I understand why insurance is the last topic anyone wants to talk about. Insurance policies can be both boring and complex–quite the double whammy!–and often times, the source of the insurance information is biased because most insurance articles are written by someone earning commission/affiliate income and trying to sell you something.
Those caveats aside, an important point to consider. In the late 1980s, a small collection of scientists began to predict that the New Madrid fault located in the New Madrid Township of Missouri was due for a devastating earthquake. That was one heck of a scary prediction, as the last time that happened in 1811-1812, the City of St. Louis was reduced to rubble and the earthquake was so extreme that the Mississippi River changed its path. It is the type of event capable of wreaking damage to life and property similar to Hurricane Katrina.
What many people do not realize is that, as a result of these predictions, the insurance began to withdraw from including earthquake as a covered peril under nearly all homeowner’s insurance policies. Meanwhile, this fact is not widely known among the purchasers of homeowner’s insurance.
For example, on June 6, 2016, the Missouri Department of Insurance released this announcement: “”Less than one in five homes in Missouri’s New Madrid area had earthquake coverage in 2015,” [Missouri Department of Insurance Director John] Huff said. “This means more than a half million Missourians are at risk of catastrophic financial loss following an earthquake. Without the insurance industry fueling recovery and rebuilding efforts, Missouri could also suffer an economic catastrophe.” I do not know what percentage of New Madridians believe themselves to currently carry earthquake insurance under their homeowner’s policy, but I would wager that it much greater than one in five.
This story plays out in other states across the country, particularly in Washington and California.
My own view of the insurance markets is that insurance markets should serve you to protect from those unexpected life events that could cause very substantial, irreparable harm to one’s financial health if not covered–i.e. Something much greater than a deep inconvenience. If you have a $1.2 million net worth, with $400,000 of it in a home, and you live in an area at all susceptible to earthquakes, I would think it would be worth the extra $800 to $1,400 per year in premium payments to find coverage.
On the other hand, if you’ve lived in the same house your whole life, have a $3 million net worth and a $320,000 house, the negotiation for a lower rate by agreeing to take on a very high deductible may be the most intelligent path.
According to Sailor & Associates Earthquake Insurance Likelihood Test, the risks appear as follows:
- In the West – According to the U.S. Geological Survey, there is a 70% probability that one or more damaging earthquakes of magnitude 6.7 or larger will strike the San Francisco Bay area during the next 30 years.
- In the East – The Earthquake Education Center at Charleston Southern University claims there is a 40% to 60% chance of a major earthquake somewhere in the eastern United States in the next 20 years.
- In the Midwest – According to the Insurance Information Institute, there’s a 40% to 63% chance the New Madrid Fault (which runs through Arkansas, Kentucky, Missouri and Tennessee) region will suffer an earthquake with a 6.0 magnitude in the next 15 years.
I do not necessarily have a recommendation as to whether or not you should carry earthquake insurance, subject to two caveats: (1) I believe sensible wealth protection involves avoiding wipeout events and protecting what you’ve got, and earthquake insurance serves that end, and (2) I seek to aid others by helping them realize they may not currently be protected by insurance for something in which they believe themselves to be protected. At a minimum, you have a duty to yourself and yourself to determine whether earthquake insurance coverage is something that would be prudent for you to have.