Earthquake Insurance

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Earthquake Insurance

With only about 10% of commercial buildings in California being insured for earthquakes, we found very little publicly available information on how commercial property owners, real estate professionals, and business advisors discuss the decision process. However, we were able to provide a great deal of information on the risks, costs, and considerations that could be examined when analyzing whether to purchase earthquake insurance for commercial properties in the San Francisco Bay area.

Risk

  • A report published in 2015 by the US Geological Survey (USGS) indicated that the 30-year likelihood of an earthquake with a magnitude of 5 of more in the San Francisco region was 100%. The likelihood decreased as follows for higher magnitude quakes: 98% for magnitude 6 or greater, 72% for magnitude 6.7 or greater, 51% for magnitude 7 or greater, 20% for magnitude 7.5 or greater, and 4% for magnitude 8 or greater. According to data from Michigan Tech, minor damage usually begins to occur with quakes above 5.5 magnitude, while quakes above 6.1 magnitude will likely cause a great deal of damage in highly populated areas. Therefore, it can be concluded that there is between a 51% and 72% chance that an earthquake causing significant property damage will occur in the San Francisco area in the next 30 years.
  • "The three faults in the Bay Area most likely to have a damaging earthquake are the Hayward Fault, the Calaveras Fault and the San Andreas Fault." The following map shows the location of those fault lines. The closer a property is to a fault line, the greater the risk of significant damage.
  • Six of the 10 costliest earthquakes in the US occurred in California.
  • The California Earthquake Authority shares earthquake risk data specific to regions of the state. Data for the greater San Francisco region can be seen here.
  • Page 2 of the report titled "Weather, Climate & Catastrophe Insight" shows the global significant 2019 economic loss events. The map shows that in California in 2019, wildfires and flooding were more significant than earthquakes. However, since 1950, earthquakes were the third most costly global peril, following tropical cyclones and flooding.

Prevalence and Cost

  • NPR reported in 2018 that only about 1 in 10 commercial buildings are insured for earthquakes in California. This would seem to indicate that most commercial property owners either do not believe the insurance is worth it, or do not have the money to pay for the insurance.
  • A 2018 report published in Risk Management and Insurance Review cited data from the Department of Insurance which indicated there were a total of 83,717 commercial earthquake policies in the US, with a total insured exposure of $168 billion. This results in an average exposure per policy of $2.007 million (168 billion/83,717).
  • Deductibles typically range from 2-20% of the value of the building.
  • According to Insurance Incorporated there are many factors that go into determining the cost of earthquake insurance for commercial buildings, including "age, construction materials, replacement cost, distance to a fault, foundation (underground parking, stilts, and basements), [and] soil conditions."
  • To demonstrate how the various factors impact premiums, "a frame house in the Pacific Northwest might cost between one to three dollars per $1,000 worth of coverage," while a brick home in the same region would cost "approximately $3 to $15 dollars per $1,000." Commercial earthquake insurance in the West ranges from $3-$15 per $1,000 of coverage. This means a $1 million policy could cost anywhere from $3,000(1 million/1,000*3) to $15,000 (1 million/1,000*15) per year. And based on the range of deductible, at the time of a claim the property owner could be responsible for between $20,000 (1 million*.02) and $200,000 (1 million*.2).
  • In California, rates for commercial earthquake insurance are not regulated.

Coverage

  • According to the ICW Group, their commercial earthquake insurance covers buildings, business personal property, loss of business income, earthquake sprinkler leakage, and betterment or repairs required by local ordinance or law." Fuller Insurance lists the same coverage for their commercial earthquake policies.
  • Earthquake insurance may also provide coverage for mudslides and sinkholes, which would also not typically be covered by a regular commercial property policy.
  • What isn't covered by earthquake policies is as important to consider as what is. Typically, fires (even when caused by an earthquake), vehicles, floods, and man-made quakes (e.g. those caused by fracking) are not covered.

Other Considerations

  • While there may be assistance available from the government in the case of a disaster caused by an earthquake, "the Federal Emergency Management Agency caps individual disaster aid at about $33,000. The actual payouts are almost always much lower."
  • Insurers may require an inspection of commercial properties, and may also require building upgrades before they will sell an earthquake policy. These potential additional costs should be included in the overall cost determination when deciding on whether to purchase earthquake insurance.
  • Even relatively small earthquakes can cause unseen damage that impacts the structural integrity of a building.
  • The size of a mortgage on a property may be an important consideration when deciding on earthquake insurance. If a property is mostly owned by a bank through a mortgage, the property owner may have less to lose by walking away if disaster strikes.
  • If the damage caused by an earthquake is extensive and results in losses higher than what insurers and the California Earthquake Authority has set aside, property owners may only receive a prorated claim payout.
  • This 2006 report from the California Seismic Safety Commission discusses weakness points for commercial buildings in regard to earthquakes. Some of these include unbraced water heaters, poorly anchored walls, steel frame buildings, large windows and ceiling mounted items. It is possible that addressing some of these potential weaknesses could position a building to sustain less damage when an earthquake does occur.
  • A 2018 report from the OECD titled "Financial Management of Earthquake Risk," goes into detail on the risks and financial costs of earthquakes.

Research Strategy

In order to obtain details on what commercial property owners, real estate professionals, business advisors and other insurance experts are saying about whether to purchase earthquake insurance for commercial properties, we examined government reports from institutions including the US Geological Survey and the OECD, expert articles from reputable news organizations including NPR and the LA Times, and studies/reports published in industry publications such as Risk Management and Insurance Review. While many of these resources discussed the factors to consider when deciding whether to purchase earthquake insurance, there was no definitive analysis showing the process followed or how property owners come to the decision to purchase the insurance. The research showed that this is a personal decision that will be impacted by a variety of factors.

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