MCFA 26 | Earthquake Insurance

 

Earthquakes are phenomena that cannot be prevented, so it’s in anyone’s best interest to prepare for the worst-case scenario. Getting insurance for your real estate properties is another layer of protection that should be welcomed by investors looking to buy near fault lines. Owners of Zenker Insurance Agency, LLC, Shawn and Debbie Zenker, join Athena Paquette Cormier to share their knowledge and expertise on the subject matter. They talk about the different benefits you can secure through insurance in the unfortunate time that you’ll need it. They also educate on the importance of having your assets protected, not only legally, but physically as well.

Watch the episode here:

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Earthquake-Proof Your Real Estate With Shawn and Debbie Zenker

I want to welcome you to our show with our different advocates for real estate investors. This talk is going to be about earthquake insurance. I’ve been getting many calls, questions, emails and texts even from people because of the earthquakes here. They’re asking me if they should get earthquake insurance. I thought, “Who better than my insurance agents, Shawn and Debbie Zenker, to come on with all their years of experience, all the ups and down on many earthquakes for many years?” Why do we think we need earthquake insurance when there’s an earthquake? Because all of a sudden, it’s in our attention span. I wanted to introduce you guys to Shawn and Debbie and have an earthquake one-on-one insurance talk. Welcome, Shawn and Debbie. Thanks for joining us.

Thank you for inviting us.

We hardly talk at all so it’s nice to be with you for once.

There have been lots of emails between us over the years.

Why don’t you give us a little bit of your background? How long have you been doing insurance? Are you agents? How did you even get into insurance, of all things?

We’ve been licensed to sell insurance since 1991. I started off at a Farmers Insurance agency. I did that for about seventeen years then we went independent. As far as how we got into the business, Debbie had her real estate license and I was a district manager for a company. I can see the writing on the wall that the company wasn’t going to make it. I reached out to a friend of ours that owned an insurance agency and I was thinking that maybe I’ll go to work for him. As soon as I met with him, he introduced me to the Farmers Insurance Reserve program and I had visions in my eyes that, “You open an office, people come in and they buy insurance.” It wasn’t like that at all. In fact, the first meeting that we went to, they put down a phone book in front of me and said, “Start making phone calls.” My heart dropped into my stomach when that happened. Debbie is an animal when it comes to that stuff. She made it into a game.

As I know you, you’re a little bit quiet and a little reserved, you might even say. You’re looking at the phonebook and thinking of calling strangers.

It’s not going to happen.

He was mortified, to say the least.

Debbie, you thought, “How fun. Let’s give it a shot.”

It was like that. My first job ever was a telemarketer, so for me, I was seasoned. I didn’t mind talking to people.

The insurance got busy and Debbie pushed a little thing to the side and she joined me. That’s how we teamed up to do this together.

That was 1991 so you’ve been in the business for a long time.

As long as you.

I got in the business a year before that for mortgages but not the insurance business. You were super young, too.

It’s been a long road but when you’re in the business, whether your mortgage or insurance, you see the evolution of how it evolves through the years. How you must also evolve in your business is important for any business. Here we are. Who would have thought that years ago, we would be doing podcasts? This is our first one.

You’re courageous because I’m like, “Do you want to do this?” You’re like, “Okay.” You had a family meeting about this, I’m sure.

I said, “Let’s get out of the comfort zone.”

You must also evolve in your business. Click To Tweet

Do you only do house insurance? Do you have to be only specifically one type of insurance or can you do any insurance? It seems like there’s a lot of different expertise that goes into it.

We do everything. The only thing that we probably don’t do is the insurance that you buy for a mortgage.

It’s like life insurance. Do they call it mortgage insurance?

No.

PMI.

Auto, home, life, commercial workers’ comp and insurance licenses.

Because you are business owners, it seems like you probably have a lot of knowledge about what a business owner needs as far as maybe their own disability or their insurance. Do people like you speak to that better than the average person?

