Earthquake insurance: The time is right to shop, but read the fine print

Want a good scare?
Search the term “earthquake due” in Google.

Your query will return more than 67 million results, including a map of recent earthquakes, and a list of news stories with alarming, eye-catching headlines, such as The Atlantic’s “Is Middle America Due for a Huge Earthquake?”

You do not have to search hard for gloom and doom about California, either. Earlier in March, a report from the United States Geological Survey (USGS) suggested an area north of Los Angeles might be “overdue” for an earthquake, as The Los Angeles Times summarized. Also, the USGS 2017 seismic event damage forecast suggests California and Oklahoma are most at risk for earthquake-related damage, with Oklahoma at risk due to man-made seismic events. (For a longer-term risk outlook, the 2014 USGS seismic forecast gives a 50-year estimate of earthquake risk.)

But earthquakes do not declare their epicenters, arrival dates and intentions, and they can cause a world of destruction when they strike.

Twenty-three years ago, a magnitude 6.7 earthquake hit Northridge, California, resulting in more than 60 deaths. It was, by estimates, the most expensive earthquake in U.S. history. According to reinsurer Munich Re, insured damages totaled $15.3 billion, or more than $25 billion in today’s dollars, with total economic losses reaching $44 billion, or more than $72 billion today.

Given the scope of damage earthquakes can cause, businesses in higher-risk areas may consider earthquake insurance as a standalone policy or an endorsement to a commercial business policy. However, there are limits and exclusions with earthquake coverage, and it traditionally has been expensive.

Here is a brief overview of the pros and cons of earthquake insurance:

Pros

⇒ From a pricing standpoint, now is a good time to be looking for earthquake insurance. Buying earthquake coverage for the first time? Shopping around for a better rate? You might like what you find. Chicago-based wholesale insurance broker Maximum, which offers expertise in earthquake coverage placements, reports “a mix of modest decreases to flat rate renewals” for earthquake policyholders, as well as “carriers aggressively courting new business.”

⇒ Earthquake insurance covers physical damage sustained due to a quake; however, standard commercial property policies may not if your property is located in an area at an elevated risk for earthquakes. It is important to identify this issue on any insurance quote before it is bound and understand what your property policy covers and what it does not. Also, some insurers may provide limited earthquake coverage below the total insured value of your building(s) and business personal property. This is something to keep in mind for businesses with physical operations in areas potentially affected by earthquakes.

⇒ When used with other coverages, including business interruption insurance, an earthquake policy can help a business stay solvent if disaster strikes.

Cons

⇒ Earthquake coverage can be limited in its scope. It is best to think of earthquake insurance as one risk management tool of many your firm might need. It is exceedingly rare for a company to purchase an earthquake policy and not other property and casualty coverages, such as comprehensive business owner's insurance.

⇒Earthquake coverage carries a high deductible, and it is essential to know the details. Maximum shares this example: “When evaluating deductibles, it is important to review both the percentage and the minimum dollar amount per occurrence instead of zeroing in on one or the other. For example, ‘Five percent of values subject to a minimum of $250,000 per occurrence’ would apply differently to a $1 million building than a $10 million building. For the $1 million building, the effective deductible would be $250,000. For the $10 million building, the effective deductible would be $500,000 because five percent of the total insurable value is more than the $250,000 minimum.”

Let Plexus lend a hand

Earthquake insurance can be complex, and understanding the coverage’s strengths and limitations is essential. When it comes to considering earthquake insurance, Plexus can be your guide, and we will be your advocate in all risk management matters. For more information, contact National Property & Casualty Practice Leader Mike Mann at 847-307-6111 or at mmann@plexusgroupe.com.