Earthquake Preparedness Month: Opportunity for Calif. to lessen coverage problems
Insurance professionals can offer strategic solutions that help.
To say California has had a rough stretch the last number of years in the catastrophic loss world would be an understatement. But as we continue into 2020 and head into California Earthquake Preparedness Month, organizations can take steps to lessen and mitigate earthquake coverage problems.
The 2010s were the costliest decade ever for natural disaster-driven economic losses at nearly $3 trillion, according to one estimate. In particular, earthquakes pose a persistent danger to California, but most commercial insurance policies do not cover them, and according to the Department of Insurance data, fewer than 10% of commercial buildings in the state are covered by earthquake insurance.
This indicates a general lack of preparedness and considerable risk exposure. Insurance professionals must address this problem with strategies to cover earthquakes at a cost that businesses can afford.
California’s Earthquake Preparedness Month in April should prompt businesses to take a proactive approach to disaster preparation and examine their current insurance coverage to identify gaps. Insurance professionals can be key strategic partners by encouraging organizations to obtain coverage and take steps in a holistic approach to disaster preparedness, promoting risk management and business continuity.
California’s calamities
California has arguably become the most difficult state to provide insurance for because of repeated calamities ranging from seasonal wildfires to mudslides. The last major earthquake to strike a populated area in California was the 2014 South Napa earthquake, but the devastating fires of 2017 and 2018 have largely overtaken the memory of the former.
In July 2019, the Ridgecrest earthquakes in Southern California had epicenters located in the sparsely populated Mojave Desert, yet they caused power outages and triggered thousands of tremors felt across the surrounding region, some more than 100 miles away. This incident highlighted the threat of multi-fault ruptures affecting a wide area that includes densely populated regions.
Beyond concerns about the natural disasters themselves, the insurance market faces a range of impediments, including the burden of high payouts from Hurricanes Harvey, Irma and Maria in 2017; PG&E’s bankruptcy filing; the ever-changing regulatory landscape; and a shortage of skilled construction workers that has resulted in increased costs.
These issues have made it difficult for insurers to provide coverage at a reasonable price. However, earthquakes are still a significant risk in California, so strategic solutions are needed to offer affordable commercial insurance policies.
Look beyond price when considering earthquake coverage
Significant premium increases can discourage businesses from obtaining earthquake coverage, leaving them unprepared and vulnerable to a disaster. However, “going bare” on earthquake coverage could bankrupt a business suffering significant economic damage from a seismic event.
Businesses should carefully examine both their earthquake exposures and coverage options to make an educated decision on whether to purchase earthquake coverage. The decision should not be based solely on whether the coverage appears expensive.
One important consideration for policyholders is that earthquake insurance often has a percentage deductible based on the valuation of the at-risk property and business income exposure, as opposed to a flat deductible. Having coverage, therefore, is not a cure-all if paying the percentage deductible will financially burden the policyholder.
Other aspects that policyholders should review in detail include policy exclusions and reimbursement sub-limits for certain items, capped loss-of-use coverage and uncovered losses that don’t count toward the deductible. Some earthquake coverage may be available in an “all-risk” commercial policy or can be provided by a separate standalone or “difference in conditions” earthquake policy. Insurance professionals can play a key role in increasing the take-up rate by helping businesses clearly understand their coverage options.
Holistic earthquake preparedness
Preparedness is a virtue, and it will provide holistic benefits to a business in the near and long term. Insurers that recognize the positive outcomes of disaster preparedness can better price the risk and build stronger relationships with organizations based on trust. Insurance needs will vary depending on the type of organization and industry, but best practices for a business to manage risk and increase preparedness include:
- Identify business vulnerabilities: Examine processes and operations to identify areas of weakness before a disaster, then develop a plan to minimize damages (preventing gas leaks, hazardous spills and electrical fires should be the top priority) and enable a prompt response. An earthquake structural retrofit could be justified if a client has an older building (and therefore is more susceptible to earthquake damage) that is critical to its operations. An organization that fosters agility and resilience in its operations is more likely to have continuity in the wake of a calamity.
- Confirm third-party preparedness: Each link in the supply chain is critical to operations and deliverability. Gaining knowledge about the vulnerability and preparedness of suppliers, vendors and clients is imperative to promote best practices, plan for contingencies and set up recovery efforts. Diversifying suppliers and production locations can also help protect the overall supply chain.
- Establish a response plan: Proactive investment in preparation can mitigate post-incident expenses as well. Businesses should identify a response team to lead recovery efforts, manage communication, minimize additional damage and injuries, maintain contemporaneous documentation post-crisis and establish milestones for claim recovery. This helps ensure that employees and stakeholders have the training, equipment and supplies, and information they need to support the response.
- Examine the insurance policy: Natural disasters are unpredictable in terms of both timing and the extent of the damage.
Businesses should work with an insurance professional to develop a comprehensive understanding of their coverage and should periodically measure the policy against their needs, probable maximum loss estimates and priorities to calculate anticipated recovery expenses.
Though the physical impact of these calamities is felt regionally, the related disruptions and the impact on the insurance market can be felt far and wide. Businesses can use the steps above to engineer resiliency by identifying and removing vulnerabilities, as well as enhancing risk management and training programs.
It can be difficult for businesses to spend resources on preparedness — as the benefits often aren’t seen until later — but developing resilience is crucial to ensure continued operations. Insurance professionals can reinforce this value proposition for businesses with efficient strategies that insure against risk and promote recovery.
Drew Olson, CPA, CFF, is a partner in BDO’s Forensic Investigation and Litigation Services practice with more than 15 years of experience assisting clients with forensic accounting and advisory services. He can be reached at dolson@bdo.com.
Chris Scheffler, CBCP, SCRM, is a vice president, property risk engineer and business continuity specialist at Woodruff-Sawyer, an insurance brokerage and risk management consulting firm.
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