How to help customers prepare for earthquake risk
Avoid a shakedown: Large earthquakes are neither common nor predictable, but they are always destructive and costly.
Insurance professionals are well-versed in expecting the unexpected, but there is no harm in being over-prepared. Navigating complex policies and working through unanticipated crises, the best brokers stay on top of their game to deliver optimal customer solutions.
Nowhere is this perhaps more true than when it comes to protecting assets and balance sheets from earthquake damage.
Large earthquakes are neither common nor predictable, but they are always destructive and costly. Government estimates peg the annual cost of earthquake losses in the United States at as much as $4.4 billion — not including losses to critical facilities, transportation and utility lifelines, or indirect economic losses. This is why it is essential to be prepared. Professionals must understand not only the obvious risks like structural damage to foundations and to the shell of a building but also the less instinctual yet equally crippling consequences an earthquake may bring.
‘Hidden’ earthquake risks
Beyond physical damage, there are secondary consequences that can be brought on by a major earthquake. Brokers must be aware of these hidden risks to help customers prepare in advance and recover post-loss.
For example, when an earthquake strikes, it can cause gas pipes in homes and businesses to separate, and the resulting gas leak can spark a massive fire. Installing flexible joints and automatic seismic gas shut-off valves and using proper bracing as well as anchoring techniques are just some precautions that can be taken. In addition to making a home or business safer, customers should be informed if any of these precautions may qualify them for a lower rate on their coverage.
Water damage is another forgotten culprit for property destruction. Many businesses have sprinkler systems installed. While these are likely beneficial in the event of a fire, depending on how the system is installed, this can create problems should an earthquake hit. Like gas pipes, sprinkler systems without proper anchoring and bracing run the risk of pipes bursting or sprinklers discharging accidentally due to the building shifting, resulting in potentially catastrophic water damage, even if the structure itself suffers only minor damage or goes unscathed.
It is important to also consider whether a business is particularly susceptible to damages caused by items falling or shifting out of place. For example, an office space is not expected to suffer loss or damage the same way a grocery store or antique shop would. In cases like these, brokers must provide insight into whether the insurance program covers internal contents and illustrate how deductibles will apply and what business owners can do to protect themselves from those losses.
Impacts felt far and wide
An indirect result of structural, fire and water damage is the interruption of business operations. This can come in many forms, from lack of access to utilities such as gas and water to a bridge collapsing, therefore impairing transit to and from the site.
Customers should be educated regarding the various types of interruption coverages that exist so they can assess their needs to protect them from uninsured financial loss. Under policy forms in the United States, short-term coverage generally has no set time limit but covers a business as long as the owners are working toward recovery with due diligence and dispatch. Long-term coverage comes into play when a business is back in operation, but due to extenuating circumstances is still not operating at the profit level it had been before the earthquake. This can be a result of customers finding an alternative provider of goods or services during the time the business was closed, or it can cover losses that may have been suffered due to a company missing its busy season.
Another aspect of this issue and one that can be addressed by contingent business interruption coverage is when an earthquake results in a supplier no longer being able to produce or transport goods to a customer’s place of business. In this instance, despite a business having little to no damage itself, it will still suffer financial loss because of a secondary business being impaired from delivering goods or services. If a customer has a business where this could pose an issue, brokers must be diligent in notifying them about any coverage limitations, for example, whether coverage extends only to suppliers who have been named in advance, or to suppliers of the first tier but not the second tier (being a supplier of the supplier).
Beyond providing all the available options ahead of an earthquake, it is important to be sure customers have a well devised and tested business continuity plan for any possible loss scenario.
The human element
The success of a business partly relies not only on its physical location and supply chain but also its workforce. In the event of a natural disaster, before ever discussing assets, dollars and cents, it is imperative that industry professionals consider the human element. The safety of a customer, their family and employees is priority number one and should be emphatically treated as such.
One option to balance the human element with business operations is to consider an off-site employee base that can pick up the work and keep the business running in the event that the employees in the affected area are unable to access their workplace. This could be due to damage to the structure, safety concerns or because they must tend to personal losses to their homes and other property. A proper business continuity plan (BCP) can help to address these types of considerations. Extra expense coverage can be used to defray the cost of executing the BCP.
Solid client advice
Not all of the risks posed by earthquakes are automatically covered by basic earthquake insurance. For this reason, it is important that industry professionals keep in mind all the potential consequences. They must provide a full range of options for their customers to consider to cover the various scenarios that could impact their business in the wake of an earthquake. Though the final decision comes down to the customer’s preference, it is a sign of professionalism and demonstrated expertise for an insurance representative to take the time to understand their customer’s business and personal needs, to make clients aware of potential risks posed by earthquakes, and provide them with loss control solutions and coverage options.
Reiner Braun, CPCU, is senior managing director of the National Property Practice at Beecher Carlson, a Brown & Brown Company. He can be reached by sending email to (rbraun@beechercarlson.com).
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