Flood insurance and earthquake insurance

My wife and I own a house in silicon valley. We have homeowner’s insurance, but it appears that that doesn’t cover either floods or earthquakes.

I just checked with my agent, and it turns out that earthquake insurance is more expensive than homeowner’s insurance. And flood insurance is ALMOST as expensive as homeowner’s insurance.

(a) isn’t that bizarre? If homeowner’s insurance covers fires, which happen all the time, not to mention whatever else they cover (which I assume is a fair number of things), how can that cost less than earthquake insurance, which almost never damages relatively modern well-built single-family homes?

(b) is there some compelling argument other than the typical pro- and con- insurance arguments why we should or should not get either earthquake or flood insurance?

Fires happen all the time, true, but they typically burn only one house. How often does a particular house suffer a devastating fire? Maybe once in a hundred years? How often does an earthquake devastate a particular house in the bay area? Maybe also once in a hundred years. In that case, the insurance costs should be the same.

On the East Coast earthquake insurance would cost much less than fire insurance I’d think, but I don’t know anyone who has it. Probably in the Midwest near the Mississippi River flood insurance cost more than fire. Or would, but I believe flood insurance is still subsidized by the government.

Flood insurance is typically back-supported or provided directly by the Federal government. I don’t believe that they provide this support in most of California (but I don’t really know). But, if you live in a place which is prone to flooding, then the taxpayers essentially subsidizes the flood insurance. If you live in a place which isn’t prone to flooding, then your flood insurance will be cheap, because it’s a rare event.

As for earthquake insurance… After the Northridge quake, a few insurers were hit hard, and pretty much all the insurers stopped offering earthquake policies. But, there was a requirement at the time that insurance policies had to include earthquake coverage, so the insurers basically pulled out of the CA homeowner’s market. In order to rectify that problem, the state de-linked earthquake insurance from general homeowner’s insurance and set up the California Earthquake Authority. This is a fund which gets money from private insurance premiums, and if the fund runs out of money (say, if there’s a major earthquake), you’re pretty much SOL. There are some private insurers who sell outside the CEA, but they generally charge higher rates. So, the result of all this is that earthquake insurance is generally expensive, and if you use a non-CEA insurer, your rates will be even more expensive.

Additionally, in recent years, our ability to determine liquefaction zones (zones where the land will probably liquefy in an earthquake) has increased. So, if you live in a liquefaction zone, your rates will be much higher than if you don’t.

Both flood and earthquake insurance in CA are government run programs. They are the main provider of the coverage. There may be private insurers in this market, but they are not many. Many that you will see actually act as brokers for the CEA or the national flood insurance program. You can go to AAA to get earthquake insurance, but really the carrier is CEA.

Earthquake insurance is expensive. There are a number of reasons for this. If there is an event, it will typically damage many many homes, with significant damage. The claims associated with an earthquake will be very large in nature, and are concentrated geographically. It’s harder to spread the risk. CEA and other insurers will get reinsurance for catastrophic events like this, but adequate risk spreading is still expensive. Consider also that the co-pay on these claims is typically 10% or more. And foundational damage to a house will quickly rise to 200K+. So not only is your premium high, but the deductible on a claim could be $50K as well.

Flood insurance is similar, except that flood events are much more common. This is because of how a flood event is defined. It’s not just rainwater. If a water main breaks and causes water damage to two or more nearby houses, that could be covered under flood insurance. It most certainly would not be covered under a typical home insurance policy. Good luck trying to get the city to pay either.

If there is a flood or earthquake, and your house is red tagged by the city and you have no insurance for it, you are pretty much hosed. You would still owe on the mortgage and have an unusable property. I believe there were about 200 or so houses red tagged after the recent Napa quake. Bankruptcy or FEMA or charity would be your best options there without insurance.

The main reason earthquake and flood insurance is much more expensive than hazard (fire/theft/storm/etc) insurance is the size of the premium pool. Everyone who has a mortgage on their home, and almost everyone else, has hazard insurance. There is a huge pool of premium dollars for the insurer to draw from to pay claims on a relatively small percentage of policies. OTOH, people not located in a flood plain or earthquake zone generally do not carry the specialized insurance to cover those claims. The premium pool is self limited to those most likely to have a claim. Premiums must be higher because of a higher percentage of insured filing claims.