The Earthquake Insurance Quandary: Is It Affordable?
By Newfront Insurance
Many property owners today do not bother purchasing earthquake insurance due to perceived high costs and limited coverage. Often, we are asked: “Is earthquake insurance affordable?” The answer is, “Yes, it is.”
California considers Earthquake Insurance another type of “CAT” (catastrophic) coverage that is underwritten by several domestic and international carriers and has been the last of the CAT coverages to start experiencing rate increases, albeit moderate, due to the presently strained state of the Property Insurance marketplace.
The Property Insurance marketplace in the U.S. has paid over $300 billion in claims since 2017 due to the variety of natural disasters and other occurrences such as wildfires, hurricanes, social unrest, and COVID-19, which has caused underwriting companies to take significant increases and reduce their financial capacity (the insurance limits offered) on each insured account to recover profitability and minimize their exposure to losses. Although the insurance marketplace has seen increased underwriting and pricing sensitivity caused by hurricane and strong wind, and wildfire exposed property, underwriters are writing profitable Earthquake Insurance policies because there have not been many destructive earthquakes recently that have impacted the insurance marketplace, and underwriters’ reinsurance contracts still provide them with enough financial backing to take on seismic activity risk.
While wildfire exposed property has seen three-digit rate increases and hurricane/wind exposed property has seen, on average, 20% rate increases year over year, earthquake coverage has seen only 10% – 15% premium increases this past year.
- Impact of Building Characteristics
A variety of factors are considered when pricing Earthquake Insurance, however, here are a few criteria that can have a large impact on underwriting and pricing:
Building Construction and Age. Different types of building materials react differently to seismic activity with some materials being more flexible, and accordingly, less prone to being damaged or destroyed, than others. Building age also impacts underwriting because older buildings are generally not as structurally sound as newer buildings. Here are the four main building types:
- Wood Frame. Consists of all wood walls, ceilings, and flooring. This is viewed favorably since wood is flexible and can sway with seismic movement.
- Joisted Masonry. Consists of masonry walls (generally, concrete or brick) with wood floors and ceilings. This is not as favorable for earthquake coverage because masonry walls are not flexible and are more prone to damage or failure.
- Masonry / Non-Combustible. Consists of pure brick, concrete, or steel frame. Steel frame is viewed favorably, as the material is ductile and can bend considerably before breaking. Concrete and brick are brittle and tend to crack or crumble under seismic force.
- Fire Resistive. Generally used in high rise buildings and has a combination of steel frame and concrete with several earthquake retrofitting measures. This is viewed very favorably due to enhanced retrofitting and ability for the ability to sway with the seismic movement without being damaged.
Earthquake Retrofitting and Soil Type. Buildings that have been seismically retrofitted or varying soil types can also make a difference in the underwriting process.
- Earthquake Retrofitting. Extra structural protection is a way to minimize or mitigate the damage to any building. This is especially important in older and soft-story buildings, as underwriters generally view them as less structurally sound.
- Soil Type. Are you on bedrock, clay, or soft soil (artificial landfill)? Earthquake severity and damage can vary based on the softness of soil and sediment. As seismic waves travel through the ground, they amplify as the soil gets softer and is more prone to liquefaction.
- Coverages and Deductibles
If not thoroughly reviewed and negotiated, Earthquake Insurance policies can be restrictive in the level of coverage offered and can leave you paying higher deductibles with a false sense of security. Here are a few coverages that should always be in any Earthquake Insurance policy:
- Replacement Cost. Replacement costs allows a claim to be paid without any deductions for building depreciation. On the other hand, Actual Cash Value only compensates for the depreciated reconstruction value of a building.
- Building Foundations. Coverage for building foundations is often time excluded unless the insurance agent or broker requests otherwise from the underwriter. Generally, underwriters can include this provision for free.
- Building Ordinance. This coverage pays for the increased cost of construction to adhere to current building codes when rebuilding (e.g., installing a fire sprinkler system).
- Earthquake Sprinkler Leakage. If an earthquake sets the fire sprinklers off, insurance companies oftentimes exclude the resulting water damage caused by the sprinklers discharging. Some insurers give policyholders the option of adding this onto a Commercial Package policy, which is often the most cost-effective way to purchase this type of coverage.
Earthquake deductibles are typically based upon percentages of the limits (typically 5%-25% of the limits offered) with a minimum flat dollar amount (e.g., 5%, minimum $25,000). There are two main waysunderwriters offer deductibles today:
- Per Unit of Insurance. Each type of coverage (building, business interruption, etc.) has its own percentage deductible. This can be advantageous as the deductible incurred before insurance kicks in is typically lower.
- Per Policy. The percentage deductible is based on the Total Insurable Value (sum of Building, Business Personal Property, and Business Interruption), which means policyholders will pay a much higher deductible before the insurance policy begins to cover losses.
There are many nuances that exist in the insurance marketplace that can either work for you or against you. Newfront is an insurance brokerage with commercial and private client expertise that provides comprehensive risk management powered by advanced technology and a client-obsessed culture. Their mission is to transform risk into opportunity, enabling everyone to pursue their goals. The team at Newfront Insurance is always ready and available to assist you to ensure you get the most comprehensive policy at the most competitive price. For a free, no obligation consultation, please contact Newfront Insurance at firstname.lastname@example.org or call (855) 830-8954 and be sure to mention you are a member of the Apartment Association of Greater Los Angeles – Members are offered a 5% discount on Workers’ Compensation Insurance and new Apartment Insurance Package.