Here's the deal with earthquake insurance: insurance companies calculate the value of your dwelling based on (1) the appraised value of the property, (2) the square footage of the house, and (3) a modifier based on the relative values of dwellings to property, determined by the geographic location. Any one of these three values increases, and the calculated value of the dwelling increases. The overall result is sortof arbitrary, but it serves as a relatively good of how much it would cost the insurance company to completely replace the dwelling if it were knocked down.
So for example, if you bought a $100,000 home (does that even exist anymore?), you'd probably have a dwelling value of around $40,000. If the house were more expensive, bigger, or in a better location, the dwelling value would similarly go up.
This value is important for three reasons: first, because your premiums are dictated by the value; second, because your deductible is calculated as a percentage of this dwelling value; and third, because most insurance policies have a cap on the amount they'll pay to replace your dwelling—typically, this is 120% of the value of the house. So if an earthquake hits and everyone in town is trying to rebuild their homes and the price of lumber skyrockets, you're stuck with the $48,000 your insurance company will pay.
Now when we called the insurance company to calculate the dwelling value on the first home on which we placed an offer, we got a fairly high figure because the house is (1) somewhat expensive, (2) large for a Rambler (1340 sq. ft.), and (3) in a location where the land is comparatively cheaper than the homes.
In contrast, this second home is (1) more expensive, but (2) slightly smaller (1200 sq. ft.) and (3) in a location where land is far pricier.
What this means is that even though the second house is far far nicer than the first, our dwelling value is actually lower.
Usually, this would be a bad thing, because we'd probably be out big bucks if the Big One slams into the greater Puget Sound area.
...but wait! It turns out that as Microsoft employees, we get a special deal with our insurance carrier, which means that we get a mondo discount on insurance and our plan carries an uncapped rebuild policy. So if our house is destroyed and it takes millions of dollars to rebuild (admittedly only to the "same size and likeness" of the original—so, no mansions), the insurance company will gladly pay out whatever it takes. And as a bonus, it means we've got unlimited wiggle room to demand the higher-quality plywood and plaster used to build the home in 1961 instead of the sheetrock and MDF they're likely to use now.
And the best part? The premiums and the deductibles are less, because the value is lower. So ... for us, houses in the priciest parts of town are by far the cheapest to insure. Sweet.
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