Japan Quake & Tsunami: Insuring for the Big One

Last Updated Mar 14, 2011 6:46 PM EDT

The devastating earthquake and tsunami that hit Japan is causing a surge of interest in earth quake and flood insurance coverage, as people around the globe realize how vulnerable they could be to losing everything in a natural disaster.

Neither earthquakes nor floods are covered by the typical homeowners insurance policy. People who want this coverage must buy separate insurance or a "rider" that's added to their homeowners insurance.

But before you buy quake or flood insurance -- even before you consider it -- you should know that it is vastly different than the type of homeowners coverage that you're familiar with.

Unlike typical homeowners' policies, deductibles on quake insurance policies are generally figured as a percentage of coverage, rather than a dollar amount. Moreover, many items are not covered at all, which could leave you exposed to bigger losses than you might think -- even when you buy the most expensive comprehensive policy.

Flood insurance has a dollar-denominated deductible, but offers extremely limited coverage for anything that might reside underground -- that's basements and rooms that are not built on an elevated structure. And, often, the maximum amount of insurance you can buy is significantly less than the amount it would cost to replace a structure and shore up the ground beneath it.

What's covered and what's not?

Quake insurance
Deductibles: Most quake policies will only pay losses that exceed a set deductible that's figured as a percentage of the replacement value of the structure. Typically, deductibles range from 2% to 20%, says Loretta Worters of the Insurance Information Institute.

In other words, if you've figured that the replacement cost of your structure is $200,000, and you have a 5% deductible, you would not be able to claim reimbursement until your losses exceeded $10,000.

In states where the earthquake risk is highest, the deductibles are usually far higher, too. In California, where the vast majority of earthquake policies are written, the typical deductible ranges from 10% to15% of the structure value.

Exclusions: In addition, quake policies can exclude coverage for a wide array of significant losses. For instance, the California Earthquake Authority policy pays just $5,000 to replace chimneys, even though the cost to replace a chimney that completely separates from a home or disintegrates in a strong quake is likely to be considerably higher.

These policies also don't pay for damage to driveways, walkways, and patios, unless they're necessary to get in or out of the home. Crystal, china and other breakable valuables are also excluded, as is damage to pools and landscaping.

Damage to decorative facades made of brick or stone are also not covered. The policy will cover the stucco needed to weather-proof your home, but if the beautiful stone masonry that graced the outside of the structure crumbles in a quake, you must pay to replace it out of your own pocket. The cost of that loss won't even be figured into the calculations determining whether you've satisfied the deductible, according to officials CEA.

Detached structures ranging from guest houses to garages are not covered, unless you buy a separate policy to add them in. And these policies provide extremely limited coverage for "loss of use," if you're forced to rent another home or apartment while your quake damaged property is being repaired.

Contents coverage: Finally, contents coverage on quake policies also doesn't work like a typical homeowners policy. With a quake policy, you choose the contents coverage amount, which can vary from $5,000 to $100,000 with the California Earthquake Authority. Your premiums, not surprisingly, will vary based on how much coverage you choose, as well as other factors, such as the building type and whether you've taken quake remediation steps, such as bolting your home to the foundation and strapping down water heaters.

However, coverage can vary significantly, depending on the insurer. While most policies written in California follow the formula set out by the California Earthquake Authority, policies written in other states are often more comprehensive. Still, if you're weighing a quake insurance purchase, be sure to read the policy's exclusions and terms carefully.

Flood coverage
Flood coverage is far more standardized than quake insurance since it's primarily offered through the National Flood Insurance Program. This program sets rates based on whether you're living in a high- or low-risk flood zone.

Deductibles: Are set as a dollar amount. Depending on whether you're in a high- or low-risk zone, you can be offered a deductible ranging from $1,000 to $5,000. Naturally, the lower the deductible, the higher the cost of the policy.

Coverage limits: But no matter where you live, the maximum structure coverage is $250,000 on a standard NFIP policy. If you need more, you must request a rider from your homeowner's insurer -- and there's no guarantee that it will be available.

Contents: Coverage limits are set at $100,000.

Exclusions: If you have a room that's below ground, coverage for anything that's in it is restricted. The only items covered in your basement are the machines needed to make the house run -- like the water heater and air conditioner.

Flood insurance also does not pay your living expenses when you are forced to leave during the flooding or when your home is being repaired.

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