Earthquake, Hazard and Liabilities

Earthquake insurance is a form of property insurance that pays the policyholder in the event of an earthquake that causes damage to the property. Most ordinary homeowners insurance policies do not cover earthquake damage.

Most of these insurance policies feature a high deductible, which makes this type of insurance useful if the entire home is destroyed, but not useful if the home is merely damaged. Rates depend on location and the probability of a loss. Rates may be cheaper for homes made of wood, which withstand quakes better than homes made of brick.

In the past, earthquake loss was assessed using a collection of mass inventory data and was based mostly on experts’ opinions. Today it is estimated using a Damage Ratio (DR), a ratio of the earthquake damage money amount to the total value of a building. Another method is the use of HAZUS, a computerized procedure for loss estimation.

As with flood insurance or insurance on damage from a hurricane or other large-scale disasters, insurance companies must be careful when assigning this type of insurance, because a quake strong enough to destroy one home will probably destroy dozens of homes in the same area. If one company has written insurance policies on a large number of homes in a particular city, then a devastating earthquake will quickly drain all the company’s resources. Insurance companies devote much study and effort toward risk management to avoid such cases.

In the United States, insurance companies stop selling coverage for a few weeks after a sizeable quake has occurred. This is because damaging aftershocks can occur after the initial quake, and rarely, it may be foreshock. Although aftershocks are smaller in magnitude, they deviate from the original epicenter. If an aftershock is significantly closer to a populated area, it can cause much more damage than the initial quake. One such example is the 2011 Christchurch earthquake in New Zealand which killed 185 people following a much larger and more distant quake with no fatalities at all.