In 2014 the U.S. Geological Survey issued an updated version of its National Seismic Hazard Maps. These maps provide an estimate of the location, frequency and intensity of future earthquakes in the United States.
According to the USGS, 42 states in the U.S. have a “reasonable chance” of experiencing damaging ground shaking within the next 50 years. Sixteen states have a relatively high risk of experiencing a damaging earthquake.
Earthquake is an excluded peril under virtually all commercial property policies. In many policies, earthquake is excluded in conjunction with earth movement. The exclusion typically precludes damage caused not only by an earthquake itself but also by any earth sinking, rising or shifting that is related to an earthquake.
Why don’t commercial property policies cover damage caused by earthquakes? The reasons have to do with predictability, the potential for large losses and the spread of risk. Large quakes occur infrequently, are impossible to predict and can cause catastrophic losses. Also, earthquake risks are not spread evenly among policyholders. The concentration of risks and the uncertainty about future losses make earthquake a difficult peril to insure profitably.
Still, some insurers do offer earthquake coverage. These insurers have protected themselves against large quake losses via reinsurance or other financial mechanisms.
Fire or Explosion Following an Earthquake
While damage to property covered by an earthquake itself is excluded under a typical property policy, most policies cover ensuing loss caused by a fire or explosion.
That is, they cover loss or damage caused by a fire or explosion that results from an earthquake. This coverage is usually provided as an exception to the earthquake exclusion.
Suppose you own a building that is insured under a commercial property policy. Your policy contains the typical “earth movement” exclusion.
Three months after your policy takes effect your area is rocked by an earthquake. The quake does not damage your building but it ruptures a gas pipe near your property. Leaking gas ignites, triggering a fire that consumes your building. Because the damage to your building was caused by the fire and not the earthquake itself, the damage should be covered by your property policy.
If you are interested in purchasing earthquake insurance, contact your insurance agent or broker. Earthquake coverage may be available via an endorsement to your existing property policy. If your property insurer does not offer an earthquake endorsement, you may be able to purchase a separate earthquake policy from a different insurer.
Your insurer may use either of two standard ISO earthquake endorsements, which include both volcanic eruption and earthquake as covered perils. Alternatively, your insurer may utilize its own earthquake endorsement or policy form.
What to Look For
Whether you buy earthquake coverage as an endorsement or a separate policy, review your coverage carefully. Here are some provisions to look for.
- What constitutes an event? Earthquake coverage typically specifies a time period (typically 168 hours) during which all quakes or volcanic eruptions are considered a single event. For instance, if an earthquake and four aftershocks occur within a seven-day period, all five will be considered a single earthquake. Your limit and deductible will apply to all damage caused by all quakes that take place within the 168 hour period.
- Policy Limit or Sublimit? If earthquake coverage is added to your property policy as an endorsement, it may be subject to a sublimit (reduced limit) rather than the limits that apply to other perils. Read the limits section to determine whether a sublimit applies.
- Deductible Earthquake coverage is subject to a deductible that applies on a percentage basis. Your deductible options may range from 2 to 25% depending on your location and the nature of your building. The deductible may be a percentage of either the limit or the value of the damaged property. A separate deductible usually applies to each earthquake (or eruption).
- Masonry Veneer Some policies exclude damage to exterior masonry veneer (except stucco) on wood frame walls unless the policy specifically states that veneer is covered. Veneer may be covered if it exists on a small portion of the exterior wall.
- Cost Premiums for earthquake coverage vary widely depending on a variety of factors. These include the location of your property and its proximity to active faults; the property’s age and type of construction; the number of stories; and seismic improvements you have made.
Whether or not you decide to buy earthquake insurance, you should evaluate your earthquake risks. Depending on the results of your assessment, you may need a risk mitigation plan. Numerous resources are available online to help you through this process. As a starting point, check out the “QuakeSmart Tool Kit” provided by FEMA and “Earthquake Hazards 101” from the USGS.