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Earthquake insurance is a form of property insurance that pays the policyholder in the event of an earthquake that causes damage to the property. Most ordinary homeowners insurance policies do not cover earthquake damage.
Most earthquake insurance policies feature a high deductible, which makes this type of insurance useful if the entire home is destroyed, but not useful if the home is merely damaged. Rates depend on location and the probability of an earthquake. Rates may be cheaper for homes made of wood, which withstand earthquakes better than homes made of brick.
As with flood insurance or insurance on damage from a hurricane or other large-scale disasters, insurance companies must be careful when assigning this type of insurance, because an earthquake strong enough to destroy one home will probably destroy dozens of homes in the same area. If one company has written insurance policies on a large number of homes in a particular city, then a devastating earthquake will quickly drain all the company's resources. Insurance companies devote much study and effort toward risk management to avoid such cases.
Earthquake insurance has become a political issue in California, whose residents purchase more earthquake insurance than residents of any other state in the U.S. After the 1994 Northridge earthquake, nearly all insurance companies completely stopped writing homeowners' insurance policies altogether in the state, because under California law, companies offering homeowners' insurance must also offer earthquake insurance. Eventually a government agency was created called the California Earthquake Authority that established a standardized "CEA policy" that could be sold by any insurer to comply with this law: only structural damage need be covered, with a 15% deductible. Claims on personal property losses and "loss of use" are limited. Premiums are paid to the insurer, and then pooled in the CEA to cover claims from homeowners with a CEA policy from any insurer. The state of California specifically states that it does not back up CEA earthquake insurance, in the event that claims from a major earthquake were to drain all CEA funds.
The government of Japan created the "Japanese Earthquake Reinsurance" scheme in 1966, and the scheme has been revised several times since. Homeowners may buy earthquake insurance from an insurance company, usually as an optional rider to a fire insurance policy. Insurers enrolled in the JER scheme who have to pay earthquake claims to homeowners share the risk among themselves and also the government, through the JER. The government pays a much larger proportion of the claims if a single earthquake causes aggregate damage of over about 1 trillion yen. The maximum payout in a single year to all JER insurance claim filers is 4.5 trillion yen; if claims exceed this amount, then the claims are pro-rated among all claimants.
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