I don’t know about the average agent but we have a sense of if you are a business owner, what types of insurance that you need and also have a built-in network to that if there is something that we don’t know or is not at our disposal, we have access to it. Being a business owner, it’s important that you protect yourself. It’s not about opening up your doors and just running a business because you’ve got to think of the protections as well. Having the right insurance in place is important. All those other things like budgeting. You’ve got to keep a close eye on what you’re spending versus what your cashflow is and all that.

You could probably help a beginner business owner know what they’re going to either need now or need soon, right?

Yes.

Our employment is going more towards self-employment or the gig industry. People don’t even work at offices hardly any more to a certain degree. That would be a good thing for a self-employed person to be able to talk to you about it. People are blowing up my phone about, “Should I get earthquake insurance?” I feel it’s such a personal thing like, “What I think I need versus what someone else’s.” I felt like it would be better coming from people like you who know the ins and outs, ups and downs, and the pros and the cons. What is earthquake insurance?

Earthquake insurance is a type of property insurance that if in the event, there was an earthquake and it happened to cause damage to your property. That could be a structure that you live in, a structure that you own or you work in and damage to your personal property. That would essentially pay for the damage. You would pay the policyholder if that happened. Earthquakes are truly important and something that most people should consider. There are a few instances where maybe people don’t need it so much. Those would be types of people talking in terms of homeownership.

If they have a lot of equity to protect in their homes, they might want to consider getting it. People forget that if an earthquake happens, they still have to pay the mortgage. If their home is destroyed, their mortgage is not forgiven. It is something that’s fairly necessary. It’s not mandated by a sense of a mortgage company will always demand that you have it. Though we have encountered over our career a couple of mortgage companies mandated it. The lawn you live on or near a fault to close, you need it.

I could see that becoming more common like hazard insurance to close a loan because the insurance companies are getting good about identifying where the earthquake faults are. It’s like the flood zones. Some mortgage companies look at the flood zones and they say, “In order to get this loan, not only do you have to get hazard insurance, you have to get flooded.” That’s becoming more commonplace in California at some point.

There’s homeowner versus renters. Do renters get earthquake insurance or do they get a renter’s policy?

You can but at that point, it is just protecting your personal property and giving you some loss of use coverage. If the place that you’re living in is uninhabitable, you’ve got to live somewhere else. You can use the loss of use coverage to pay rent while that other place is being repaired or help you get set up in a new place.

If I’m a renter in an apartment building, the owner of the building may not have earthquake insurance. It would help me to move somewhere else to live. That’s important.

For renters, it’s fairly inexpensive, too. It’s remarkable generally on the loss of use coverage.

MCFA 26 | Earthquake Insurance

Earthquake Insurance: People forget that if an earthquake happens and their home is destroyed, they still have to pay the mortgage.

 

If I have expensive belongings, but if I’m a renter, I probably don’t. I have expensive paintings on the wall or crystals.

The basic policy comes in $1,500 for personal property under for loss of use.

It’s something that you can spend a little more aside from the basic policy and have that increased if you feel. The $1,500 is fine for someone that says, “I’ll just move back in with my parents or move in with my brother or my sister for a while.”

That would pay for storage, maybe for your stuff or pay for you to be in a hotel until you figure it out.

For a renter, that loss of use coverage is important.

On a ballpark, how much does that cost usually? Is it $500 a year or $200 a year?

For a renter, it’s probably $150 a year.

You have to be fairly economical because it’s not a lot of coverage. There’s earthquake insurance for your actual home. Since we have a lot of investors that are reading, for your apartment building or commercial building, what are the benefits of an apartment building, multifamily building and residential building owner? What’s their benefit to having earthquake insurance?

The benefit for them is they’ll help rebuild the part of the building but the biggest thing would be the loss of income. That’s probably the biggest one.

That and any damage to the structure itself gets repaired and rebuilt. That’s important, too. As the building owner, you’ve got to decide, “Is it in the budget? How much equity is in the building?” If there’s not a whole lot of equity, they tend to not buy it but if there’s substantial equity and we know in California the property value, there’s a lot of equity out there to protect. The news media is doing an excellent job of informing the public of these different earthquake policies that are available. The earthquake preparedness is spinning the news and continues to be in the news. When there is seismic activity, the awareness is certainly there. It’s something that everybody needs to be more aware of and assess for themselves whether or not an earthquake is a value to them. With insurance, you don’t realize the true value of it until you need it.

