Earthquake Insurance: What's Your Exposure?

In an effort to spread risk, insurers and government agencies are using reinsurance, state and private pools, Fair Access to Insurance Requirements (FAIR) plans, and trading options on a catastrophe index that the Chicago Board of Trade maintains. However, more is needed, according to ISO. Consequently, many insurers advocate a proposal put forth by the Natural Disaster Coalition. This proposal provides for:

  • Mandatory coverage of hurricanes, earthquakes, volcanoes, and tsunamis, at actuarially sound rates
  • A federal reinsurance program
  • Incentives for state governments to develop loss mitigation programs

The exposure to loss by earthquake may be more significant than people realize. Organizations need to check periodically with their insurance advisors to ensure that their insurance coverage realistically meets their exposures.

Earthquake insurance is also available with a Difference in Conditions (DIC) policy, the topic planned for a future issue of Adjusting Today.

1 Copyright, Insurance Services Office, Inc. 2007, with permission.
2 Sinkhole collapse (collapse of land into underground spaces created by the action of water on limestone or similar rock formations), which is common in Florida and Pennsylvania, is covered by the commercial property policies of AAIS and ISO. The peril is covered in AAIS homeowner forms, but is not covered in ISO homeowner forms, but may be added by endorsement. In some states the coverage is required by law.
3 Copyright, American Association of Insurance Services, Inc., 2000, with permission.
4 Copyright, American Association of Insurance Services, Inc., 2007, with permission.
5 Copyright, Insurance Services Office, Inc., 1998, with permission.

Courts Have Made a Distinction
Earth Movement: Man-Made vs.
Natural Causes

Since this issue of Adjusting Today focuses on earthquake insurance, it seems fitting to include a related subject that can likely be encountered in earth movement claims. That subject has to do with causation, and particularly whether an earth movement claim involves loss or damage caused by natural events, which are often widespread and catastrophic, or loss or damage caused by man-made activity, which usually is more confined.

Although property insurance policies contain earth movement exclusions, the courts have sometimes held for coverage when the cause of the earth movement can be attributed to man-made activities, while excluding loss from natural events, i.e., earthquake, related earth sinking or shifting, or mudslide. For example, building damages caused by nearby blasting activities or excavation on an adjacent lot that resulted in settling, sinking, and cracks and separations in the foundations were considered to be man-made activities and held to be covered, despite the earth movement exclusion.

Whether coverage applies typically depends on how the exclusion is worded, and particularly on the existence and/or strength of the anti-concurrent causation lead-in language to the exclusions. For many years, the Insurance Services Office (ISO) and the American Association of Insurance Services (AAIS) have included anti-concurrent causation language in their commercial property, businessowners, and homeowners policies. Essentially, the doctrine of concurrent causation holds that when a loss can be attributed to two causes, one that is covered and one that is excluded, the loss will be covered. It applies primarily to “all risks” or “open perils” policies. Insurers then countered the concurrent