Recent data reveals that only 12% of California households purchased earthquake insurance in the past year. This statistic raises eyebrows, especially considering that federal scientists estimate there is a 20% chance of the Bay Area experiencing a quake stronger than the 1989 Loma Prieta earthquake in the next 30 years. Yet, despite these warnings, few residents are taking steps to protect their homes from the potential devastation of another major earthquake.
According to a report from the San Francisco Chronicle, California is seismically active with far more earthquakes than other states, leading to significantly higher potential losses. However, data from the California Department of Insurance shows that in 2023, only 1.5 million households secured earthquake insurance, a mere 12% of homeowners.
It’s important to note that standard homeowners, condominium, and rental property insurance policies in California do not cover damages from earthquakes. This means that if a major quake were to hit, residents would have to bear the financial burden of all losses and expenses themselves.
The low uptake of earthquake insurance in California is understandable for a couple of reasons. Firstly, the cost of premiums is quite high. Secondly, since the significant quakes of 1989, California has seen relatively few major seismic events. As a result, many younger homeowners may not feel a strong sense of urgency or risk regarding the possibility of losing their homes to an earthquake.
The California Earthquake Authority (CEA), the state’s largest provider of earthquake insurance, has recently made changes that decrease coverage. Since last year, the maximum payout for personal property loss has been reduced from $200,000 to $25,000, and options for a 5% or 10% deductible have been eliminated for homes valued over $1 million or for non-slab foundation homes built before 1980 that do not have retrofitting.
The CEA explains that these decisions are a response to rising inflation and increasing reinsurance costs, which are necessary for insurers to mitigate their risk of substantial losses.
Historically, homeowners insurance did cover damage from earthquakes, but following the 6.7 magnitude Northridge earthquake in 1994, coverage began to shift. The Northridge quake is remembered as the costliest earthquake in U.S. history when adjusted for losses, ranking among the top ten most damaging natural disasters globally, according to risk management firm Aon.
While some insurance companies still offer private earthquake insurance—accounting for about one-third of California’s total policies—the majority of households opt to purchase insurance through the CEA. The average premium through the CEA is approximately $925, while private market policies average around $885.
Interestingly, breakdowns of insurance options indicate that CEA prices tend to be more economical, showing a downward trend over the past decade. It was only at the end of last year that prices saw a slight increase due to rising reinsurance costs and the expenses associated with rebuilding homes.
