By Roy C. McCormick
Earth tremors in the southeastern United States and a catastrophic volcanic eruption in Montserrat in the British West Indies this summer are reminders of the need to review property insurance policy provisions relative to earthquake and volcanic activity.
It is timely that we do this during a lull in major occurrences of this nature in the United States, so that appropriate steps may be taken. We need to know how basic coverage applies and the options that are available so that we can discuss the exposure and available protection with insureds.
Commercial property building and personal property forms, businessowners policies and homeowners policies do not cover property damage caused by "earth movement," including earthquake. They cover loss caused by "volcanic action."
The "earth movement" exclusions in commercial policies and homeowners policies are virtually identical. For reference purposes, we refer to the ISO commercial property causes of loss forms and the AAIS homeowners forms. Other comparable forms of basic property insurance contain similar provisions.
Damage done by earthquake, a term understood by insurance buyers, is clearly not covered, a fact that is not known to many policyholders outside California. Experience with earthquakes, concerted effort by the insurance industry, and public sector involvement have resulted in widespread understanding by California insureds of the need for additional coverage. We are well advised to discuss the exposure with insureds elsewhere and to inform them of the coverage situation.
Underwriting procedures now in general use by insurers provide for the writing of earthquake (earth movement) coverage only by endorsement of basic property insurance. "Earthquake only" coverage is the exception rather than the rule. By way of example, ISO's Earthquake Form CP 10 40 is available for use only with the basic, broad and special causes of loss forms applicable to commercial property. AAIS's Endorsement ML-54 attaches to homeowners policies.
Focusing on how homeowners insurance and commercial property insurance would respond to claims for damage caused by a volcano, we note that there is virtually identical coverage under both, subject to limitations that must be taken into account. The specifics that follow are drawn from the AAIS homeowners forms and the ISO commercial causes of loss forms.
Coverage is included for direct loss to insured property by airborne volcanic blast or airborne shock waves, ash, dust particulate matter or lava flow. It is made clear that there is no coverage for the removal of ash, dust or particulate matter that does not cause direct physical loss to covered property. Otherwise, there would conceivably be a multitude of claims 500 miles distant for the cleaning of property as well as property relatively near to the occurrence that is not damaged.
For additional premium, coverage for damage to insured property from earthquake, including that associated with "volcanic eruption" (as distinguished from basically covered "volcanic action"), may be made effective by endorsement. The endorsements, described above, pick up earth movement associated with volcanic eruption as well as that independent of it.
Questions over which coverage applies, that for the earthquake peril or that for the fire peril, have certainly been minimized by the endorsement process. Determination of what part of a loss can be attributed to earthquake and what part was caused by fire is less a problem when both perils are covered by the same insurer, in the same policy, for the same amount of insurance. Furthermore, having a single adjuster for a claim involving both earthquake and fire is a major factor in getting the job done relatively quickly and with a high degree of customer satisfaction.
With the recent rumbling of the earth fresh in mind, a major concern is getting the insurance message to property owners throughout the country who haven't had the experiences that are familiar to California residents. Agents, brokers and insurers serve their insureds well by discussing the earthquake threat, the basic earth movement exclusion, and the option to add coverage for the exposure.
There is scientific evidence that an earthquake as strong as the one that damaged the San Francisco area in 1989 will occur in the less prepared eastern United States in 10 or 15 years. The New Madrid (Missouri) fault is considered by the U.S. Geological Survey to be a major threat for earthquake activity in the East. A series of quakes around New Madrid, Missouri, in 1811 and 1812, shifted the ground so drastically that the flow of the Mississippi River was reversed for a time; the ground shook as far away as Washington, D.C. A similar quake today could cause devastation in highly developed parts of Missouri, Illinois, Indiana, Kentucky and Tennessee.
A devastating earthquake struck Charleston, South Carolina, in 1886, and serious quakes have been felt in Massachusetts, Connecticut, the border of Virginia and West Virginia, upstate and Jamaica Bay regions of New York, Illinois, Utah and other states.
It is notable that the cost of adding earthquake coverage to property insurance policies in most of the country is minimal.*
©COPYRIGHT: The Rough Notes Magazine, 1997