Insure This

Understanding Disaster Insurance

by Various Authors

Q. Earthquake insurance is so expensive. What is being done to make earthquake insurance more affordable?

A. Earthquake-insurance premiums on apartment buildings have risen dramatically in the last few years. Making matters worse, after the Northridge and Loma Prieta earthquakes, only a limited number of insurers offering earthquake insurance remain in California. As a rule of thumb, apartment building insurance premiums for earthquake insurance alone are typically twice the cost of property-only and casualty-package policy premiums. Earthquake deductibles are now averaging 10% to 15%, and quake policies are riddled with restrictive coverage wording and sublimits.

Recently released statistics, published by the U.S. Geological Survey, state that there is a 62% probability of a magnitude 6.7 or greater quake capable of causing widespread damage striking the San Francisco Bay region before 2032. Given these odds, owners of investment properties with substantial equity are understandably jittery.

While most carriers do not offer affordable premiums for catastrophic quake protection, the Commercial Industrial Building Owners’ Alliance, an insurance group-purchasing facility, is currently offering (on a limited basis) value for premium dollars spent. CIBA offers comprehensive earthquake insurance with a 5% earthquake deductible (the lowest deductible available in the California marketplace) on a shared-limit basis. The CIBA policy includes critical coverage, such as unlimited loss of rental income, along with liberal building-ordinance and debris-removal coverage. Buildings over 40 years old must be earthquake retrofitted and must pass a seismic evaluation of a 30% probable maximum loss with a 90% “confidence” factor.
�David Costello

Q. If, as happened frequently in the 1906 quake, my building is destroyed not by the earthquake itself, but by a large fire, will my standard property owner’s insurance cover the loss?

A. Your property policy protects you against definable “causes of loss,” which is defined within the policy itself. Likewise, your policy will also have a list of exclusions, which are conditions for which it will not provide coverage. If the covered locations incur a covered loss, the contract has been triggered and the carrier must pay the claim.

All property polices cover a basic set of losses that include fire, lightning and internal explosion. This type of policy is called basic-form coverage. Most property policies today also provide special-form coverage, which increases the types of loss you are insured against. Your policy will list your coverage form on the declarations page and define your “causes of loss” within the policy.

Earthquake coverage is usually excluded from property policies per the list of exclusions within the policy. The exclusion clause will generally read “damage resulting from an earthquake or earth movement.” If you do not have a specific earthquake policy, your property is not insured against damage resulting from an earthquake. If your property slides off its foundation, rumbles to the ground and cracks every wall and seam in the house, you are not covered for this loss.

However, all property is covered for fire. This is the basic form of coverage that we all purchase in any property policy. After an earthquake, if your neighbor’s property catches on fire and burns your property down, this is a covered cause of loss. If the entire block or hillside catches on fire and results in your property catching on fire, you are covered per your basic causes of loss for fire.

But what about the property that initiated the fire where the cause of loss was the earthquake? The “proximate cause,” or the immediate cause that sets the other causes in motion, is an earthquake in this example. If the property that initiated the fire was not insured against an earthquake, and the cause of loss is a fire resulting from an earthquake, then the policy for that property will not provide coverage for the fire loss. However, the rest of the block and hillside will be insured against a fire loss resulting from the original fire.

Insurance policies are designed to protect you against loss or damage to your property. The better you understand your policy, the better your insurance agent can serve you. I encourage you to discuss these types of questions with your insurance representative so you will have complete confidence in both your insurance policy and the people who serve you.
�P.J. Tradelius

Q. What are the differences between the earthquake insurance I can get from the state through the California Earthquake Authority and the earthquake insurance I could get from a private insurer?

A. The California Earthquake Authority is only authorized to provide insurance for dwellings with 1-4 units. It does not provide coverage for larger buildings unless the insurance is for a unit owner or renter in a larger building. Coverage can be obtained from the CEA only by going through the carrier from which you purchased your primary fire-insurance coverage. There are 19 such carriers affiliated with the CEA. If you are with a carrier other than these 19, then it must offer earthquake coverage directly on any 1-4-unit residence, assuming it is a standard carrier, licensed and admitted in California.

The CEA provides only basic coverage, meaning that there is very little coverage for personal property such as furniture and clothing and very little coverage for loss of use. These items are typically limited to $5,000 and $1,500 respectively. In addition, the building coverage is typically limited to the amount of fire insurance one carries through the package policy.

CEA provides only coverage for smaller buildings, makes it available only through the 19 carriers that participate, and assures only minimal coverage, so you should definitely check around. There are plenty of private carriers competitively writing earthquake insurance for both 1-4-unit buildings and larger buildings. There are even carriers, such as Lloyd’s of London, which cover very old buildings, even concrete and masonry. Although the market for earthquake insurance is not as wide as I would like, most buildings do qualify with one or more carriers. Quotes for these should be readily available through a broker. Many direct writers, however, no longer write new earthquake-insurance policies for larger commercial buildings, so find a broker who deals with many carriers to get the broadest opportunities for competitive pricing.

One area in which the CEA does coordinate well with standard earthquake insurance is in the realm of condo associations. This is because the CEA is available to condo unit owners. There is a coverage called “EQ loss assessments” that can dovetail with an association’s master earthquake policy to fill in the gaps and deductibles. This is a detailed subject, which is beyond the scope of this article.
�David B. Gordon

The opinions expressed in this article are those of the authors and do not necessarily reflect the viewpoint of SFAA or the San Francisco Apartment Magazine. The information contained in this article is general in nature. Consult the advice of an insurance agent for any specific problem. David Costello is with NorthStar Risk Management & Insurance Services in Walnut Creek, 925-975-5900 ext. 228. P.J. Tradelius is with Commercial Coverage, 415-436-9800. David B. Gordon, CLU has been an insurance broker in the Bay Area for over 25 years and specializes in commercial property insurance. He can be reached at 877-877-7755. Copyright � 2006 by the San Francisco Apartment Magazine. All rights reserved.