Nobody wants something to happen to where they get paid out. How did they put a dollar value on what they’re going to pay you to rebuild the home? Do they pay you to rebuild it exactly as it was or upgrade? How does that work?

When you get an earthquake policy, you have to have the exact same building or dwelling coverage amount as you do like on a homeowner’s policy. Let’s say that your hazard insurance policy or homeowner’s insurance policy has $500,000 for your dwelling coverage. When you go to get the earthquake policy, you have to have that exact same coverage limit. That’s how you determine what you ensure the dwelling for. The rest of the policy is up to you like how much personal property coverage you want and what do you want your deductible to be.

For example, I have one building that’s a 1970s building. You can’t rebuild a 1970s building in a 1970s way. It is going to be upgraded.

You’re going to have building code coverage there as well. Typically, it’s 10%.

If you own some more commercial buildings, like industrial, if you have a big box, is it worth getting earthquake insurance for that or is it an equity question?

There’s a company that came out with a standalone business interruption earthquake policy. This is for somebody that has a business, but they don’t own the building. The building is destroyed so they can no longer generate an income. The business interruption policy pays them from that loss of income and that’s just a standalone policy all by itself.

Especially anyone who’s in sales like the ice cream shop or anyone who’s selling to the public. If you’re in a service industry, you could probably do business at home or find another rental but if your business was the location of Goodwill with the traffic, you’re in trouble.

What you see goes out, you’ve got to make phone calls and it goes down. That’s exactly it.

Being a business owner, protection is very important. You've got to think of having the right insurance in place. Click To Tweet

For the money part, what is the cost structure of something like that? If my house is 1,500 square feet and I pay $600 a year for fire insurance or homeowner’s insurance, what’s to be expected with the earthquakes? I heard it’s super expensive.

It depends on where the property is located. If you’re in a fault, you’re going to pay more than someone who is further away. At South Bay, I looked at a quote. Some home was insured for about $500,000. Their basic earthquake policy through the CEA was about $1,200 for a year. It’s not bad but that’s the basic coverage.

They probably had a 15% deductible.

The $1,500 loss of use, is that enough to relocate someone for any length of time? Probably not.

Is this for massive destruction?

Yeah.

Was the $500,000 the 15% of the value of rebuilding it?

Yeah.

That’s where you’ve got to think, “How much equity do I have in my house that I’m trying to protect?” You’re looking at that and you’re like, “I love this house. I love this location. I am never going to leave even though my equity isn’t there.” It comes down to personal decision at that point.

Let’s be clear and I get this question a lot. A lot of people say, “The deductible is $40,000. I don’t have that money to give the insurance company when it comes time to pay my deductible,” but that’s not how it works. What they do in the event of a loss is to determine how much loss there is. They subtract the deductible. It’s not like you have to write a check.

That’s what we all think.

Still, if you rebuild, you’ve got to take that $40,000 loss and you’re going to feel it somewhere when you rebuild.

Maybe instead of putting on that intricate architectural roof you have.

You have to downgrade a little bit to offset that money that got deducted. I seriously thought you have to write that check and nobody has that money.

It is not at all. I don’t know why that’s not publicized more than what it is. It comes up a lot when earthquakes are around. When we’re quoting it, a lot of times, someone’s eye is drawn to that deductible $40,000. People are aware of what a deductible is. In insurance, if they get into an accident, they know they have their deductibles to pay. When it comes to the deductible in earthquake policy that being so high like that, they’re a little distraught when they see that.

It is freakish to think you have to write a check like that.

It is a big amount of money but people also have to understand it’s a way that the insurance company can keep those premiums down, too. If there are no deductibles at all, you’d be feeling it a lot more in the pocket.

Maybe that’s $5,000 a year.

MCFA 26 | Earthquake Insurance

Earthquake Insurance: There are 15,000 faults in California, and 500 of them are active.

