Recent Earthquake Activity Causes Many to Wonder About Coverage

May 24, 2010 By Corey Harris Insurance

Reports last week indicated that Southern California had been shaken by a 5.1 magnitude earthquake. After further review, however, the USGS downgraded the quake to a 4.5 and has opined that the tremor was most likely an aftershock from the April 4, 2010, 7.2 magnitude quake, which rattled buildings in Baja.

While it appears that last week’s tremor was not as serious as first thought, the effects of this 4.5 magnitude quake were felt in both Los Angeles and San Diego. It goes without saying that these two cities are heavily populated and would suffer widespread damage if directly hit by a large quake.

Earthquakes seem to be occurring more frequently over the past few years. California, Chile, Mexico, and Haiti have all felt the effects of these natural disasters in the past few months and many have been left wondering when the next big one will hit. Unlike hurricanes, tornados, and wildfires, earthquakes are unpredictable and may occur at any time. The devastation associated with earthquakes is particularly concerning for Condominium Associations and other large buildings or complexes, which are home to many people. It is important for associations to check their policies and speak with their agents frequently about earthquake coverage and whether the association’s property is fully covered.

A recent study of California homeowners found that more than 90% of homes in that state are not covered for earthquake damage, and, while condominium associations are more apt to purchase earthquake protection, there is no doubt that the majority are underinsured in California and across the nation. There are a number of reasons homeowners and associations do not purchase proper earthquake insurance. First, in places like California, the coverage is extremely expensive. After the Northridge Earthquake in 1994, nearly all of the private insurance companies stopped writing earthquake coverage and those that continued charge very steep prices. The reason for this was simple: the costs associated with property damage from a major earthquake were deemed too high for private insurers. The 6.7 magnitude Northridge Earthquake damaged or destroyed more than 300,000 buildings and resulted in 600,000 claims filed. Insurers paid heavily for the damages associated with the quake. State Farm paid $3.5 billion in claims and Farmers paid around $2 billion, according to most reports.

While the cost of earthquake insurance is extremely high in areas like California, many individuals and associations also do not purchase earthquake coverage because they believe their location is immune from earthquake damages. Even though historically, many areas outside of the Western United States do not suffer from frequent earthquakes, it is important to know that the potential for earthquakes is prevalent in other places. The New Madrid Fault, which runs through Missouri, Tennessee, and Arkansas, is considered by many experts to be one of the most dangerous faults in the world. While this fault line hasn’t been as active as others, many experts predict that an earthquake on par with the recent earthquake in Haiti will occur within the next 50 years.

This would not be a first for the area. In 1811 and 1812, the New Madrid Fault shook so heavily that it caused church bells to ring as far away as Boston and even changed the course of the Mississippi River near Memphis, Tennessee.

Given the high potential for earthquakes in many areas of the country, it is important to be mindful of coverages and make sure that your association is fully protected. Almost all insurance policies specifically exclude earthquake damage, and the coverage must be purchased additionally. Luckily for most people outside of the Western United States, the price is relatively cheap. A few dollars a year could mean the world if and when a major disaster strikes.

For those of you on the “Left Coast,” there may be hope to bring you more affordable coverage. Congress is currently considering H.R. 4014 — The Catastrophe Obligation and Guarantee Act, which would allow the California Earthquake Authority to offset the cost of expensive reinsurance by borrowing from private markets with federal guarantees. This could lead to a decrease in premiums for earthquake insurance in California by as much as 50% and could allow many more people to purchase the coverage they need.

It is important for associations to have a good relationship with their insurance agent so that an open and frequent dialogue occurs. Now is the time to speak with your agent and make sure that you are fully protected at the time that disaster strikes.

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