Property Insurance Coverage Law Blog : Florida Insurance Lawyer & Attorney : Merlin Law Group Law Firm : Tampa, Houston, Coral Gables, Gulfport

The catastrophe area experienced a series of earthquake aftershocks (one as recent as December of 2011) which inevitably delayed rebuilding projects. Mindful of the one-year coverage deadline, many businesses are feeling pressured to pay increased costs to speed up construction and resume normal operations.

The New Zealand Herald noted an example:

Louisa Cullen, of Beale and Cullen Dentists, said there had been pressure on her business to get up and running again before her insurance policy payments ran out. After the September [2010] earthquake, the business claimed a week of interruption insurance but realised that if it had been forced out of action for longer, it would not have been able to survive. The business' cover was increased three-fold before the February earthquake, which Cullen said enabled it to retain all its staff while its doors were shut for 10 months. Cullen had to find new premises for her business and said she was conscious of the February deadline.

"The builder's timeline initially had it finished in February but we said it had to be done before Christmas, come hell or high water," Cullen said.

The dentists are now operating again and the government is providing marketing assistance to rebuild its customer base, but not all Canterbury businesses have been as successful.

Canterbury’s Governor, Alan Bollard, addressed the Canterbury Board of Employers on the issue of delays recently and stated, “[w]ith the risk of ongoing damage from aftershocks and still high levels of uncertainty, insurers are not currently increasing their overall exposure to Canterbury and some insurance holders are having difficulties getting cover for new risks or increased limits”

A spokesperson for Vero Insurance stated that the company had paid out over NZ $800 million across their group towards claims in Christchurch, Canterbury, but the reality is that, unlike the dentists, many businesses did not have adequate insurance. The earthquake killed 181 people, and it has been estimated to be the world’s third costliest earthquake ($20 billion dollars).

Brett Solvander, of the Insurance Council of New Zealand, said the quake highlighted the fact that a lot of businesses did not have adequate insurance.

We know, anecdotally, that some small- to medium-sized businesses did not have sufficient business cover when the first earthquake happened in September 2010 ... The big February 2011 earthquake compounded the issue.

Notwithstanding the panoply of pressures, Christchurch policyholders should not cave to the insurance and reinsurance market. In fact, the U.S. has had numerous experiences with catastrophic claims handling and, under similar contruactual agreements, policyholders have been successful in extending the period of restoration beyond the theoretical period of coverage, which is calculated by insurers and rarely considers real world circumstances like aftershock delays. Christchurch policyholders can also benefit from the newest business interruption claims handling trends, where some courts have agreed that post-loss market conditions (i.e., recessions and downturns) should benefit policyholders. For a brief outlook on these issues, readers can follow this blog at Can "Real World Circumstances" Be Considered To Establish a Theoretical Period of Restoration? - Understanding Business Interruption Claims, Part 26 and To Consider the Economy, or Not To? 'That is the Question' -- Understanding Business Interruption Claims, Part 9.

Probably the strongest evidence of this storm’s damage is in the San Pedro area, where the roadway collapsed in a landslide into the ocean. Although this was an area of concern before the rainstorm, it was certainly driveable before Sunday. Thankfully, no homes were lost, but now the nearby houses along the cliffside may be geologically compromised.

With winter and additional rainstorms, there comes the possibility of landslides. Despite these worries, the threat of another major earthquake is California’s most dangerous and costly potential natural disaster. If you believe the statistics, a large quake occurs once every twenty years, so we are overdue for another large quake. Our last big earthquake in Southern California was the 1994 Northridge Quake, which caused about $20 billion in damage.

In California, earthquake insurance is not a covered risk under a general “All Risk” policy. In fact, earthquakes are specifically excluded under most property insurance policies. See California Insurance Code § 10088. To have insurance coverage for earthquake related damage, a separate policy must be purchased. These earthquake insurance policies can be costly. Thankfully for homeowners, earthquake coverage must be offered at the time of purchase of residential property insurance or at least within sixty (60) days of the purchase. Earthquake insurance must also be offered every other year upon renewal of a homeowners policy. With residential properties, an insurer must offer earthquake coverage to a homeowner or forego insuring the property altogether. See Williams v. State Farm Fire & Casualty Company (1990) 216 Cal.App.3d 1540, 1545.

Although many insureds wish to forego the extra expense of earthquake coverage, it should be noted that the insurance company insuring your home must offer the coverage and the failure to offer earthquake insurance coverage may give insureds who suffer earthquake losses a possibility to recover from an insurer who failed to comply with the insurance code and applicable Act. See Jacobellis v. State Farm Fire & Casualty Company (9th Cir. 1997) 120 F. 3d 171, 173,-174. Jacobellis implies that a private right of action exists because otherwise the Insurance Code Statues could not be enforced.

