Earthquake insurance: Taking steps to prepare for the Big One

The little pig who built his house with bricks foiled the big bad wolf, but there’s another risk the fairy tale porker might not have considered.

A wood-frame house has a much better chance of survival when the Big One hits — and as a recent article in The New Yorker suggests, the Big One might (or might not) strike soon.

According to the State Office of the Insurance Commissioner, 155 companies underwrote earthquake insurance in Washington in 2013.

Of those insurers, State Farm Fire & Casualty Insurance Co. wrote the majority, with a market share approaching 30 percent and direct premiums written of $36.8 million. The company suffered no losses, and neither did the second largest insurer, Geovera.

So earthquake insurance is a moneymaker for insurance companies — until the Big One hits.

The Olympian recently spoke with Karl Newman, president and 16-year veteran of the Northwest Insurance Council, concerning earthquake insurance.

The council is an educational body sponsored by member insurance companies, and Newman explained that one of his goals “is to speak plain English to help people understand what’s covered and what isn’t.”

As it turns out, earthquake damage typically isn’t covered.

Q: Let’s start with the obvious. What is earthquake insurance?

A: It might be better if we start with what it isn’t. A standard homeowner’s or commercial policy specifically excludes earthquake damage. Earthquake insurance is designed to fill that gap. It covers damage to homes, outbuildings and contents, and for a business, the structure and the contents.

Q: It seems that not a lot of people buy it. Why do you think that is?

A: Many times people say, “I’m not going to get earthquake insurance because it’s too expensive and the deductibles are too big.”

Q: How expensive is it?

A: Earthquake insurance can double what you pay for a homeowner’s policy. If you’re paying about $600 a year, you could pay $400 to $600 more per year, on average. The deductibles are 10 to 20 percent, depending on the company that’s writing it.

Q: For those who might not know, please explain what a deductible is. Some people might think it’s something they have to pay up front.

A: It’s the amount of the loss that you’re responsible for, deducted from the final payment.

Q: People who own homes have homeowners insurance, and they might think they’re covered against any casualty. What percentage of policyholders do you think are unaware of the exclusions?

A: I’d estimate that 50 percent or more are not aware that they don’t have coverage.

Q: Do you have an estimate of how many people in Washington have bought coverage?

A: Only 10 to 15 percent or homeowners and renters have earthquake insurance.

Q: Maybe they are aware and just figure the government will come in after a disaster and start handing out grants.

A: Federal assistance in most cases come in the form of low-interest loans rather than grants. That’s on top of paying your mortgage, which doesn’t go away. With earthquake insurance, you get paid right away and you can begin rebuilding right away.

Q: It’s probably too early to see if there’s any impact from The New Yorker article, but did companies see an increase in interest after recent earthquakes?

A: With the Nisqually quake, you saw an uptick in interest, but the actual (business) doesn’t rise much.

Q: About brick versus wood-frame construction, how much of a difference would that be in the cost of coverage?

A: With a wood-frame house, it might double the premium. With a brick house, it could be three, four, five thousand (dollars) per year. Wood flexes and masonry shatters. Wood can take much better stress.

Q: The Nisqually quake didn’t cause that much damage, and I’m guessing most people wouldn’t have losses much above their deductible. Maybe it’s better to just save money and hope for the best.

A: People might have been lulled by (the Nisqually quake). But to say we made it through the last earthquake and I’ll be fine is a dangerous approach. A Cascadia subduction quake (such as geologists are suggesting) will be massively larger in scale. Nisqually was a relatively small quake, and away from major population centers.

If there’s a disaster on the scale of what the experts quoted in The New Yorker are predicting, it will be decades before the area recovers.

Q: So what are you recommending?

A: We recommend that you shop for earthquake insurance. Companies’ rates vary, as do the deductibles. Everyone who lives in an earthquake area should consider it. The risks have been known for a number of years, and rates have been relatively stable for more than 10 years.

Q: We’ve been reading about the importance of making an inventory of possessions and having family emergency kits ready in case it happens. Other than buying insurance, is there anything else you recommend. Is there a way to save money?

A: I retrofitted my own home in Tacoma. It cost about $1,200. It’s a good investment, and it can save you money on earthquake insurance premiums. Research shows that a $2,000 to $4,000 investment to retrofit a home can save 30 to 50 percent off premiums.

Strap heavy shelves and your hot-water heater. Some older homes just sit on a foundation. In a retrofit, you bolt the frame (to the foundation).

Q: Good advice, but do you think people will follow it?

A: We have a huge risk, but earthquakes are infrequent. We as Americans tend to be optimistic. We send people to the moon, we do all kinds of things. The result of that is, “It won’t happen to me.” That strategy works until it doesn’t.

This story was originally published July 26, 2015 at 10:45 AM with the headline "Earthquake insurance: Taking steps to prepare for the Big One."