Below is a guest post from my friend, mentor, boss and truly one of the great technicians in the realm of personal finance, Drew Tignanelli, on a topic that caused an immediate reaction in me–a phone call to my homeowner's insurance agent to make a change on my policy!
By now, most of us have seen the pictures of devastation in New Zealand from the 7.2 magnitude
earthquake. The message was very clear…When an earthquake hits, it's devastating! Houses can collapse, foundations can be destroyed, interiors can be cracked, and homes still standing can be too dangerous to inhabit. Many times the likely loss is a total of the insured value of the home. This is the result in a place that is accustomed to earthquakes, like New Zealand, that has building requirements to minimize the earthquake property damage.
Now consider the same degree of earthquake in a land with no building codes for earthquake damage control. The likely result may be the equivalent of the devastation from Hurricane Katrina. The East Coast of the United States is the perfect example of an area that has no building code requirements to protect from land movement. A magnitude 7.0 earthquake on the East Coast could be beyond our understanding of devastation, since nothing built in this region was designed to withstand land movement. Do some internet searches of U.S. fault lines on the East Coast and you will find out we are clearly at risk. These faults have just been less active than those out west.
Now here is the point of this article. Your homeowners insurance policy completely EXCLUDES coverage for the movement of land. So, if there is an earthquake and your house is destroyed, you will lose everything. I am a financial professional and even I did not realize that my policy excludes land movement coverage. Of course you can get coverage, because West Coast residents have it. But you have to ask for it from your property casualty agent who has incentives to NOT suggest that you consider adding earthquake coverage. Here is the best news of all… The cost to add the rider for land movement may be no more than $100/year.
Call your agent and consider the cost of coverage versus the risk of an earthquake on your homeowners' policy. No matter where you live–East Coast, West Coast, or any coast at all–call your agent and consider the coverage. One way to add the coverage without increasing your policy cost is to raise your deductible and self-insure the first dollars of loss. I would rather pay a $1,000 or $1,500 for a few small claims than to lose everything.
I was awake on July 17, 2010 at 5 a.m. when a relatively small 3.6 magnitude earthquake hit in Germantown, MD and I live 45 miles north in Reisterstown, MD. After what I experienced, and now what I have learned about my policy, I gladly added the $85/year cost of the coverage. You should be calling your agent NOW to look into adding earthquake coverage to your policy. Remember, if your agent tries to talk you out of it, it is because they have an economic incentive for you not to carry it.
Hopefully your area will always remain earthquake free and the coverage proves to be a waste of money!
Andrew V. Tignanelli, CPA, CFP(r)