Earthquake Insurance

Last Updated 10/2/17

Issue: According to the United States Geological Survey’s (USGS) latest report, 143 million people across 48 states, or nearly half of all Americans, are now at risk for damage from an earthquake. The most active seismic areas are along the West Coast plate boundaries of California, the Pacific Northwest and Alaska. Most people think of large magnitude earthquakes when contemplating earthquake risk. However, earthquakes of smaller magnitude along other faults can still cause significant damage. The United States Geological Survey (USGS) 2014 National Seismic Hazard Map indicates an increased potential for higher magnitude earthquakes in several areas. Additionally, there is rising concern that the Cascadia Subduction Zone, which runs through California, Washington, and Oregon, may experience a mega earthquake in the near future. Despite this, insurance covering earthquake losses remains low. According to the Western Insurance Information Institute, in the U.S. only 25%–28% of homeowners in earthquake prone areas have earthquake insurance.

Overview: There are several key reasons that many people fail to obtain earthquake insurance to protect themselves and their property. High cost and limited coverage is the primary deterrent to purchasing earthquake insurance. Those that purchase earthquake insurance are typically the ones most at risk from earthquakes—a phenomenon called “adverse selection.” Moreover, as earthquakes are low-frequency, high peril events, consumers typically take earthquake insurance for granted until they experience a significant earthquake.  Other reasons that consumers may be hesitant to purchase earthquake coverage include confusion about what is covered in insurance agreements, false hope for federal assistance, and lack of priority.

Earthquake insurance is important because it decreases the post-earthquake loss burden on individuals, businesses and society in general. Insurance serves as an important tool in transferring the risk of earthquake damage and funding recovery efforts. Its function as a pre-disaster funding tool limits the economic impact of post-disaster recovery to individuals, businesses and government. Insurers pay for earthquake losses from funds pooled via insured premiums that are set in proportion to the risk, thus allowing for financial diversification of risk. Insurers protect themselves from the financial instability caused by adverse selection by limiting the amount of risk they will accept from any one region, thus spreading the risk among other insurers, as well.

It is a common misconception that earthquake coverage is provided in a homeowners or business insurance policy. For this reason, the NAIC produced the Consumer’s Guide to Purchasing Earthquake Insurance, which explains the interworking of earthquake insurance, including information on how to obtain coverage and file claims. As outlined in the guide, earthquake coverage is sold primarily through admitted direct and surplus lines insurers, mostly as an endorsement to a homeowners or businessowners policy and occasionally as a stand-alone policy. However, it should be noted that the California Earthquake Authority, a publically managed, mostly privately funded entity, sells earthquake insurance in California through participating insurance companies.

The guide also defines common earthquake coverages and exclusions. For example, earthquake insurance typically only covers direct damage to the property resulting from the shaking of an earthquake. Indirect damage, such as fire and water damage from burst gas and water pipes is covered under a homeowners policy. Damage to vehicles would be covered under an auto policy. Earthquake coverage is usually subjected to two separate deductibles, typically 10-15 percent of the cost of rebuilding the home and the home’s contents.

Status: The CIPR held the All Things Earthquake event on August 14, 2015 during the 2015 NAIC Summer National in Chicago. Topics covered during the event included the link between waste water disposal from hydraulic fracturing activities and earthquakes, modeling for earthquake exposure, the legal environment surrounding hydraulic fracturing, loss mitigation needs, earthquake insurance coverage features and pricing trends, insurance regulatory concerns, the role of mitigation in addressing exposure to earthquake loss, and consumer awareness and education activities. For more on this event, please refer to the  CIPR Newsletter article Insurance Regulators Discuss Earthquake Insurance Issues and Challenges at Event.

The NAIC Property and Casualty (C) Committee serves as a forum for discussing issues and solutions related to earthquakes. Of recent interest has been how induced earthquakes differ from natural earthquakes. The new USGS One-Year Seismic Hazard Forecast has prompted catastrophe vendors to update their models. These updates allow insurers a better grasp on how induced seismicity impacts their portfolio results.

Mitigation efforts for induced and natural earthquakes should be viewed differently. Induced seismic hazard is fluid and can easily change before higher building codes are enacted. Additionally, induced earthquakes have been linked to known human activities that are themselves regulated at the state and national levels. As such, experts have advised that reducing induced seismicity at the source may be the best prevention measure.