Apartment Management Magazine The Earthquake Insurance Quandary: Is It Affordable?
By Newfront Insurance
These days, many homeowners do not bother to purchase earthquake insurance due to the perceived high costs and limited coverage. Often we are asked, “Is earthquake insurance affordable?” The answer is, “Yes, it is.”
California views earthquake insurance as another type of “CAT” (catastrophic) coverage that is underwritten by several domestic and international carriers and was the last of the CAT coverages to start seeing rate increases, though. than moderate, due to the current tight state of the property insurance market.
The property insurance market in the United States has paid over $ 300 billion in claims since 2017 due to the variety of natural disasters and other events such as wildfires, hurricanes, unrest social security and COVID-19, which has prompted underwriting companies to take significant increases and reduce their financial capacity (the insurance limits offered) on each insured account to recover profitability and minimize their exposure to losses. Although the insurance market has seen an increase in underwriting and price sensitivity caused by hurricanes and high winds, and assets exposed to forest fires, underwriters write earthquake insurance policies. profitable earthquakes because there haven’t been many destructive earthquakes recently that have impacted the policyholder insurance and reinsurance market. the contracts still provide them with sufficient financial support to assume the risk of seismic activity.
While properties exposed to forest fires have seen triple-digit rate increases and properties exposed to hurricanes / wind have seen, on average, rate increases of 20% year over year, earthquake coverage has only seen a 10% to 15% increase in premiums this year.
- Impact of building characteristics
A variety of factors are taken into account when pricing earthquake insurance, however, here are some criteria that can have a big impact on underwriting and pricing:
Construction and age of the building. Different types of building materials respond to seismic activity differently, with some materials being more flexible and, therefore, less likely to be damaged or destroyed than others. The age of the buildings also affects subscription, as older buildings are generally not as structurally sound as newer buildings. Here are the four main types of buildings:
- Wooden frame. Consists of all walls, ceilings and flooring in wood. This is viewed favorably because the wood is flexible and can sway with seismic movements.
- Joist masonry. Consists of masonry walls (usually concrete or brick) with wooden floors and ceilings. This is not as favorable for seismic coverage as masonry walls are not flexible and are more prone to damage or failure.
- Masonry / non-combustible. Consists of a pure brick, concrete or steel structure. Steel reinforcement is viewed favorably, as the material is ductile and can bend considerably before breaking. Concrete and brick are brittle and tend to crack or crumble under seismic force.
- Fire resistant. Typically used in high rise buildings and has a combination of steel framing and concrete with several earthquake retrofit measures. This is viewed very favorably due to the improved retrofit and the ability to swing with seismic motion without being damaged.
Seismic renovation and soil type. Buildings that have been renovated seismically or different types of soil can also make a difference in the underwriting process.
- Earthquake renovation. Additional structural protection is one way to minimize or mitigate damage to any building. This is especially important in older, mid-story buildings, as underwriters generally view them as less structurally sound.
- The type of soil. Are you on bedrock, clay or soft ground (artificial landfill)? The severity and damage of earthquakes can vary depending on the softness of the soil and sediment. As seismic waves pass through the ground, they amplify as the ground becomes softer and is more prone to liquefaction.
- Coverages and deductibles
If not fully reviewed and negotiated, earthquake insurance policies can be restrictive in the level of coverage offered and can leave you paying higher deductibles with a false sense of security. Here are some coverages that should always be included in any earthquake insurance policy:
- Replacement cost. Replacement costs allow a claim to be paid without any deduction for depreciation of the building. In contrast, the actual cash surrender value only offsets the depreciated reconstruction value of a building.
- Building foundations. Coverage for building foundations is often excluded over time, unless the insurance agent or broker requests otherwise from the underwriter. Generally, policyholders can include this provision for free.
- Building Ordinance. This coverage pays the increased cost of construction to meet existing building codes during the reconstruction (eg, installation of an automatic fire extinguisher system).
- Earthquake sprinkler leak. If an earthquake triggers fire sprinklers, insurance companies often exclude water damage resulting from the discharge of the sprinklers. Some insurers offer policyholders the option of adding it to a commercial package policy, which is often the most economical way to purchase this type of coverage.
Earthquake deductibles are generally based on percentages of the limits (typically 5% to 25% of the offered limits) with a minimum fixed amount (eg 5%, minimum $ 25,000). Underwriters today offer deductibles in two main ways:
- Per unit of insurance. Each type of cover (building, business interruption, etc.) has its own deductible percentage. This can be advantageous because the deductible incurred before the insurance takes effect is usually lower.
- By policy. The deductible percentage is based on the total insurable value (sum of the building, the company’s personal property and the business interruption), which means that policyholders will pay a much higher deductible before the policy. insurance does not begin to cover losses.
There are many nuances that exist in the insurance market that can work for you or against you. Newfront is an insurance brokerage firm with expertise in commercial and private clients that offers comprehensive risk management backed by cutting edge technology and a client-obsessed culture. Their mission is to transform risk into opportunity, allowing everyone to pursue their objectives. The Newfront Insurance team are always ready and available to help ensure you get the most comprehensive policy at the most competitive price. For a free, no-obligation consultation, please contact Newfront Insurance at [email protected] or call (855) 830-8954 and be sure to mention that you are a member of the Greater Los Angeles Apartment Association – Members get a 5% discount on Workers’ Compensation Insurance and on the new apartment insurance package.