Earthquake Insurance: What's Your Exposure



Deductible Issues

The earthquake deductible generally is in the form of a percentage rather than a dollar amount. Deductibles can range anywhere from 2 percent to 20 percent of the value of the property (e.g., replacement value or actual cash value, whichever is applicable) of the structure. Insurers in Washington, Nevada and Utah, with higher than average risk of earthquakes, often set minimum deductibles at around 10 percent. In most cases consumers can get higher deductibles to save money on earthquake premiums.

The deductible provisions of ISO’s earthquake endorsement apply to each earthquake or volcanic eruption. It is important to note that separate deductibles are calculated for and apply to each building, to personal property at each building, and to personal property in the open.

Deductibles are calculated separately and applied even if two or more buildings sustain damage, personal property at two or more buildings sustains damage, or a building and the personal property in it sustain damage.

If, in addition to earthquake damage, there is also damage from another cause (such as fire) that is covered through an exception to the earth movement exclusion in the base policy, then the earthquake deductible is the only deductible taken. It will be significantly higher than the base policy deductible.

The ISO earthquake endorsement contains an example of the application of the deductible as follows: (Assume values shown are from the most recent Statement of Values on file with the insurer.)

Building #1 $500,000 Value of Property Building #2 $500,000 Bus. Per. Prop. at Bldg. #1 $250,000 Bus. Per. Prop. at Bldg. #2 $250,000

Assume that the following amounts of loss do not exceed the applicable limits of insurance (for specific insurance). Also assume that the total amount of loss does not exceed the applicable blanket limit of insurance (for blanket insurance).

Building #1 and business personal property at #1 have been damaged: the amounts of loss are $95,000 (Bldg.) and $5,000 (Per. Prop.). The deductible is 10 percent.

The percentage deductible provision is significant. Though the deductible is 10 percent, it is not 10 percent of the loss, but rather 10 percent of the value of the property (RC or ACV).

Loss is adjusted as follows:

Bldg. Step (1): $500,000 (amt. of ins.) x 10% = $50,000 deductible amt. Step (2): $95,000 (loss) minus $50,000 = $45,000

Bus. Per. Prop. Step (1): $250,000 (amt. of ins.) x 10% = $25,000 deductible amt. The loss of $5,000 does not exceed the deductible.

The most that will be paid is $45,000. The remainder of the building loss, $50,000, is not covered due to...

“The exposure to loss by earthquake may be more significant than people realize.”