 

How do they determine how much you’re going to get covered for? The $500,000 is to rebuild the house, also the garage and the buildings. Because the dirt didn’t get hurt, it’s still there. This $500,000 is to rebuild the actual structures. Me as a layperson, I don’t know. Do I use $100 or $200 a square foot? How are they determining what it’s going to cost to rebuild my house?

It goes back to the homeowner’s hazard policy. When that policy is written, the insurance companies use proprietary software to determine what the replacement costs should be. If there’s a fire, you have a total loss. That same number is carried over to the earthquake coverage limit.

Let’s say we don’t like the number they have there, is there a way we can push the number off?

No. If you feel that your property is under-insured, even after we’ve come up with a number, absolutely, we can’t go backward.

Do it now because when something happens, it’s too late to argue whatever it is.

If you’re not going to get earthquake insurance, what we offer is an additional 50% beyond the limit chosen at various stages. Let’s say you’re insured for $500,000 and you have this official endorsement, so you’ve got another $250,000. To rebuild your home from a fire, you have $750,000. If you’re not going to get earthquake insurance, I’d be totally happy with that. If you feel that your home is underinsured at that $500,000 and you’re going to hit an earthquake, then maybe you want to push that number a little bit more.

You mentioned these letters, CEA. Who’s CEA?

CEA is the California Earthquake Authority. They are an insurance company essentially that offers earthquakes. They are not the only one but the CEA was born from what we had all experienced years ago. It first started out in the ‘80s, where the mandate of the earthquake became the law of the land where if you were a homeowner’s insurance company and you were selling homeowner’s insurance, you had to also offer an earthquake. That became the law. When the well-known Northridge earthquake happened on January 17, 1994, the insurance companies took a big hit. There were $20 billion worth of losses and only about half of those covered. The insurance companies went into panic mode at that point and they started not writing a homeowner’s insurance policies.

What they tried to do was, “We’re just going to offer homeowner’s insurance. Probably what the insurance said, “No, it’s the law that if you sell homeowner’s insurance, you must also offer earthquake.” They’re like, “We’re not going to offer earthquake so we’re going to stop selling homeowner’s insurance.”

That also had a big effect on the mortgage industry. We were having lots of problems trying to close escrows for people that were trying to buy because they couldn’t get homeowner’s insurance.

I do remember that. We had to have appraisers go out and re-inspect homes to see that we’re still there or if there were red tagged.

After the earthquake in 1994, it took two years and finally, the CEA was born. Insurance companies had to decide whether or not they want to be a participating partner with the CEA. They could offer their own earthquake products. That’s why you have some that participate in the CEA and offer the CEA earthquake policy. Some have their own type of policy.

Is it a branch of the government?

It’s not. It is a non-profit, privately funded and publicly managed company.

Insurance companies can partner with those guys instead of having their own funds covering the earthquake policy?

That is correct.

There are about 20 or 25 companies that participate with the CEA. The companies that decide that they want to offer earthquake insurance, they always offer the minimum. It’s going to be $1,000 and $1,500 for loss of use and you cannot change those limits. Another thing is when your policy is either written up brand new, they offer that to you and they give you 30 days to accept or reject and they won’t offer to you again for another two years.

If someone misses the boat, they’ve missed it for an entire two years.

You don't realize the true value of insurance until you need it. Click To Tweet

We have standalone companies so we can get insurance anytime. A lot of times, they offer better coverage at a more affordable price than what the insurance company is offering and the CEA. When somebody comes to us and says, “I’m interested in earthquake insurance,” we go through all of those. We go to the CEA and the insurance companies and what they’re offering.

You cost-compare for that person in that particular situation. What would you say is the most important thing about this earthquake insurance that people should know?

The most important thing is you need to evaluate yourself as an individual. I wouldn’t let the fact that the news media is out there promoting it at the state level. Look at your financial position, your budget, and your exposure. Are you near a fault? People ask us, too, all the time, “How do I know if there’s a fault nearby?” There’s a website that they can go to. You can start at www.EarthquakeAuthority.com. From there, there’s a basic map but there are links in there that can take you to a big map in California that you can zoom in on where those faults are. You can see your own risk. We all know in California that the San Andreas Fault is the big one. It’s not been tremendously active, but it’s there. There are going to be more earthquakes that follow. There’s no doubt about that.

