This article is a continuation of our Real Estate State of the Market series on earthquake insurance. Real Estate - State of the Market (Part 1) focused on earthquake insurance and the earthquake insurance marketplace. In this article we examine some of the factors that are used in determining rates for an earthquake policy, the types of coverage offered, and deductible options.
Impact of Building Characteristics
A variety of factors are considered when pricing Earthquake Insurance, however, here are a few criteria that can have a large impact on underwriting:
Building construction and age: Each type of building material reacts differently to seismic activity with some materials being more flexible, and thus less prone to being damaged, than others. Building age also impacts underwriting because older buildings are generally not as structurally sound as newer buildings.
Here are the four main building construction types:
- Wood Frame: Consists of all wood walls, ceiling and flooring. This is viewed favorably since wood is flexible and can sway with the seismic movement.
- Joisted Masonry: Consists of masonry walls (generally, concrete or brick) with wood floors and ceilings. This is not as favorable since masonry walls are not flexible and are more prone to damage.
- Masonry/Non-Combustible: Consists of pure brick, concrete, or steel frame. Steel frame is viewed favorably, as the material is ductile and can bend considerably before breaking. Concrete and brick are brittle and tend to crack or crumble under seismic force.
- Fire Resistive: Generally used in high rise buildings and has a combination of steel frame and concrete with several earthquake retrofitting measures. This is viewed very favorably due to the enhanced retrofitting involved and ability for the ability to sway with the seismic movement without being damaged.
Type of Building Foundation: This is a critical underwriting consideration, given that any shift in the ground could damage the foundation and cause the structure to collapse. Examples of foundations that are viewed favorably by underwriters include concrete slabs; while post and pier or buildings with tuck under parking are viewed as higher risk.
Earthquake retrofitting: Extra structural protection is a way to minimize or mitigate the damage to your building. This is especially important in older buildings, as underwriters generally view them as less structurally sound. It is important to understand the details and extent to which your building has been retrofitted, so this can be communicated to the underwriter.
Soil type: Are you on bedrock, clay, or soft soil (artificial landfill)? Earthquake severity and damage can vary based on the softness of the sediment. As seismic waves travel through the ground they amplify as the soil gets softer and is more prone to liquefaction.
Coverages and Deductibles
If not thoroughly reviewed and negotiated, earthquake policies can be restrictive in the coverage offered, and can leave you paying high deductibles with a false sense of security. Here are a few coverages that should always be on your policy:
- Replacement Cost: This allows your claim to be paid without any deductions for building depreciation. On the other hand, Actual Cash Value only gives you the depreciated reconstruction value of the building.
- Building Foundations: This is oftentimes excluded in the definition of “covered property” unless your agent/broker asks the underwriter to include it. Generally, underwriters can include this coverage free.
- Building Ordinance: This pays for the increased cost of construction to adhere to current building codes when rebuilding (e.g., installing a fire sprinkler system, widening doorways, etc.). City governments can require buildings to upgrade their systems and structural components to rebuild even if only part of the building is damaged.
- Earthquake Sprinkler Leakage: If an earthquake sets the fire sprinklers off, insurance companies oftentimes exclude the subsequent water damage from the sprinklers discharging. Some insurers give you the option of adding this on to your Commercial Package or Business Owner’s policy, which is oftentimes the most cost-effective way to purchase the coverage.
Earthquake deductibles are typically percentages, usually between 5-25% of the limits with a minimum flat dollar amount (e.g., a 5%, minimum $25,000). There are two main ways underwriters offer deductibles:
- Per Unit of Insurance: Each coverage (building, business interruption, etc.) has its own percentage deductible. This can be advantageous as the deductible incurred before insurance kicks in is lower.
- Per Policy: The percentage deductible is based on the Total Insurable Value (sum of Building, Business Personal Property, and Business Interruption/Loss of Rental Income limits), which means the deductible amount will be higher before the insurance policy pays.
At Newfront, we are experts in the real estate insurance industry, and we can help you craft a policy to ensure you are covered. Contact one of our trusted advisors today.
About the author
Associate Vice President
Keane is an Associate Vice President on the Real Estate team at Newfront and focuses on Habitational style risk (apartment buildings, HOAs and Co-Ops), commercial real estate portfolios, REITs, and real estate developments (both new ground up construction and renovations). Keane is an advocate for his clients. He believes there is no one size fits all solution and understands how to evolve clients’ risk transfer strategy as his clients’ needs evolve and the insurance market conditions change. Connect with Keane on LinkedIn.
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