With the statistics indicating a large earthquake will hit Southern California, it’s time for insureds to examine their policies to see if their earthquake insurance is adequate or determine whether they should be purchasing earthquake insurance if they don’t already have it.

Interestingly, the East Coast 5.8 magnitude earthquake was centered in Virginia and felt up and down the entire Eastern seaboard. The last East Coast earthquake of a similar magnitude happened in New York in 1944. In contrast, California and the rest of the West Coast has literally hundreds of earthquakes daily, and when a 5.8 earthquake strikes the West Coast, its rumblings are usually localized and not felt region wide.

Geologists believe West Coast earthquakes are a result of plate shifts along known active fault lines, and seismic waves are prevented from traveling great distances due to the many fault lines. On the East Coast, quakes result from stresses built up over time, and seismic waves are able to travel more efficiently over the harder and cooler rock which makes up the East Coast.

Here in California, we are constantly reminded that we are overdue for another big earthquake of similar or greater magnitude than the 1994 Northridge Quake. Since the 1994 Northridge Quake, insurance companies have changed the way earthquake insurance is sold to homeowners and businesses. Earthquake insurance, in most cases, is not part of the regular policy that is purchased from the insurance company. Instead, it is a separate policy or rider purchased at an additional cost to the insured.

In California, earthquake insurance is expensive. Over the course of the last few years, homeowners and businesses have dropped the additional expense of earthquake coverage in an attempt to cut back on costs. However, with the growing risk of earthquakes across the country, (let’s not forget that Colorado had a 5.9 earthquake the day before Virginia), it may be time for policyholders to assess their needs. If improvements have been made to homes or if businesses have gained value in equipment, stock or other upgrades, these changes should be reflected in the insurance coverage purchased.

Californians have found after disasters that their homes and businesses have been underinsured. In light of the East Coast quake, it’s time for insureds to examine their policies to make sure there’s enough coverage in the event of a loss.

For more information on earthquake insurance in California, see the Earthquake Authority’s website, www.earthquakeauthority.com.

The answer to this question is:

. . .there is nearly $13 billion in liability insurance protection available to be used in the event of a commercial nuclear accident. The level of available insurance protection serves as the liability cap.

Standard property/casualty insurance policies issued in the United States exclude coverage for property damage and personal injury caused by such accidents. All claims are channeled through the nuclear power plant operator.

A relevant discussion of the Japanese catastrophe and similar insurance coverage needs in the United States appeared in "Few Homes Have Insurance Coverage for Earthquake or Tsunami, Although the U.S. Is At Risk for Both." Similar to what I indicated in Insurance Coverage for Tsunami Floods and Earthquakes, the Insurance Information Institute provided the following regarding earthquake coverage:

Standard homeowners, renters and business insurance policies do not cover damage from earthquakes. Coverage is available either in the form of an endorsement or as a separate policy. Earthquake insurance provides protection from the shaking and cracking that can destroy buildings and personal possessions. Coverage for other kinds of damage that may result from earthquakes, such as fire and water damage due to burst gas and water pipes, is generally provided by standard home and renters insurance policies.

Earthquake coverage is available from private insurance companies. In California, homeowners can also get coverage from the California Earthquake Authority (CEA), a privately funded, publicly managed organization. Only about 12 percent of California residents currently have earthquake coverage, down from about 30 percent in 1996, two years after the Northridge, California, earthquake. Nationwide 86 percent to 90 percent of U.S. homeowners lack earthquake coverage. . . (emphasis added)

Regarding coverage for a tsunami, the article noted:

Flood damage from a tsunami is not covered under most standard homeowners, renters and business insurance policies. Flood insurance, however, is available from the federal government’s National Flood Insurance Program (NFIP), and some private insurance companies. It can generally be purchased through the same agents and brokers who provide home and renters insurance.

The NFIP provides coverage for up to $250,000 for the structure of the home and $100,000 for personal possessions. Private flood insurance is available for those who need additional insurance protection, known as excess coverage, over and above the basic policy or for people whose communities do not participate in the NFIP. Some insurers have introduced special policies for high-value properties. These policies may cover homes in noncoastal areas and/or provide enhancements to traditional flood coverage. The comprehensive portion of an auto insurance policy includes flood damage.

A 2010 poll by the Insurance Information Institute found that 10 percent of Americans had a flood insurance policy, down from 13 percent in 2009 and 17 percent in 2008 . . . .