They know that there are 15,000 faults throughout California and 500 of them are active. They also said that most farmers are within 30 miles of a fault that’s active.

The one that happened in the Riverside in Ridgecrest, it’s a tiny town, how shocking. Miles away at my condo in Palm Springs, I have cracks. You can have slight damage that’s irritating. It’s slight but it’s enough to worry. You’ve got to take the crown molding down because it’s separated and there are cracked isles. Do you leave those like that or do you say, “This doesn’t look right?” My condo is like a rental for out of towners, short-term rentals and most of them are from Canada. Imagine, they come and they’re like, “Why is everything cracked?” Ridgecrest to them will seem close. I don’t know how far it is but it’s close. You also leave things to people’s imagination. If someone owns a condo and they’re not a renter, but they are in a communal building that has their own insurance. You, as a condo owner, should have insurance. By the way, I did not have earthquake insurance. What’s your take on a condo owner? Is it worth it for them to get it? I don’t have a lot of equity but it looks a little weird to have all these cracks.

I’m torn with this because coming from an insurance guy, you should have everything. Let’s say that you live in a condo and the association does not have an earthquake insurance policy.

I think it’s typical. I don’t run across a lot of condos with insurance.

There are a few.

It’s not the norm.

Let’s say that the structure is severely damaged and you can’t live there but you have earthquake insurance. You can’t get anybody going there and return your unit until the structure is fixed. That’s the HOA’s responsibility. I have a problem with that.

It’s a challenging situation if that case scenario happens.

I would imagine that lawsuits would be flying like crazy. That is a problem. They work together at that point.

What you’re saying is if the condo association doesn’t have an earthquake, then it mitigates the thing that you’re trying to help yourself with by getting the earthquake insurance.

Yeah.

It looks terrible, but you fixed your crown molding. What good does that do?

You would have your covers for your personal property and loss of use of it becomes uninhabitable. You will be able to use that part of it. You just wouldn’t be able to fix the place back up or back in.

Hopefully, people will consider it. This has been helpful. If someone wanted to run by you about their own personal house, condo or commercial building, how do they get in touch with you to ask questions? I’m sure you’re super busy so maybe the best way to contact you, your turn times for answering and stuff like that.

They can call us anytime. Our phone number is (310) 214-2444. They can also go to our website and fill out the Contact Us form from the main menu. That website is www.ZenkerInsurance.com. We’d welcome that opportunity.

Thanks for joining me. I learned a lot which is always great. Hopefully, we’ll talk again soon.

By the way, we are licensed in California and in Arizona as well.

Everyone who has their vacation condos in Arizona, which is a lot of people, you have a tax-free state there. Is that right?

We do. We are getting a lot in California that’s moving to Arizona. It’s a great place to buy a property. Our real estate here is hot and extremely affordable. We’re keeping an eye out because our daughter is in the market. She wants to get her own place and you can buy a nice house for $250,000.

I’m sure that’s maybe a garage here. Thank you, guys.

Thank you, Athena.

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About Zenker Insurance

Those of you that already do business with us know that we are not just your average Independent Insurance Agency.  We are a family-owned agency that is highly service-oriented. Over the last 29 years, our business has evolved around various online marketing efforts but it’s the personal referrals that have ultimately created the agency that we have today.  It’s those referrals that we take personal pride in.  Our motto has always been and always will be “Do the Right Thing!”  The faith and trust that our clients have in us has allowed us to confidently and proudly serve many of their friends and family members in all of California and Arizona.

We frequently serve the South Bay communities such as Torrance, Palos Verdes, Rolling Hills, Redondo Beach, Hermosa Beach, Manhattan Beach.  We also do business with those who live in Northern California, Southern California and recently expanded our operations to include all of Arizona. By using the latest technology available and an efficient management system that incorporates streamlined office processes, most of our services can be efficiently and effectively provided by telephone, fax, email or by visiting our online portal.

We know you have choices for your insurance and we are here to meet and exceed your expectations.  Don’t forget, we are also consumers just like you!

We look forward to your continued support and we look forward to serving you!

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