Should I Buy Earthquake Insurance?

General observations about buying insurance

Should you buy fire, auto, and life insurance?

You also have no choice on whether or not to buy auto insurance. In this case, we the people, acting through our government, require that you have it. That way, if you are in an accident, you will be able to pay those that you injure for their losses.

You would probably buy fire insurance and auto insurance anyway. The hazard is undeniable. Based on information in the 1995 Statistical Abstract of the United States, in 1993 about one out of every 200 single family housing units had a loss due to fire, and about one in ten vehicles was involved in an accident. You may choose to buy more insurance coverage than the minimum that is required. You also may have life insurance to protect yourself and others in your family from an untimely death. None of these insurance decisions are made because you expect to make money on insurance. Rather you recognize that there is a hazard, and want to protect yourself and your family from the consequences of that type of catastrophe.

Application to earthquake insurance

Earthquakes are a different type of disaster from fire, auto, or life coverage. They differ because in an earthquake everyone in the region has the loss at the same time. This introduces logistical difficulties for insurance companies, who may need to go for many years in a row with no claims at all, and then cover enormous claims all at once. With fire, auto, and life insurance claims, the losses are smaller and more frequent, and the statistics are thoroughly understood.

Some people believe that after earthquakes the government will step in with aid so that they will not lose out financially. That is not generally true. The government is likely to provide disaster aid, but it does not protect the individual homeowner from loss. The most common Federal aid after a disaster is low-interest loans, but you still need to pay the loan back. Recently the Federal Emergency Management Agency has also encouraged projects to mitigate (reduce) the effects of possible future earthquakes. The idea is that a little spent now for mitigation will prevent larger losses at a future time.

One puzzle is why your lender does not require you to buy earthquake insurance. There are a number of historical and logistical reasons why this is the case in Nevada. Earthquake insurance has not always been readily available, and the earthquake hazard of the region has been underrated.

Perspective for western Nevada

Earthquakes happen on faults. For that reason, one might decide to study a fault map of the area, and use the distance to the nearest fault to help decide whether to buy insurance. Unfortunately, it is likely that numerous faults in the area are still undiscovered. Most of the small earthquakes located by the Seismological Laboratory are not on major known faults. Earthquakes with magnitude less than about 6.5 are not very likely to break the surface. Thus, although the fault map may show you where the nearest earthquake with magnitude 7.0 or greater could occur, a magnitude 6.0 or greater could occur closer. In addition, when studying the fault map, it is important to remember that some of the faults dip down beneath the valleys, rather than breaking vertically. Wherever that happens, the fault may be closer to your structure than it looks on a map. You need to consult with a geologist to see if anyone knows which way a fault goes beneath the surface.

What is the worst earthquake that western Nevada could experience?
The Nevada Earthquake Safety Council sponsored the preparation and publication of Planning Scenario for a Major Earthquake in Western
Nevada," by dePolo and others (1996). This report hypothesizes a magnitude 7.1 earthquake on the fault system that forms the eastern boundary of Mt. Rose and the Carson Range, and the western boundary of the Truckee Meadows, Washoe Valley and the Carson Valley. The fault dips to the east beneath the urban areas. Such an earthquake appears to occur on average once every 1000 years. The report describes some of the consequences of this earthquake. Nobody can say that the scenario earthquake is absolutely the worst case," but it would be a very serious earthquake. It is on the major fault that most worries the geologists and seismologists who have studied the area.

This scenario earthquake is strong enough to cause serious damage throughout the entire Reno-Carson City urban area.

Is there an earthquake hazard in the rest of Nevada?
Yes. Generally it is lower than in western Nevada. However, essentially every part of the state is susceptible to a large earthquake (M~7) on at least extremely rare occasions. Figuring out the way earthquake hazard is distributed in Nevada is one research priority for the Nevada Seismological Laboratory and the Nevada Bureau of Mines and Geology.

What else should I keep in mind in my decision on whether to buy earthquake insurance?

One factor to keep in mind is the deductible on an earthquake insurance policy. A typical deductible is 10%. Coverage of the structure and coverage of the contents is separate. Thus a $200,000 home with $100,000 contents would only exceed the deductibles if structural damage exceeds $20,000 and contents damage exceeds $10,000. For a well-built wood-frame house, this deductible generally exceeds the structural loss for most moderate earthquakes. Due to good design, in recent earthquakes the damage to structures is a smaller part of the total loss than the damage to contents. It should be clear that earthquakes can have different sizes and occur at different distances from your home. In general, as either the magnitude goes up or the distance decreases, the severity of shaking increases. Those residences that are relatively close to an active fault are more likely to suffer damage, although there can be exceptions due to numerous causes. Thus, even though the probability of a magnitude 6 earthquake someplace in the Reno-Carson City region is as high as 8% per year, the probability of it being close enough to damage your house is smaller.

You may want to consider the quality of construction of your residence. Single-story wood frame houses generally perform well in earthquakes so long as they are properly attached to their foundation. Some of the factors that increase the risk of loss are: presence of a cripple wall between the foundation and the floor of the first level; multiple stories, especially with living space above the garage; or construction from less resilient materials, such as unreinforced masonry.

Another factor is your personal attitude about risk and your personal financial situation. Some people are more willing to take risks than other people. Some people are more able to afford earthquake insurance than other people. Some people have sufficient financial resources that loss from a severe earthquake is tolerable for them.

Finally, remember that not all insurance companies are the same. It may be worthwhile to shop around for the best rates or lowest deductible before purchasing your earthquake insurance.

Conclusion

Consider the following as you decide whether or not it is right for you to purchase earthquake insurance:

• There is an earthquake hazard in western Nevada, so there is the potential for loss in an earthquake.
• The insurance companies set the rates so that on average they will not lose money on earthquake insurance.
• You cannot count on financial aid from government resources if you experience an earthquake loss.
• Single-family wood frame structures that were built recently performed reasonably well in recent serious U. S. earthquakes. However, damage to contents is likely to be greater than structural damage to your house.

We strongly encourage you to talk with as many people as you can before you make your decision: your insurance agent, professionals who understand the earthquake hazard, family and friends, or your financial counselor.

Acknowledgments

References

• dePolo, C. M., J. G. Rigby, G. L. Johnson, S. L. Jacobson, J. G. Anderson and T. J. Wythes (1996). Planning scenario for a major earthquake in western Nevada, Nevada Bureau of Mines and Geology, Special Publication 20, 128 pages.
• dePolo, C. M., J. G. Anderson, D. M. dePolo, and J. G. Price (1997). Earthquake occurrence in the Reno-Carson City urban corridor, Seismological Research Letters 68, 401-412.
• U. S. Bureau of the Census (1995), Statistical Abstract of the United States: 1995, U. S. (115th edition.), Washington, D. C.: Tables 359, 1026, 1033, and 1230.

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