The Basics of Earthquake / Earth Movement Insurance

Earthquake and Earth Movement are typically excluded from most property policies and are purchased separately as part of your risk transfer strategy. Several regions around the globe are exposed to higher earthquake risk due to the proximity to the earth’s tectonic plates that sit beneath the ground.

When tectonic plates shift, a significant amount of energy reverberates through the ground causing shifts in the soils and land, which can significantly damage several buildings, businesses, and the utilities that allow these buildings and businesses to operate. For this reason, Earthquake and Earth Movement are known as Catastrophic (CAT) coverages.

Earthquake and Earth Movement are underwritten by several US domestic and international carriers (e.g., Lloyds of London). It is important to note the difference of how Earthquake and Earth Movement are defined in the policy. Earthquake coverage is commonly purchased, as it is the most widely available and the specific differences between the two definitions are commonly misunderstood or coverage is assumed, however this is not the case.

Earthquake vs Earth Movement

Earthquake has a more restrictive policy definition that only covers an “abrupt shift of rock along a fracture or fault in the earth” while Earth Movement expands the definition to include “landslide, mudslide, mudflow, sinkhole, earth sinking, rising, or shifting including soil conditions that cause settling cracking or other disarrangement of foundation of foundations or other parts or realty whether natural or manmade.” Oftentimes Earthquake policies will contain exclusions for damage that is caused by any sinking of the soil or sinkholes, whether manmade, regardless of if it is triggered by a sudden shock from an earthquake. This slight difference in definition can determine whether your claim is accepted or denied by the carrier.

When deciding which of these coverages to purchase, it is important to consider the location of your structure. Those properties located in liquefaction zones, areas with softer soils, or areas with significant removal of ground water, oil and other minerals that can cause shifting, sinking and settling of land.

State of the Earthquake/Earth Movement Marketplace

The Real Estate insurance marketplace has faced significant challenges since 2017 with a plethora of wildfires, hurricanes, and floods. In 2021 alone, the insurance marketplace incurred about $120B from in claims from natural disasters. In efforts to recover profitability, many carriers increased pricing significantly and cut their capacity (the limits of insurance) offered to each client, meaning multiple carriers are having to participate in sharing the risk (if higher limits are required).

Although there have been challenges, Earthquake has remained profitable for underwriters, thus rates increased at a lesser rate than the other types of CAT coverages. Thankfully, rates are increasing at a decreasing pace and we are reaching, what we believe is the top of the bell curve and with decreases coming in the near future (assuming carriers’ books of business remain profitable). Underwriters are reviewing each application with higher levels of scrutiny when determining whether to offer coverage to a client, especially when in higher risk earthquake zones. Having a detailed conversation about the structural characteristics of your building will help underwriters feel more comfortable offering competitive coverage terms.