Summary Mother Nature is a powerful and uncontrollable force. Of all the natural events that occur, earthquakes are among the most destructive. According to the U.S. Geological Survey (USGS), our nation experiences approximately 20,000 earthquakes a year, mostly small. According to a 2006 National Research Council (NRC) report, 42 states have some degree of earthquake risk, 18 of which have areas of high or very high seismicity. Since 1900, there have been earthquakes in 39 states, with damage in all 50 states. A National Earthquake Hazards Reduction Program (NEHRP) was established in 1977 to lead government efforts to reduce property damage, injury and fatalities due to earthquakes. The Federal Emergency Management Agency (FEMA), the National Institute of Standards and Technology (NIST), the National Science Foundation (NSF), and the U.S. Geological Survey (USGS) are tasked to work together to implement and maintain the program.

Topics covered:

What is an earthquake?

Fracking

Wastewater Injections

Building construction

Is my property at risk for earthquake damage?

Do I need earthquake insurance?

What does earthquake insurance cover?

Earthquake insurance cost

Homeowners

Conclusion

What is an earthquake?

An earthquake is caused by a sudden shaking of the ground caused by a disturbance deep within the earth’s crust. Most earthquakes occur when masses of rock straining against one another along a fault line suddenly fracture and slip. Fault lines are where the fault cuts the earth’s surface. Fault lines are located everywhere, which means that seismic activity can happen any place and at any time. While earthquakes typically run along fault lines, there are various kinds of earthquakes or movement of the ground and therefore you no longer have to be located on or near a fault line to suffer damage and feel the ground shake. Some types of earth transmit the movements much farther away than others; the type of bedrock in the central United States means that an earthquake can shake an area approximately 20 times larger than earthquakes in California. Many fault lines are small and not surprisingly numerous slight earthquakes go undetected. It is easier to indicate the possibility of earthquakes along larger fault lines because of previous earthquakes along those faults. That being said however, there really is no definitive way to predict an earthquake. An area that has had no seismic activity in decades may be quiet forever, or it may just be storing up energy for the next big quake.

Fracking

Even though some places are more earthquake-prone, it is a possibility that an earthquake can occur in any of the 50 states. In western states, including of course California, everyone should be well aware of the risks and the need for insurance. In other regions however, frequent seismic activity may come as a surprise. For example, Virginia and Oklahoma have both had devastating–and utterly unexpected–earthquakes in the last few years. New faults are being discovered all the time, and until they shake the earth, there’s no way to know they exist. In 2011, a 5.7 magnitude earthquake hit in the state of Oklahoma. According to the Insurance Institute and later publications, researchers at the University of Oklahoma, Columbia University and the U.S. Geological Survey believe that this quake, as well as many others in the middle of the U.S., may be the result of human activity such as fracking, which is awakening fault lines that have been dormant for millions of years. Enough quakes due to fracking have occurred that the United States Geological Survey now tracks quakes caused from fracking as well as traditional earth movement.

Wastewater Injections

One of the major concerns with fracking is the wastewater and its disposal. Wastewater treatment is not a viable option because there is generally too much water for the treatment to be able to remove all of the chemicals. For disposal, the wastewater can be injected into the ground or put into a lined pond and allowed to evaporate. Even though the water is injected far below groundwater levels, there is still concern from individuals claiming that it contaminates the groundwater from which they drink.

Injecting the water into the ground can lubricate faults and cause earthquakes. While previously under dispute, the USGS has confirmed that the injection of wastewater from fracking can cause small quakes; however actual results show increasing frequency and higher magnitude earthquakes from the period 1975 to mid-2013. For the years 1975-2008, one to three magnitude 3.0 earthquakes or larger occurred in Oklahoma annually, but from 2009 to mid-2013 that number rose to 40 earthquakes per year, all of which were attributed to fracking. The largest earthquakes caused by fluid injection occurred in 2011—a magnitude of 5.3 in Colorado and a magnitude 5.6 in central Oklahoma.

Today, because of the increases in fracking and wastewater disposal in Oklahoma, the state now has more earthquakes of magnitude 3 or greater than California. In addition, Arkansas, Colorado, Kansas, Oklahoma, and Texas all have recorded earthquakes between magnitudes 4.5 and 5 due to fracking.

The earthquakes are not always near the point of injection; they can be as many as several miles away from the injection point and two miles or more deeper. The USGS is developing methods to assess earthquakes associated with fracking and wastewater disposal and has placed seismometers at sites of known or possible injection-induced earthquakes in Arkansas, Colorado, Kansas, Oklahoma, Ohio, and Texas. Temporary set-ups have been placed in Ohio, Illinois, Kansas, Oklahoma, and Texas to look at other regions.

