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I live in an area that's at a high risk for a catastrophic earthquake and I've been considering switching my home insurance to a company that also offers earthquake insurance.

All the companies I've contacted so far have a separate deductible for earthquake claims. Unlike a typical fixed deductible (e.g., $1000), deductibles for damage caused by earthquakes are always a percentage -- anywhere from 10% to 20%. So if my deductible is 10% and I have $250,000 in dwelling coverage, then I would have to pay the first $25,000 on any damage that occurs.

This leads me to my question: does the deductible as a percentage make it advantageous to purposely select lower coverage totals? For example, on my current home insurance I have $230,000 in personal property coverage (separate from dwelling coverage). However, I do not have $230,000 of personal property inside my house -- it'd probably be closer to $80,000. Given that I have $230,000 PP coverage, if an earthquake hit and the house collapsed, then I would have to pay for the first $23,000 in damage. That's a huge deductible when in reality I only have $80,000 worth of personal property.

Wouldn't it make sense to lower my personal property coverage to $80,000 (or even slightly below it)? Such a change wouldn't much affect my annual premium, but it would significantly lower the threshold at which my policy will pay out.

This seems a little counter-intuitive. Is there some sort of flaw in my logic?

  • Is there a max payout on the policy? I'm in a similar situation but rejected PP quake coverage because it covered only the amount between $30k and $35k. – Kevin Sep 11 '17 at 20:49
  • @Kevin Interesting, I hadn't heard of a max payout limitation -- I thought the maximums were by coverage category (dwelling, personal property, dwelling extension, etc). I'll definitely look into that. – Elliot B. Sep 11 '17 at 21:07
  • Thanks for the clarification. It seems that rather than accurately set the level of coverage at the value of the property, your insurance company has set a perhaps somewhat arbitrary figure above that value. This may have been done in order to prevent them from needing to hire a valuator to get the full value of your property covered. As you say, in this case it seems that this will actually cost you if you make a claim, because you would never get the benefit of the higher coverage anyway [because your losses would never be that high], but you still pay a higher deductible. Seems quite odd. – Grade 'Eh' Bacon Sep 11 '17 at 21:23
  • You should check whether your insurance company even allows that, mine has a minimum PP of 20% of the dwelling value. – Kevin Sep 11 '17 at 21:29
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    75%!? Even if the house is flattened, how many people have belongings worth more than 3/4 of their home? Are you quite certain you (or a phone rep) didn't just misread a 15 (fifteen)? – Kevin Sep 11 '17 at 23:03

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