I’m often asked for a recommendation about when one should consider buying earthquake insurance on a home or office/industrial building. My general response is it depends–a good lawyer-like answer!
The answer is that it depends on how much of the home or building you own as opposed how much the bank/lender still owns.
If the lender owns a large percentage of the property, and considering there will be a 5 or 10% deductible on the insurance policy, it may make more sense to walk away from the rubble in a catastrophic quake.
However, if you own most of the property, and it represents a significant value of your overall estate assets, it may be prudent to buy the insurance for the catastrophe.
One recent quote on a local office building with a replacement value of $10,000,000 including loss of rents, was $55,000. This of course is no small amount, as the annual income from rents is $900,000, roughly 6%.
When there are multiple buildings in a property owner’s portfolio, he can be protected by “spread of risk” assuming the properties are in different geographical areas. In the ’89 quake, buildings were affected differently with only slight variations in geography.
Is there anything more scientific to determine the answer as to whether or not to insure? Not really; often times it boils down to a long standing risk management principle–what give you a “quiet night’s sleep”?
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