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Evolving Skylines: Is Seismic Risk a Blind Spot in Your Commercial Real Estate Portfolio?
For real estate owners, investors and developers, risk management is top of mind. Yet, seismic property exposure is often overlooked or misunderstood. Standard commercial property insurance typically excludes earthquake damage, leaving a critical gap that can turn a single event into a portfolio-level loss.
55 Earthquakes Every Day
The USGS1 reports that roughly 20,000 earthquakes occur globally each year, working out to an average of 55 earthquakes a day. Unlike many other types of natural disasters, earthquakes cannot be predicted. They can strike any location, and they can happen at any time.
Some regions are much more prone to earthquakes than others. The “Ring of Fire,” or the Circum-Pacific seismic belt that follows the rim of the Pacific Ocean, is the world’s greatest earthquake belt. Damaging earthquakes can strike the U.S. outside of this region, such as the earthquakes that hit Missouri and South Carolina in the 1880s, but they are less common.2
Earthquake Impact and Insurance Exclusions
An earthquake’s impact can be far-reaching. One notable event occurred on April 18, 1906, when San Francisco was devastated by an earthquake followed by a fire.3 The disaster caused losses of $235 million, equivalent to $6.3 billion in today’s dollars.
The widespread, unpredictable and high-severity nature of earthquakes makes them unique to insure. If insurers included earthquake coverage without rating for it in standard property insurance policies, one large event could challenge their balance sheet. As a result, earthquake losses are typically underwritten on a separate policy or separately contemplated within rating metrics within a large property policy.
Understanding the Deductible
A common misconception is how a earthquake deductible is applied. Earthquake policies typically carry a large deductible that is usually represented as a percentage of the property’s value rather than a flat amount. Some commercial earthquake deductibles are as high as 10% of total insured property values, but lower deductibles are available in the marketplace and underwritten based on condition and characteristics of the property.
Earth Movement Insurance vs. Earthquake Insurance
There are two types of earthquake insurance to consider.
- Earth movement coverage includes seismic activity and is an expanded definition that can cover additional perils such as sinkholes, man-made earth movement, mudslides and landslides.
- Earthquake insurance only covers earthquakes (seismic activity).
Because earthquake insurance is narrower in coverage, it can result in reduced premium. However, it will not offer protection against other types of earth movements, so it could leave you with insurance gaps and uncovered losses.
Earthquake Insurance Requirements
Earthquake insurance is often considered optional coverage. However, some lenders may require earthquake insurance for certain types of real estate and in certain seismic prone areas.
Do You Need Earthquake Insurance?
Although earthquake insurance can seem expensive, damage caused by an earthquake can be costly. Whether or not you have lender requirements, it’s worth thinking about whether coverage should be part of your risk management strategy.
This may be a good time to shop for coverage, because the earthquake insurance market has been softening along with the rest of the commercial property insurance market.
Commercial real estate risks continue to evolve, and your insurance strategy should evolve with them. As part of Alera Group, Propel Insurance and Legacy Risk have access to multiple carriers with different deductible options, and we can help you find a policy that meets your commercial property needs. Contact us to learn more.
Sources:
1. https://www.usgs.gov/faqs/why-are-we-having-so-many-or-so-few-earthquakes-has-naturally-occurring-earthquake-activityÂ
2. https://www.usgs.gov/faqs/where-do-earthquakes-occur
3. https://www.iii.org/article/san-francisco-earthquake-1906-insurance-perspective
4. https://content.naic.org/article/consumer-insight-understanding-earthquake-deductibles
5. https://mfguide.fanniemae.com/node/4526
Melody Olson
Melody has spent over 20 years specializing in real estate, construction, and project risk insurance. Melody is known by clients and colleagues for having strong technical expertise, creative problem-solving skills, and relentless client advocacy. More about Melody...
Brynnan Hyland
With over a decade of industry experience, Brynnan brings a strong underwriting background with a focus on complex risks and program design. By analyzing client risk profiles and tailoring coverage solutions, Brynnan delivers clear guidance and a strategic approach to risk management.