Heaven help us if we suffer from a disaster like that experienced recently in Japan. The statistics clearly indicate that most of us do not have the proper insurance to soften the blow from such tragic events.

Typical property insurance policies written in the United States exclude flood and earthquake damages. A tsunami is a tidal wave often caused by an earthquake; it is a flood and excluded under most policies. Generally, these perils are only covered by endorsement or special policies.

It should be noted that automobile, vehicle, life and health insurance provide coverage for these events. Some mobile home policies and marine forms cover these risks as well. Accordingly, these catastrophes are not completely uninsured when they occur in the United States.

The problem of private insurance coverage for tsunami events was discussed in a paper delivered by George Walker at the 2005 Proceedings of the Australian Earthquake Engineering Society, SOME REFLECTIONS ON THE INSURANCE ASPECTS OF TSUNAMI DAMAGE:

A characteristic that distinguishes tsunamis from most other major hazards is that they appear to have no sensible upper limits to the level of losses that they could cause. There are limits to the level of losses that can occur from earthquake shaking and from tropical cyclones. There are probably limits to the losses that could occur from tsunamis generated by earthquakes. But if scientists are correct, the upper limit of losses from tsunamis caused by landslides, volcanic eruptions or meteorite impact could be orders of magnitude larger than the potential maximum losses in San Francisco, Los Angeles or Tokyo from earthquakes.

The most severe would be a major meteorite impact on the ocean. At its worst such an impact could result in the extinction of most life on earth due to a combination of the massive tsunami that could be generated combined with the associated severe changes in climate. The probabilities associated with tsunamis generated by meteorite impact are very small, but they exist, and every coastline in the world is at similar risk from them.
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The normal insurance industry approach to uninsurable hazards has been to exclude them totally. This has left the problem with governments to resolve, and has led to a number of national disaster insurance funds or pools, either completely run by the government as in the case of the U.S. Flood insurance scheme, and the N.Z. residential earthquake insurance scheme, or to joint government / insurance industry schemes like the Taiwan Residential Earthquake Insurance Program (TREIP).

A characteristic feature of some government schemes, especially where the possible magnitude of the loss, and not the frequency of the loss, is the problem, has been the imposition of limits on the insurability. This has been largely pioneered in Japan where in addition to limits being placed on the liability of the insurance industry to earthquake losses, with government providing a guarantee above this, a limit is also set on the contribution of the government, and above this the policyholders share the loss on a proportional basis. TREIP also embodies this approach. This latter approach may be the only way by which tsunami risk can be covered in a manner that would be sustainable over the long term." (emphasis added)

Those in vulnerable areas should buy flood and excess flood coverage to insure for tsunami events. My post, Earth Movement and Earthquake Coverage Should Be Reviewed Warns FC&S, explains some of my concerns as well. I strongly encourage all commercial policyholders to ask their insurance agents and brokers about Difference in Conditions Coverage, which typically adds earthquake and flood losses to commercial polices.

The reality is that an earthquake can strike anywhere in the world with potentially devastating effects. Injury and damage in poverty stricken areas like Haiti, with a poor infrastructure, of course will be much greater than in an area where buildings are sturdier and compliant to earth movement safety standards.

But disaster can strike anywhere and at anytime. Despite this reality, only 13-15 percent of California residents carry earthquake insurance on their homes—and it is well known that much of California is prime territory for destruction by earth movement.

Have you reviewed the earth movement insurance that your clients carry recently?

It even offers a white paper regarding the coverage and issues, "After a Quake: Insurance Coverage in Earthquake Disasters." My suggestion is that policyholders discuss the alternative methods for obtaining the coverage with their agents and brokers. Also, consider obtaining a Difference in Conditions form which picks up otherwise excluded coverages. 

The possibility of the earthquake event that happened in Haiti was anticipated. The World Bank provided Haiti a loan to pay natural catastrophe insurance premiums starting in 2007:

The Haiti Catastrophe Insurance Project's objective is to reduce Haiti's financial vulnerability to natural disasters through insurance coverage against earthquakes and hurricanes. This will be achieved by providing financing to Haiti to allow it to join the Caribbean Catastrophe Risk Insurance Facility (CCRIF) and purchase financial protection against catastrophic earthquake and/or hurricane events. Without the IDA grant, it is unlikely that Haiti would join this pilot initiative, which represents the first entity created to protect small island states from the financial impact of natural disasters. The project has two main components with the first being to assist Haiti in joining the CCRIF through the financing of the entrance fee. This fee is equal to the first year's insurance premium of US $2.57 million. The second project component is payment of annual insurance premium which will assist Haiti in purchasing the catastrophe insurance coverage offered by the CCRIF during the first three years. As such, the project supports the establishment and viability of the CCRIF.