There is now no doubt that human activity may be placing us at greater risk of earthquake damage than we realize. In fact, in places where the injection of fracking wastewater has stopped, earthquakes have dropped down to near zero.

Building Construction

The National Seismic Hazard Model from the USGS forecasts the strength and frequency of ground shaking in future earthquakes. Because of the increase in earthquakes due to human activity, the addition of such quakes to the hazard model is seriously being considered. In March, the USGS warned that seven million Americans were at risk of induced seismicity, raising concerns within the insurance and reinsurance industry.

In earthquake-prone areas, building construction codes require that seismic features be added to withstand earthquakes, particularly in the state of California, which is second only to Alaska as the U.S. state experiencing the most earthquakes. For example, many new buildings and homes are built with flexible wooden frames and bolted to the foundation. For newly constructed buildings, the California building code requires specific tests for masonry to ensure that structures can adequately resist seismic forces during earthquakes. Brick walls must meet specifications for facing, bonding and distance between headers. Masonry must be tested using an in-place shear test that displaces a single brick, then applies weight and checks for movement. Wall anchors are tested and must pass code requirements, and embedded wall bolts receive periodic inspections. The exact guidelines change from time to time as California adds additional knowledge to its building standards. Older buildings are typically subject to retrofitting, in particular those of unreinforced masonry construction with the highest risk of collapse.

However for areas not previously prone to earthquakes, such as states in the mid portion of the country where fracking has been occurring, construction standards do not address earthquake safety; as such, homes and buildings in these states are quite vulnerable to earthquake damage and many lives are at risk.

Loss prevention by way of building construction codes, building materials, and community preparation are very beneficial at lessening destruction and injuries caused by earthquakes. Even so, it does not totally mitigate all losses.

Is my property at risk for earthquake damage?

Your risk depends not only on your location, but even a specific location within a high-risk zone can also affect your risk of loss. For example, a building built on a foundation of sand or pilings, as opposed to concrete, would be more likely to suffer greater damage due to the instability of the ground. In addition, older buildings with weaker structural walls or foundations may suffer greater damage in an earthquake.

If you know you’re in a risk zone for earthquakes, you can take steps to mitigate the earthquake risk, and this may affect the cost of your insurance. For example, bracing potentially weak walls, affixing your building firmly to the foundation, or securing valuables and equipment against movement may prevent unnecessary damage.

Since an earthquake can occur at any place and any time, and cannot be definitively predicted, if one does occur, you could be looking at serious losses. While not all-inclusive, the following are some examples of earthquake damage and risks.

Building damage or destruction Building collapse Structural damage to buildings or other structures, creating dangerous circumstances and requiring repair or replacement Damage to business personal property Damage to property of others Explosions Fires Gas Leaks Landslides Avalanches Flash floods Tsunamis

If you have doubts that an earthquake could damage your property, or don’t think that an earthquake would affect your location, you can check the frequency of earthquakes using the USGS damaging earthquake shaking map. You may be surprised to find there is a fault line closer than you think. The Insurance Information Institute can inform you about the insurance risks in your specific area, whether it be Central, Eastern, or the Western United States. Additionally, the data from a Federal Emergency Management Agency (FEMA) study will provide additional insight to help assess your risk.

Do I need earthquake insurance?

Since earthquakes can neither be prevented nor predicted, avoidance, loss prevention, and insurance are the best ways to cope with this threat. As earthquakes can occur anywhere, at any time, avoidance is not a viable option. Damage can span far away from the epicenter of the quake. That means that even if your business isn’t situated near a fault line, a major earthquake can still do significant and costly damage. The standard commercial property policy will not cover damage caused by an earthquake.

Following are some basic questions to help determine if you need earthquake insurance:

  • Can your business replace your business property like inventory, computers etc., if damaged or destroyed?
  • Can your business pay for temporary relocation and other expenses if your location is uninhabitable?
  • As a business owner, can you afford the cost of rebuilding or repairing your building if it is damaged or destroyed?

With all of that being said, earthquake insurance is something that all business owners–no matter where they operate–should consider. However, organizations that are located in earthquake-prone areas should definitely invest in this type of insurance coverage.

Earthquake insurance is not mandatory. However, even one large earthquake can be devastating, and you probably can’t afford to rebuild your business and replace all your belongings out of pocket. That’s where earthquake insurance comes in. For business owners who operate in areas that are prone to seismic activity, earthquake insurance is a wise investment.

What does earthquake insurance cover?

