Natural disasters are events that create fear. When you add the way these events are reported, the fear is greatly increased, especially if you are not used to a particular event. For someone who grew up in an area where blizzards were common, in an era before the Weather Channel decided to name winter storms (a choice I consider dubious at best), blizzards don’t scare me. And having lived in Florida for 17 of the last 22 years and dealing with hurricanes in different ways, they don’t really scare me either.
Earthquakes are a different story. I watched the 1989 World Series when the Loma Prieta earthquake (yes I had to look up that name) happened and it was one of the scariest things I’ve ever seen on TV. For me, the thought of being in an earthquake is really scary. If you’ve experienced an earthquake and aren’t as scared as I am, that’s fine and I’m glad. Just let me have my irrational fear.
Behind this we want to answer three questions: What is the risk? What does a real estate policy cover? Who Really Needs Earthquake Protection?
What is the risk?
While this sounds like a simple question, like most insurance questions, it is more complicated than it first appears. While considering risk, we are not talking about the life risk or liability that could be associated with an earthquake event. We are only talking about the risk to property in connection with an earthquake event.
Part of earthquake risk is what can happen to the building and associated personal property. During an earthquake, the earth moves. This isn’t exactly a shock to anyone (it’s not even an aftershock). An earthquake occurs when the ground begins to move in an unexpected way; this makes everything on the ground tremble. This can lead to property damage.
Damage to buildings can include a few windows smashed, cracked, or broken, and some items falling off walls and shelves. In the worst case, an entire building could be destroyed if it cannot withstand the stresses caused by the tremors. Regardless of whether the damage is minor or major, there are events after the initial tremor that can cause major damage. This ranges from fire or explosion from damaged gas or power lines, to water damage from pipes ruptured by the quake, to the aftershocks that continue to occur after the initial tremor. These aftershocks can be strong enough to finish the work that the original tremor started.
Another part of answering the risk question is answering the question: What is the actual earthquake risk at a given location? According to the FEMA website, there is no place in the contiguous United States that does not feel the effects of an earthquake. This does not mean that every place has the same earthquake risk or a strong earthquake. But there is no zero risk zone. We’re sorry.
So, depending on where the building is located, there are certain areas that are at higher risk of more and stronger seismic activity, and there are many areas where the risk is lower.
What does the policy cover?
Again, this is a bit complicated and depends on whether the policy is a home or commercial real estate policy, a registration policy or a deductible policy, a California policy or a Florida policy. But here are some general thoughts from the ISO Special Causes Form (CP 10 30 09 17).
Covered Causes of Damage Where Statements state “Specific” then “Covered Cause of Damage” means direct physical loss unless loss is excluded or limited in this policy.
That’s a good start, but you know there’s more to the story, right?
(1) earthquakes, including tremors and aftershocks, and any subsidence, rise or shifting of the earth in connection with such events;
(2) landslides, including landslides, elevations or displacements associated with such an event;
If you want to earn points we have now excluded coverage as this is a specific exclusion. In fact, it’s exclusion B (if you start counting from A). Very early in the form we excluded coverage for damage related to earthquakes. You’ve probably already noticed that we didn’t add the entire exclusion. That’s because we’re not talking about mine subsidence (that’s another article for another day), nor are we talking about sinkholes (which are covered), or the natural settlements that occur under a building over time (which aren’t covered are).
However, there is one exception that we might need to look at because you’re already thinking you thought fires should be covered after an earthquake. Let’s see how that happens.
However, if the movement of earth as described in b.(1) to (4) above results in a fire or explosion, we will pay for the loss or damage caused by that fire or explosion.
The earth trembles, causing damage to a building, but in the course of that damage, a gas line breaks and two pieces of metal scrape together, creating a spark large enough and in the right place to ignite that gas and cause an earth more jarring Kaboom. Damage from the earth-shattering Kaboom is covered. Good luck to the claims adjuster trying to figure out what damage was caused by the earthquake and what was not.
