As part of the President’s budget proposal to Congress for fiscal 2002, the following was proposed:
“The budget proposes two reforms that will help to ensure that States and localities make a significant commitment to preparing for disasters before they happen. First, the Administration proposes that publicly-owned buildings carry disaster insurance. States and communities that do not carry insurance should not be rewarded with disaster assistance unavailable to those who do carry insurance. Second, States will be expected to carry a larger share (50 percent) of the cost associated with hazard mitigation grants, the pre-1993 practice for the program. Shouldering a larger share of the costs will help to ensure that States select truly cost-effective projects, an incentive that is missing if most of the funding is provided by FEMA.”
The Administration perceived federal cost-shifting to local government as saving, an error that many Americans either do not understand or ignore. Then, the 9/11 terrorist attacks occurred, and this was mainly forgotten.
That said, “What exactly does having earthquake (EQ) insurance mean?” I don’t think, given the constitution of current insurance market mechanisms, it means much for most public entities in EQ-prone areas.
Consider, for example, a comparison of the perils of flood and EQ. The choice of purchase of EQ insurance in EQ-prone areas is not directly comparable to the choice of purchase of flood insurance in floodplains.
Flood insurance is universally available to residents of U.S. flood plains whose communities participate (community participation is voluntary, although I can’t understand why a community with an identified hazard wouldn’t participate). As a federal program, it is highly subsidized, extremely secure insurance with low deductibles and limits that are adequate in many parts of the U.S. In addition, there are opportunities in the private insurance markets for commercial flood coverage.
In contrast, EQ insurance is only available to residents of EQ-prone areas (albeit, typically with 15% of value deductibles) through private and quasi-public (CEA, privately funded and publicly managed) insurers. For commercial insureds (and public entities), availability is through commercial markets and problematic. For example, a city with which I’m familiar (excluding its port) has approximately $1.5 billion in total insured values (TIV) in its special perils property insurance program. For EQ, the “program” this city was most recently offered (and rejected) on its portfolio was $25 million in total limits coverage over a 10% of TIV deductible for a $2.5 million premium. In my opinion, not wasting taxpayers’ money on that “offering” is not an equivalent decision to declining to purchase, at a minimum, coverage equivalent to NFIP.
That said, this city, like most, historically has been and is concerned with seismic safety. In response to a 1933 earthquake, it adopted a very rigoroush building code. In addition, it has pursued the seismic retrofit of hazardous buildings for many years, and special assessment financing has also been used to fund private retrofit programs.
In summary, to maximize a public entity’s position with respect to the FEMA Public Assistance program when an EQ occurs, I’d recommend the following procedures now:

Market your EQ risk every year
(a) If the costs and coverage are reasonable, purchase it
(b) If the costs and coverage are unreasonable, fully document the quotes and your reasoning

Present your elected officials with (a) and (b) as options (along with the pros and cons as well as your recommendation)

Document your loss reduction mitigation efforts

All things equal, EQ (or DIC) insurance is better than no EQ insurance. Unfortunately, it’s more complicated than that… .