Last Updated 10/14/2021
Issue: According to the United States Geological Survey (USGS), 42 states are at risk for damage from an earthquake. The most active seismic areas are along the West Coast plate boundaries of California, the Pacific Northwest and Alaska. Most people think of large magnitude earthquakes when contemplating earthquake risk. However, earthquakes of smaller magnitude along other faults can still cause significant damage. The United States Geological Survey (USGS) National Seismic Hazard Map indicates ground shaking across the central and eastern U.S. and certain areas in the western U.S. This includes increased seismicity over the past few years near the New Madrid Seismic Zone (NMSZ). Despite this, a poll by the Insurance Information Institute indicated that only 11% of American homeowners had earthquake insurance. Even in the earthquake-prone Western U.S., only 17% of homeowners had such insurance.
Overview: There are several key reasons that many people fail to obtain earthquake insurance to protect themselves and their property. High cost and limited coverage are the primary deterrents to purchasing earthquake insurance. Earthquake insurance generally carries a percentage deductible, ranging from 2% to 20% of the value of the structure insured. This higher deductible amount contributes to an increased cost to rebuild a structure following an earthquake. Those who purchase earthquake insurance are typically the ones most at risk from earthquakes—a phenomenon called “adverse selection.” Moreover, as earthquakes are low-frequency, high peril events, consumers typically take earthquake insurance for granted until they experience a significant earthquake. Other reasons that consumers may be hesitant to purchase earthquake coverage include confusion about what is covered in insurance agreements, misplaced hope for federal assistance, and lack of priority.
Earthquake insurance is important because it decreases the post-earthquake loss burden on individuals, businesses and society in general. Insurance serves as an important tool in transferring the risk of earthquake damage and funding recovery efforts. Its function as a pre-disaster funding tool limits the economic impact of post-disaster recovery to individuals, businesses and government. Insurers pay for earthquake losses from funds pooled via insured premiums that are set in proportion to the risk, thus allowing for financial diversification of risk. Insurers protect themselves from the financial instability caused by adverse selection by limiting the amount of risk they will accept from any one region. As a result, risk is spread among many insurers.
Many homeowners believe that earthquake coverage is included in their homeowners insurance policy. For this reason, the NAIC produced the Consumer’s Guide to Purchasing Earthquake Insurance (PDF). The guide explains earthquake insurance, including information on how to obtain coverage and file claims. Earthquake coverage is sold primarily through admitted direct and surplus lines insurers. While it is usually offered as an endorsement to a homeowners or businessowners policy, it can also be sold as a stand-alone policy. However, the California Earthquake Authority, a publicly-managed, mostly privately-funded entity, sells earthquake insurance in California through participating insurance companies.
The consumer guide also defines common earthquake coverages and exclusions. For example, earthquake insurance typically only covers direct damage to the property resulting from the shaking of an earthquake. Indirect damage, such as fire and water damage from burst gas and water pipes is covered under a homeowners policy. Damage to vehicles would be covered under an auto policy. Earthquake coverage is usually subjected to two separate deductibles, typically 10-15 percent of the cost of rebuilding the home and the home’s contents.
Status: In 2020, NAIC’s Journal of Insurance Regulation published The Earthquake Insurance Protection Gap: A Tale of Two Countries. The article analyzed why market penetration of earthquake insurance for personal properties is higher in the Lower Mainland of British Columbia (about 60%) versus western Washington state (about 14%), even though both places face similar and significant earthquake risk. The authors offer policy recommendations regarding barriers and considerations for improving market penetration of earthquake insurance.
The NAIC Catastrophe Insurance (C) Working Group under the Property and Casualty Insurance (C) Committee serves as a forum for discussing issues and solutions related to earthquakes. Of recent interest has been how induced earthquakes differ from natural earthquakes. The 2018 USGS One-Year Seismic Hazard Forecast prompted catastrophe vendors to update their models. These updates allow insurers a better grasp on how induced seismicity impacts their portfolio results.
Mitigation efforts for induced and natural earthquakes should be viewed differently. Induced seismic hazard is fluid and can easily change before higher building codes are enacted. Additionally, induced earthquakes have been linked to known human activities that are themselves regulated at the state and national levels. As such, experts have advised that reducing induced seismicity at the source may be the best prevention measure.
Committees Active on This Topic
Facts + Statistics: Earthquakes & Tsunamis (Insurance Information Institute, May 2020)
Background on earthquake insurance and risk (Insurance Information Institute, April 2020)
Earthquake Insurance (FEMA)
NAIC Consumer Insight: Do You Know What to Do Before and After and Earthquake? (March 2021)
NAIC Consumer Insight: Understanding Earthquake Deductibles (Jan. 2021)