Earthquakes can knock down buildings, but more often in the United States they cause less, but still very serious, damage. You may experience a crack in your foundation or your building sprinklers could be activated, causing large-scale water losses.
Financial protection comes in various forms. In some cases, you can enhance a property insurance policy to add earthquake insurance; in other cases, you will need a stand-alone earthquake insurance policy. Here we look at earthquake insurance as it applies to businesses, multifamily housing, and personal residences.
Earthquake insurance for businesses
When insuring your commercial property for earthquake loss, the total insurable value of your property is factored with your risk of being hit by the most likely serious seismic shock. Earthquake insurers refer to this calculation as the probable maximum loss. It is based on your location and risk of a severe earthquake, the size of your building and its construction materials, when it was built and any structural work that was done to help the building survive an earthquake intact, and what kind of equipment or inventory is inside. An estimate of how long your business could be shut down for restorations is also included because business interruption insurance is part of an earthquake policy. It will provide a stream of revenue during a closure due to earthquake damage. Your probable maximum loss determines the limits of coverage you should purchase as well as your premium and deductible.
Earthquake Insurance for Business Basics
Property damage insurance: Covers repair or replacement of buildings (if you own the property), betterments you made (if you lease), and building contents, such as equipment, fixtures, furniture, or stock
Business income insurance: Provides a revenue stream during an earthquake-caused shutdown and can be enhanced to cover shutdowns due to earthquake damage at a supplier of material inputs or a utility service (called contingent business interruption or utility services interruption coverage)
Deductibles: Calculated as a percentage of the total insured value of the property — lower (5% of TIV or less) for buildings engineered to resist earthquake damage but higher, maybe 20% or more of TIV, for more at-risk structures
Premium: The price of your earthquake policy is determined based on your location, your severity of risk, the size and contents of your building, your structure’s age and resistance to earthquakes, and your potential revenue loss due to shutdownExtra business protections to enhance earthquake insurance
You may wish to go beyond covering direct earth movement and tremor damage by endorsing your earthquake insurance with sprinkler leakage coverage, ordinance and law costs, and extra expenses associated with a shutdown of your operations.
Damage from sprinkler leakage resulting from an earthquake might be insured under a standard commercial property policy, but where it is excluded, you may be able to add it by endorsement or include it in an earthquake insurance policy. It may have its own deductible, or it may be subject to the full policy deductible. Check with your insurance agent or broker to determine each policy’s details.
Ordinance and law coverage is an addition to an earthquake policy that obliges the insurer to provide money so you can comply with updated building codes for an undamaged portion of your building after a direct earthquake loss to another portion.
Extra expense coverage added to the business income section of your earthquake policy will help with financing temporary accommodations for your business, such as a rental property or leased equipment, while your building and equipment are restored.
Earthquake insurance for homes
Insuring a home is much simpler than protecting a business from earthquake loss. If you live in a low-risk zone, it can be as easy as calling your insurance agent and asking for an earthquake rider to be added to your home insurance policy. If you live in a high-risk zone, you may need a stand-alone residential earthquake insurance policy. In some states, lenders require earthquake insurance as long as the property carries a mortgage.
A home earthquake insurance policy usually covers the dwelling, including the foundation, walls, roof, pipes and built-in fixtures, such as cabinets, flooring and sinks, as well as your home’s contents, such as furniture, appliances and other possessions. You can include coverage for detached structures, such as garages, and additional living expenses (ALE) to cover costs if you are displaced from your home. Some insurers will pay for debris removal, and you can purchase ordinance or law coverage, which helps pay for upgrades required by modern building codes. A rider might offer less protection than a stand-alone earthquake policy, so talk to your insurance agent to compare the differences.
If you own a condominium, your earthquake insurance will not cover the entire building. That kind of protection should be secured by your condo association. Your policy will likely insure your fixtures and belongings—basically from the walls in—though some insurers may offer coverage for the unit’s structure.
Dollar amounts of coverage are typically determined based on the value of what is being insured, the risk your home faces from a serious earthquake, and its ability to withstand seismic movement. Your deductible will usually be a percentage of the overall coverage limit, and it may contain separate deductibles for the different coverages supplied, such as dwelling, contents, and separate structures. The National Association of Insurance Commissioners says homeowners can expect to pay 10% to 20% of their overall coverage limit as a deductible.
Parametric earthquake insurance for business and home
Because deductibles are so high, most earthquake damage in the United States does not reach the threshold for a claim payout. For those wishing to receive some help for lower-cost damages resulting from an earthquake, parametric insurance may be an option.
A parametric insurance policy pays out quickly (typically within 30 days) and requires very little in the way of claims adjustment. Often, you submit proof that you sustained damage, then the insurer uses geologic information on the earthquake to determine the level of ground movement at or near your address. If that measurement meets or exceeds the trigger in your parametric policy, you will be issued payment according to the terms of your policy.
Parametric insurance can be used as a complement to an earthquake policy or as the sole earthquake coverage that enhances commercial or personal property insurance. However, it may not meet your mortgage requirement if earthquake insurance is mandated by your mortgage lender.
Get earthquake insurance help
Since earthquake insurance varies across policies, an independent insurance agent or broker can help you evaluate specific coverage options. Those options may include raising or lowering your deductible levels, using a property policy rider or a stand-alone policy, and choosing a full earthquake policy or parametric insurance. If you own a residence in California, you may also use the California Earthquake Authority for coverage.
There is typically a delay between the purchase of an earthquake policy and its effective date (often two weeks or more) so don’t delay in securing the coverage you need, especially if your property is in a high-risk region. Locate an insurance agent who can help you find an earthquake insurance agent or broker near you.