Earthquake Insurance: What's Your Exposure



Adding Earthquake Coverage

Premiums for earthquake coverage differ widely by location, insurer, distance from fault lines, and the type of structure that is covered. Generally, older buildings cost more to insure than new ones. Wood frame structures generally benefit from lower rates than brick buildings because they tend to withstand quake stresses better.

ISO offers two endorsements to add earthquake and volcanic eruption coverage under commercial property insurance. Independently filed earthquake endorsements are also available from some insurers. The two ISO endorsements are:

The first endorsement provides coverage for the full policy limit and contains a coinsurance clause. The second provides coverage subject to a sublimit that is lower than the base policy limit and it does not contain a coinsurance clause.

AAIS offers an endorsement similar to the ISO endorsements that provides earthquake and volcanic eruption coverage. Both the AAIS and ISO forms state that all earthquakes or volcanic eruptions that occur within a 168-hour period will be considered a single occurrence and that the 168-hour period is not limited by the policy expiration.

In addition, both forms include a potential limitation that in the AAIS form reads as follows:

Masonry Veneer — “We” do not cover loss to exterior masonry veneer (other than stucco) on wood frame walls caused by earthquake or volcanic eruption. The value of masonry veneer is not included in the value of covered property or the amount of loss when applying:

However, “we” cover masonry veneer when described as included on the “declarations” or when it is less than 10 percent of the exterior wall area.

Although coverage for collapse is limited to specific perils in standard property insurance policies, the ISO Earthquake Endorsement includes coverage for collapse caused by earthquake or volcanic eruption. However, there is no coverage for damage caused directly or indirectly by tidal wave or tsunami, even if attributable to an earthquake or volcanic eruption. Businesses would need flood insurance to pay for the flood damage caused by a tsunami or tidal wave. In addition, coverage does not apply to loss caused by requirements for building code upgrades, unless ordinance or law coverage is added by endorsement.

Business Interruption Coverage

The business interruption exposure from a loss caused by earthquake is significant. Commercial firms must carry business interruption coverage as part of their commercial property insurance if they want that coverage to apply in the event of an earthquake. Business interruption coverage is only triggered if there is a covered property loss, so insureds with exposure to earthquake loss need to carry both business interruption and earthquake coverage.