Start Here: 5 Things You MUST Know
Earthquake Insurance is PRIVATE (Not a Government Program!)
Unlike flood insurance (which comes from the federal government through NFIP), earthquake insurance is sold by regular private insurance companies like State Farm, Allstate, etc. There's no federal earthquake program. In California, there's the CEA (California Earthquake Authority) - a special organization, but it's still not the government.
Deductibles Are PERCENTAGES, Not Dollar Amounts (10-25%!)
Your homeowner's policy might have a $1,000 deductible. Earthquake insurance is DIFFERENT - it uses percentages of your home's value! If you have a 15% deductible on a $400,000 home, that's $60,000 you pay before insurance kicks in! This shocks many homeowners after an earthquake.
Earthquake Coverage is NEVER Required
Remember how flood insurance is mandatory if you live in a high-risk flood zone (SFHA = Special Flood Hazard Area) and have a federally-backed mortgage? Earthquake is different - it's ALWAYS optional. Even in California where earthquakes are common, no law or lender forces you to buy earthquake coverage.
"Fire Following Earthquake" is Covered by Your REGULAR Homeowner's Policy!
Here's a key exam point: If an earthquake breaks a gas line and your house catches fire, your normal homeowner's insurance pays for the fire damage - you don't need earthquake insurance for that! Earthquake insurance only covers the shaking damage (cracks, collapsed walls, foundation damage). Fire is covered under your standard fire coverage.
Two Ways to Get Coverage: Endorsement OR DIC Policy
Endorsement = You add earthquake coverage to your existing homeowner's policy (like adding an option to your phone plan). DIC Policy (Difference in Conditions) = A separate, standalone policy that fills gaps in your regular insurance, including earthquake coverage. Both work - it's just different ways to buy the coverage.
1. Earthquake Coverage Basics
Definition
Earthquake = A trembling or shaking of the earth that is volcanic or seismic in origin, often resulting in severe damage.
Seismic Origin
Tectonic plate movement (most common)
Volcanic Origin
Earthquakes from volcanic activity
Why Excluded from Standard Policies?
- • Excluded from most standard property forms
- • Catastrophic, concentrated losses in specific geographic areas
- • Available as endorsement to property policy
- • May be written in a Difference in Conditions (DIC) Policy
- • NEVER mandatory - always optional
What Earthquake Insurance Covers
Building Damage
Structural damage from shaking
Personal Property
Contents damaged by earthquake
Loss of Use
Additional living expenses (unlike NFIP!)
Foundation Damage
Cracks and structural foundation issues
What's NOT Covered
What is "External Masonry Veneer"?
Masonry veneer is a thin layer of brick, stone, or stucco attached to the OUTSIDE of a building for decoration. It's NOT structural - it's just a "skin" that makes the house look nice.
Example: Your house has wooden walls, but the outside is covered with a layer of decorative brick. During an earthquake, that brick facing cracks and falls off. Many earthquake policies WON'T pay to repair it because it's just decorative, not structural. You'd need to check if your specific policy covers it or excludes it.
2. Percentage Deductibles
The BIG Difference
Unlike standard property policies with dollar deductibles ($500, $1,000), earthquake uses PERCENTAGE deductibles ranging from 10% to 25% of coverage limit.
Deductible Calculations
Why Such High Deductibles?
- • Catastrophic nature of earthquake losses
- • Keeps premiums affordable
- • Encourages loss prevention and mitigation
- • Shares risk between insurer and insured
Real-World Scenario: Percentage Shock
The Setup: Nina has a $400,000 home. Her homeowners policy has a $2,000 deductible. She adds earthquake coverage with a 15% deductible.
What Happens: An earthquake causes $100,000 in damage.
The Result: Nina's earthquake deductible is $60,000 (15% of $400,000)! The policy pays only $40,000. She thought it would be like her homeowners $2,000 deductible - she was SHOCKED to pay $60,000 out of pocket.
3. California Earthquake Authority (CEA)
What is CEA?