Commercial earthquake insurance is a specialized policy or endorsement that covers the damage associated with ground movement caused by earthquakes. Your business earthquake policy will generally cover damage to your building and to your business property such as your machinery, equipment, and inventory. Depending on the policy, demolition costs and lost business income caused by an earthquake may also be covered. Coverage only begins when damage has exceeded the policy’s earthquake deductible. Earthquake insurance often requires high deductibles—ranging from 2 percent to 20 percent of the value of your building, depending on its location, age and condition. In states where the earthquake risk is low, that percentage will typically be at the lower end of the range. The deductible generally applies separately to each building or structure, to the contents of each building or structure, and to personal property in the open. However, the deductible does not typically apply to some additional coverages such as business income, extra expense, or civil authority.

While earthquake insurance will generally cover a wide range of damages that are associated with seismic activity, it will not cover everything. Some things that your earthquake coverage likely won’t include:

Fire:  Earthquake insurance usually does not cover anything that the businessowners or commercial property policy already covers. For example, if the property policy covers fire damage, even if an earthquake causes the fire, the earthquake insurance will not cover it.

Land:  Earthquake insurance does not cover damage to land, such as sinkholes. However, additional coverage may be available to restore or stabilize land. In addition, earthquake insurance does not cover fences, trees, shrubs, plants, or unattached signs.

Vehicles:  Earthquake insurance does not cover damage to vehicles. You should check your auto insurance carrier to see if earthquake coverage can be added.

Flood:  Earthquake insurance does not cover water damage that is excluded under the businessowners or commercial property policy, such as sewer or drain back-up, floods or tsunamis. A flood insurance policy will be needed to cover these damages.

Non-covered losses are not included in the deductible. That means that if your businessowners or commercial property policy excludes certain items, those items likewise are not covered for earthquake loss, and as such the cost of replacing those items does not contribute towards your earthquake deductible. For example, your business signs not attached to a building would not be covered for earthquake loss and the replacement cost of those signs would not be applied to the earthquake deductible.

Immediately following an earthquake, some carriers may restrict their earthquake coverage. This is because aftershocks may follow a larger quake, and many businesses will want to add the coverage once they realize than an earthquake can in fact happen to them. Rather than take on the additional risk associated with aftershocks, many carriers will simply refuse or postdate coverage until a reasonable time after the initial earthquake.

California Insurance Commissioner Ricardo Lara issued a bulletin following the recent earthquakes advising consumers that they could buy earthquake coverage, and moratoriums were not in force. However, for new policies coverage is not provided for the next 360 hours, or 15 days, for earthquakes that are seismically related to the initial event. This is apt to vary by state. The commissioner was preparing to advise insurers that refusing to write coverage for an existing residential policyholder does not comply with state law.

Earthquake insurance cost

Commercial earthquake insurance premiums vary by carrier and coverage options. In addition, there are several factors that will impact the cost of this type of policy, such as how close your business is to a fault line, the history of seismic activity in your area, the size of your business, and the type of equipment and machinery used in your operation. To find out how much a commercial earthquake insurance policy will cost, speak to a broker who works with a reputable insurance company that offers this type of coverage.

Rates for earthquake insurance will depend on your coverage limits, deductible and numerous additional factors, such as:

Your building ZIP code; Building age and construction; The number of stories in your building; Rebuilding costs; The property’s soil type (sand, pilings, clay, etc.); Proximity to fault lines and seismic activity.

Many carriers who make earthquake insurance available have restricted or limited capacity to provide the coverage, depending upon the area and the number of earthquake policies inforce and the limits insured. These carriers likely have additional reinsurance costs built into the premium as necessitated by the carrier’s inability to bear all of the costs if there is a major earthquake affecting a large number of policyholders.

Homeowners

Homeowners’ issues are very similar to those of commercial property insureds. Damage is likely for the building as well as personal property. Bookcases and pictures may fall, dishes may fall from cabinets, windows may break and significant damage may occur. Fire is a significant hazard as well.

The standard homeowner’s policy does not provide coverage for land, earth movement, earthquake, earth rising, shifting or sinking, subsidence or sinkhole or land shock waves. However, fire, explosion or theft that results from an earthquake are covered. It is very common for gas lines to rupture and cause fires when an earthquake occurs.

An endorsement is available for standard homeowners’ policies and some states may have specific earthquake carriers, such as the California Earthquake Authority. The endorsement provides coverage for earthquake and considers any shocks within a 72-hour period one event. Exterior masonry veneer is not covered, nor is damage by flood caused by the earthquake, nor is the cost of filling land. Deductibles for the endorsement range from 5% to 25% and the limits that apply to Section I coverage remain the same.

Conclusion

Since earthquakes cannot be prevented, predicted or avoided, loss prevention and insurance are the best ways to cope with this threat. It is therefore a wise decision for a business or homeowner to consider the purchase of earthquake insurance. While rare, earthquakes are often devastating, and recovery can be long and difficult.