Earthquake aftershocks: When does business income coverage apply?

Coverage Q&A: Following recent earthquakes in Puerto Rico, the insured's business was continuously disrupted by aftershocks.

On January 7, 2020, in the town of Guanica, Puerto Rico, an earthquake of magnitude 6.6 occurred causing damage to countless residences and public buildings, including schools. This photo was taken on January 11, 2020. (Photo: Xavier Garcia/Bloomberg)

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Editor’s Note: Earthquakes are one of those unpredictable natural disasters that can cause significant damage. They are often excluded from insurance policies because they are both unpredictability and losses can be severe. This week, a subscriber shares their insurance conundrum following the recent earthquakes in Puerto Rico. 

Question: Our insured owns an auto dealer business with two locations that offer sales, services and parts. The two locations are each insured for earthquake loss with business income limits of $600,000 at 50% coinsurance with a 5% earthquake deductible, respectively.

On January 7, 2020, there was an earthquake registering 6.4 on the Richter scale that damaged 40 auto hydraulic lifters at both insured locations. As of January 16, 2020, aftershocks and/or earthquakes registering from 2.5 to 4.5 on the Ritcher scale were still occurring every hour and every day.

Some lifters were damaged due to the earthquakes, and an expert, contracted by the insured, advised not to use them because if the lifters are used during an earthquake, they will break, causing the vehicle to collapse, causing additional damages to the lifters and to the property.

We understand the following:

  1. The damaged lifters will activate property damage and business interruption coverages because there is physical damage to the property and earthquake coverage in place. 
  2. The insured was advised not to use any of the lifters during the aftershocks due to the risk of breaking, damaging vehicles, or injuring an employee. Since the shocks continued for days following the first earthquake, the insured was required to take all reasonable steps to protect covered property according to the “Duties” on the policy. 
  3. The insurance company must pay business interruption because, out of the 40 lifters, some suffered physical damage and others were unable to be used to avoid further damage during the period of aftershocks. 
  4. The period of loss or restoration does not apply because it is not known when the shocks will stop; however, business income loss will be either for six months (50% coinsurance) or up to the moment aftershock stops, whichever comes first. We understand this is a mitigation expense for business interruption.
  5. Extra expenses are covered since the physical loss triggered the coverage.
  6. We also understand that the loss should apply only to the section of business dedicated to service.

Please let us know your opinion.

— Puerto Rico Subscriber

Analysis: Unlike a hurricane that has a reasonably predictable path and life span or a tornado with a distinguishable beginning and end, earthquakes do not. An earthquake may have hundreds of aftershocks lasting for an extended period. Sometimes, it can be challenging to determine when one earthquake starts versus another. So it begs the question: How many aftershocks or days must pass before an event is considered a new earthquake occurrence?

Answer: To learn the answer to this week’s coverage Q&A, please log into your FC&S Expert Coverage Interpretation account.

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