- • Publicly managed, privately funded organization
- • Created after the 1994 Northridge earthquake
- • Provides residential earthquake coverage in California
- • Not a government agency - operates like private insurer
CEA Coverage Types
Dwelling
Based on replacement cost
Personal Property
$5,000 - $200,000
Loss of Use
$1,500 - $100,000
CEA Deductible Options
5%
Minimum
10%
Common
15%
Standard
25%
Maximum
Higher deductible = Lower premium
Real-World Scenario: CEA Choice
The Setup: Patricia owns a $600,000 home in Los Angeles. She's choosing between CEA deductibles: 5% ($30,000) or 25% ($150,000).
What Happens: 5% option costs $1,800/year. 25% option costs $600/year - $1,200 annual savings.
The Result: Patricia chooses 25% to save money. She saves $1,200/year but accepts risk of paying first $150,000 if a major quake hits.
4. Fire Following Earthquake
Critical Distinction!
Standard property policies DO cover fire damage that occurs following an earthquake, even though earthquake itself is excluded!
Standard Property Policy Covers:
- • Fire damage from earthquake
- • Explosion damage
- • Smoke damage from fire
Earthquake Policy Covers:
- • Shake damage to structure
- • Foundation damage
- • Crack damage from tremors
Scenario: Fire After Earthquake
The Setup: Marcus has only a homeowners policy (no earthquake coverage). An earthquake cracks his foundation and breaks a gas line.
What Happens: The gas line ignites, causing fire that destroys the house.
The Result: Homeowners policy pays for fire damage ($400,000). Foundation cracks are NOT covered (earthquake exclusion). But the fire damage IS covered!
Scenario: Both Policies Apply
The Setup: Elena has homeowners AND earthquake coverage. Earthquake causes $80,000 structural damage and starts a fire causing $200,000 more damage.
What Happens: She files claims with both insurers.
The Result: Homeowners pays $200,000 (fire). Earthquake policy pays $80,000 minus percentage deductible. Total coverage across both policies!
5. Flood vs Earthquake Comparison
| Feature | Flood (NFIP) | Earthquake |
|---|---|---|
| Federal Program | Yes (FEMA) | No (Private) |
| Mandatory Purchase | In SFHA with federal mortgage | NEVER mandatory |
| Waiting Period | 30 days (standard) | Varies by insurer |
| Deductible Type | Dollar amount | PERCENTAGE (10-25%) |
| Living Expenses (ALE) | NOT covered | Usually covered |
| Standardized Coverage | Yes - all WYO identical | No - varies by insurer |
| Rates Set By | FEMA | Each insurer |
Key Takeaway
- • Flood = Federal, standardized, can be mandatory
- • Earthquake = Private, varies by insurer, ALWAYS optional
- • Both excluded from standard property policies
- • Fire following earthquake = Standard policy covers it!
Cheat Sheet
Print for quick referenceDefinition
Trembling/shaking from volcanic or seismic origin
Deductibles
PERCENTAGE: 10-25%
CEA: 5%, 10%, 15%, 25%
Coverage Options
Endorsement to policy
OR DIC Policy
Fire Following
STANDARD policy covers fire!
No earthquake policy needed
CEA (California)
Created after 1994 Northridge
Publicly managed, privately funded
Key Facts
NEVER mandatory
Private market (not federal)
Exam Trap Alerts
1. Percentage, NOT Dollar Deductible
15% of $400,000 = $60,000. Not $500! This shocks many policyholders.
2. Fire Following = Standard Policy
Fire damage from earthquake IS covered by standard property policy. Shake damage is NOT.
3. NEVER Mandatory
Unlike flood (mandatory in SFHA), earthquake is ALWAYS optional.
4. CEA Minimum = 5%
California Earthquake Authority starts at 5%, not 10%. Know all four: 5%, 10%, 15%, 25%.
5. Private Market, Not Federal
Earthquake = private insurers. Flood = federal NFIP. Don't confuse them!
6. DIC Policy Option
Earthquake can be endorsement OR Difference in Conditions policy. Know both options.
7. Earthquake Covers ALE
Unlike NFIP (no ALE), earthquake insurance usually covers additional living expenses.
Quick Reference Summary
Private Market
Not federal like NFIP
10-25% Deductible
Percentage, not dollars
CEA: 5-25%
California options
Never Mandatory
Always optional
Fire Following
Standard policy covers!
Endorsement or DIC
Two coverage options
ALE Covered
Unlike NFIP!
Varies by Insurer
Not standardized