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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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All the companies I've contacted so far have a separate deductible for earthquake claims...deductibles...are always a percentage

this is industry standard; you will not find any exceptions to this.

does the deductible as a percentage make it advantageous to purposely select lower coverage totals?

No. The insurance company will not sell you a policy with a limit that is less than the value of the home and they have software tools to ensure the value makes sense.

More importantly, the reason earthquake deductibles are so high is that catastrophic events (earthquakes, hurricanes, etc.) tend to either completely destroy or completely miss a house; don't think of it as the company making you cover the first $25k, think of it as the insurance company paying you $225k if an event happens instead of $250k.

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.

Contents coverage is almost always set at a percentage of the dwelling limit - usually around 20%-30%, so I'm guessing you have $750k to $775k in dwelling coverage. Talk to your agent or company about options to lower that, although you're not likely to save a lot of money doing so since most of the earthquake premium is based on the value of the home.

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.

Read Your Policy: Most earthquake deductibles are based on Dwelling Coverage * Pct Deductible, not (Dwelling + Contents) * Pct Deductible, although this may vary. If it is Dwelling Coverage * Pct Deductible, then it is obvious that lowering your contents coverage will not decrease your deductible.

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