So if there is an exclusion, you have to ask yourself if there is a way to provide coverage to bridge that gap. The answer is that there are solutions. ISO has several endorsements that can provide earthquake coverage. When considering an ISO solution, consider whether the insured is best served with a flat deductible or a percentage deductible. You need no introduction to the differences between the two. You already understand that, but if I were the insurer and your client’s building was a $3 million building in a higher seismic risk area, I’d want to give a percentage deductible, but that’s just me.
Another solution exists. You can look for a policy for different conditions to provide earthquake coverage and other coverages that you feel may be missing from the insured’s current policy. The same caveat applies. Pay attention to the deductible provision to ensure the insured is aware of it and its application. These percentage deductibles can turn into large dollar amounts.
Who needs earthquake protection?
So the insurance guy in me answers first – that everyone needs earthquake insurance. I mean, if everyone buys it, it can cost less for the people who really need it, right? Not exactly. In this case, those who should buy earthquake insurance because they are in an area where earthquakes are more likely will pay more for their earthquake insurance.
To be clear, not everyone needs to buy earthquake insurance.
This will no doubt irritate the company out there trying to build their earthquake book by adding low cost coverage to all policies that are in a relatively less risky area. It may help that I don’t intend to list the risks that I don’t think need earthquake insurance. I can’t, and not because someone from our risk management department is looking over my shoulder and making faces at me when I think of making blanket assessments without considering the details of the individual risk.
A customer who needs earthquake insurance is the one who thinks it is the case. If they want coverage, whether they are anywhere along the New Madrid Fault or anywhere in Nebraska, you will find coverage. It will likely cost them next to nothing and it will make them feel better. For my part, I wouldn’t generally discourage anyone from buying more coverage, even if I’m not sure they’re taking enough risk to make the purchase.
I bought earthquake insurance for my HO-4 in Florida. OK, it was included, but I still didn’t ask for it to be excluded when I discovered it.
It may seem obvious to most of us, but I’ll put it here anyway. Any customer who owns property in an area where an earthquake is more likely and likely to be stronger should consider purchasing earthquake insurance.
This becomes a conversation about the costs and potential benefits of this purchase, because the higher the risk, the higher the replacement cost, the lower the deductible, and at least 17 other factors will go into the decision-making process. In short, if the customer isn’t already convinced of earthquake insurance, you may need to help them make that decision.
Some customers will feel that the cost is too high compared to the likely benefit of the coverage. Others will think they need the coverage, but they may need a sizeable deductible to make the cost make sense to them. Then you might need to have a conversation about where they get the money for their chosen deductible because not everyone has just 10% of $5 million lying around in petty cash.
There are some customers who may not be located in a high risk area nor in a low risk area, but to add complexity they are located in a highly developed area or city. Not a city like Jacksonville, but more of a city like Boston. Prosecutors in these areas might consider earthquake insurance, not because they have a high risk of loss due to earthquakes, but because they have a relatively lower risk of loss but a higher risk of catastrophic loss.
Purchasing insurance for a lower risk event in an area where more buildings are at risk has two benefits. First, the insurance is cheaper. Yes, the risk of a catastrophic event is higher because of the sheer number and value of the property, but most companies that write earthquake insurance may have a lower concentration of buildings on their books in this region, hence lower risk and risk , there is the potential for a lower premium.
Here’s another thing to think about. If there is an earthquake in a major metropolitan area and relatively few buildings have earthquake insurance, where will the money for reconstruction come from?
Right. Some will come out of the pockets of building owners and far too much will come from local, state and federal governments in the form of emergency funding from FEMA or some other similar organization.
When thousands of people seek money from these sources, it takes longer for them to get the money. If it takes longer to get money, it will take longer to rebuild buildings and remove debris. If the building was insured, the chance of getting a check faster is higher.
What did we learn? Earthquakes are terrible and expensive. More customers require earthquake insurance than none. And I don’t have anyone on our risk management team looking over my shoulder to make sure I don’t write anything that gets me (us) in trouble with anyone, anywhere.
catastrophe natural disaster earthquake