is treated as a refusal.