The sad truth is that poor countries and poor people usually have no or little insurance. In this case, as indicated in a Wall Street Journal article, Haiti Insurance Coverage Expected To Be Far Short Of Losses, only multinational corporations were expected to have any significant earthquake coverage. The insurance fund supported by the World Bank apparently has only $8 million:

Haiti will likely receive some help from its main catastrophe insurer, the Caribbean Catastrophe Risk Insurance Facility, a regional fund administered by participating governments. A spokesman said that Haiti's earthquake coverage is up to $8 million, which would be paid from the fund in about 14 days, once the earthquake is categorized. The spokesman said he knows of little private insurance coverage in Haiti.

Devastating earthquakes will happen in the United States. Most vulnerable are California, Oregon, and Washington. The only question is "when." I bet that many in those areas are taking the news from Haiti as a wakeup call, as indicated in an article from Oregon, Only 20 percent of Oregonians have quake insurance:

"As we offer our support and help to the victims of the Haiti earthquake, Oregonians may also be thinking about how to protect themselves in the event of an earthquake.

Although Oregon is among the states at highest risk for a major earthquake, only about 20 percent of Oregonians have earthquake insurance, according to a Department of Consumer and Business Services survey.

Standard homeowner policies do not cover earthquakes but optional earthquake coverage is readily available and relatively inexpensive, the 2009 survey indicated.

"Consumers may want to think about their ability to rebuild if their house is destroyed in an earthquake," said Cory Streisinger, director of the Department of Consumer and Business Services. "Insurance should be weighed as part of other earthquake preparations."
...

• Homeowners generally can buy earthquake insurance as an endorsement (addition to their policy) or as a separate policy. The few companies that do not offer earthquake insurance in Oregon typically refer clients to a company that sells stand-alone earthquake policies.

• Earthquake coverage is relatively inexpensive - often less than $300 a year for a $300,000 wood-frame home. Masonry homes are more expensive to insure. And, if you live in an older home, you may need to bolt your home to the foundation or make other seismic upgrades before you can buy earthquake insurance.

• To keep premiums low and because it is designed to cover catastrophic loss, earthquake coverage generally features high deductibles. These typically amount to 10 percent or 15 percent of the amount covered by insurance. A homeowner with a house insured for $300,000 and a 10 percent deductible would pay $30,000 before the policy would pay. Coverage for contents is separate.
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Studies by the Federal Emergency Management Agency (FEMA) show the bulk of the nation's annual losses from earthquakes are expected to occur in California, Oregon and Washington – with most of that loss in California.

Although quake-prone California collects more earthquake premiums than any other state, the insurance costs significantly more than in Oregon and only about 12 percent of Californians are covered for earthquakes. The state created the California Earthquake Authority to ensure homeowners could buy earthquake insurance after the 6.7-magnitude Northridge Earthquake of 1994, the costliest quake in U.S. history.

The majority of economic loss is along the West Coast but earthquake risk is nationwide. About 35 percent of Missouri residents, who are part of the New Madrid seismic zone in the central Mississippi Valley, are insured for earthquakes..."

Insurancenewsnet also noted that the Haitian earthquake disaster could act as a wakeup call in, Recent Temblors Put Focus on Need for Quake Insurance: 

"A 6.5 magnitude earthquake that recently struck the shore of Northern California didn't even come close to the devastation of the quake that destroyed much of Haiti on Jan. 12. But Pete Moraga, spokesman for the Insurance Information Network of California, said temblors like the one that shook the Sunshine State put focus on the need for insurance.

"This was a sizable wake-up call," Moraga said. He said the combination of where the earthquake's epicenter was and building codes in the state reduced the damage but the next time could be a different story."

The Insurance Information Network of California highlights the current state of affairs regarding earthquake insurance in California:

"Only 12 percent of California homeowners currently own earthquake insurance policies, potentially leaving millions of Californians financially unprotected in the event of a catastrophic quake.

“Historically, the longer California goes between major quakes, the more homeowners drop their earthquake coverage,” said Candysse Miller, executive director of the Insurance Information Network of California. “Without a financial recovery plan, homeowners should expect to be hit by financial aftershocks in the event of a major quake.”

Though Tuesday’s Chino Hills temblor caused only minor damage, it was the first sizable quake to strike a Southern California metropolitan area since the 1994 Northridge earthquake. At the time of the Northridge quake, nearly 30 percent of California homeowners purchased earthquake coverage.

