Is Flood Insurance Worth It? How About Earthquake Insurance?

If you buy a home in a federally designated flood zone with a federally insured loan (and most loans fall into this category), you are required to purchase flood insurance. Sometimes, property that falls within a designated zone on a map isn’t all that likely to flood, yet the insurance is still required—with one exception: you have a Letter of Map Amendment Determination from a surveyor or civil engineer who says your property isn’t any more likely to flood than homes outside the flood zone.

Flood insurance is very expensive ($1,000 to $3,000 a year). If you live on top of the one hill in a flood zone, and you don’t want to pay for flood insurance because you really don’t need it, it’ll cost between $500 – $2,000 for a survey to prove it. Locally, surveyor Ron Franz and civil engineer George Rau are both excellent.

Here’s the thing: if you drive around Ukiah in the winter, you won’t see much flooding and with today’s mortgage rates, $3,000 per year equates to about $50,000 more in mortgage. So, if the home you’re interested in buying requires flood insurance, you may be better off to pay a little more for a home outside the flood zone than to pay for the “less expensive” home in a flood zone. Of course, if the house in the flood zone is an exceptional value, go for it.

Jumping onto my soapbox for a moment, I have to say that I believe flood insurance rates are outrageous. At $3,000 a year, flood insurance is way higher than insurance for similar potential disasters. My take is that the Federal Emergency Management Agency has to pay for Katrina and other devastating hurricanes somehow, and charging appropriate insurance rates for the folks affected by those disasters isn’t politically palatable. And they make the rules on who must buy it.

Since I’m on a roll with insurance here, I think we should talk about earthquake insurance, too. California is known for earthquakes and Northern California has the San Andreas Fault running through it. Locally, we also have the Mayacama Fault and a few others. This leads one to seriously consider purchasing earthquake insurance. Unlike flood insurance, it isn’t required, but sometimes it is advisable.

According to local insurance agent Mark Davis, typical premiums for earthquake insurance usually run about the same as rates for homeowners insurance, about $500/year for a $300,000 home. If you own a one-story home built in the last fifty years that is bolted to the foundation (as most are), and you’re not located on the edge of a cliff, you’re probably fine without earthquake insurance. However, if you have a two-story, unreinforced masonry home built in the 1800s, you may want to consider it—and for this level of risk, you’ll likely pay quite a bit more than the amount quoted above. Some homes do not qualify for earthquake insurance: if you have a post and pier home (not bolted to the foundation), most insurance companies won’t sell you insurance at any price.

Even with earthquake insurance, you may end up paying for earthquake damage. Most policies have a 15 percent deductible; that’s $45,000 worth of damage before your policy kicks in on that $300,000 home. And as I’ve said before, be sure to read your policy. Some policies have exclusions and it’s a bummer to learn about them right after the earthquake hits.

So, is earthquake insurance a good idea? Without a crystal ball, there’s no telling whether you’ll use it. So it boils down to this: if it makes you sleep better at night and you can afford it, it’s worth it. Of course, I really value a good night’s sleep.

If you have questions about real estate or property management, feel free to contact me at rselzer@selzerrealty.com or visit our website at www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you’re a $5.00 gift card to Schat’s Bakery. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 35 years.