IINC research has indicated that Californians may errantly believe that their homeowner and renters’ insurance cover earthquake damage. Past surveys by IINC revealed that far more Californians believed they had insurance for earthquake and flood damages than actually purchased the policies. Like flood insurance, however, earthquake coverage is purchased separately from standard homeowner and renters’ policies.

In 2006, an IINC poll found that 31 percent of Californians believed they had earthquake insurance, when sales trends indicated that fewer than 13 percent of California homeowners had earthquake coverage. Today, roughly 88 percent of California homeowners reject earthquake coverage.

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“Financial preparedness is a key and often overlooked part of disaster readiness,” Miller said. “It may sound like a chore, but understanding your insurance coverage is a critical step in protecting your home and assets.”

Fear of loss and the current reminder from Haiti's devastation is something insurance agents and brokers should be emphasizing to their customers. It is human nature to not dwell upon unpleasant possibilities of financial disaster caused by events out of our control. The purpose of insurance is to provide the peace of mind that, in the unlikely event of a catastrophe, there is a softening of the impact. Insurance helps and is most effective to individuals and society at large when we recognize those perils and widely insure against them. California, in particular, is awaiting this crisis because its population is not widely insuring against earthquake destruction. Agents and insurers need to get this message out in the media before California truly becomes a national bailout state.

Many adjusters have found purposeful work as catastrophe adjusters. I have suggested to many experienced adjusters that there is a great deal of gratifying work when they help adjust claims in an area of widespread devastation. I have heard countless stories from policyholders and adjusters about how an adjuster can soften the emotional blow to policyholders. While I am often looked at by many as only a critic of the insurance claims industry, most dedicated adjusters work long and hard to help those in need following widespread natural disaster. Most do it for more than just the money, and I strongly encourage those in the insurance claims industry to try CAT adjusting.

Public adjusters can also help. Following Hurricane Andrew in 1992 and then the Northridge Earthquake in 1994, I noted how many public adjusters travelled cross country to ply their trade. This trend has continued. I have also encouraged public adjusters to obtain licenses in various states, anticipating a demand for their services. Public insurance adjusters should consider the need for their work in the western states following an earthquake and prepare for that today. Business arrangements with local public adjusting firms can be made in advance.

Unlike Haiti, we are one of the wealthiest countries and people. In an affluent society such as ours, insurance becomes even more important because we have so much more to lose. Our financial affairs are interconnected. In modern American society, business collapse and personal financial loss have ripples far beyond the local community and its physical damage. Insurance is a wonderful man-made financial product that provides society in general with a mechanism to mitigate these inevitable catastrophes, so that those ripples do not become waves causing more significant loss, including that of our fortunate affluence.

Our society, unfortunately, seems ever more inclined to defer personal expenditure upon available insurance for one reason or another. Instead, possibly as a result of seeing so many other individuals, small businesses, and, now, even our largest financial institutions being given money from the government following various widespread physical or man-made financial disasters, many are irresponsibly refusing to take responsibility for themselves. When I served on the Citizens Mission Review Task Force, I heard many people comment that Florida would simply rely upon the national government in the event the "big one" struck Florida. I noted in Actuaries Are Underwriters With No Personality that:

"After the session ended, I tried to explain what I think we did as a group to three newspapers and another television station. I recognize that the issues are very important, but I have never dreamed that issues of insurance rates, which will take effect a year from now, could ever be this newsworthy. The problem is that we are just making suggestions for legislation. The big fights will take place later this spring. We did not directly address the biggest issue.

The biggest question which needs to be answered by all the intelligent, nerdy actuaries and financial types is:

If we get into a really big hurricane season or another Hurricane Andrew, is there any way to avoid Florida's bankruptcy and inability to pay claims?

From what I have heard about the current scheme so far, the answer is "no." Nobody wants to hear this. It is almost impossible to contemplate that the Catastrophe Fund will not operate to save us. But in some of the limited discussions we had on this topic, my impression is that no actuary is guaranteeing anything if a big disaster hits. All bets are off at that point. We will be charting new financial waters similar to what we are doing now with our economy. A few mentioned that Florida will have to look for a bailout. Seems like that line is pretty long right now."

Eventually, there is no free lunch. Debts will have to be paid. Actuaries can estimate debts of future physical destruction. We should encourage private expenditures and savings for these occurrences through private insurance as much as possible. Every law and action that we take which fails to do so, encourages this growing notion that others will be there to finance individual catastrophe losses as a bailout and discourage saving and actions mitigating against the same. There is not enough discussion of this unfortunate trend in the United States. The trend is reflected by many who have much more financially at stake than the poor victims in Haiti could ever dream of losing, intentionally not insuring against exposures.