Month of earthquake readiness is an opportunity for California to reduce

In the California high-risk insurance market, strategic solutions are needed to provide affordable seismic coverage to business and corporate document holders. (Photo: Shutterstock)

To say that California has stretched backwards, the number of recent years in the world of catastrophic losses will be an understatement. But as we continue into 2020 and head to California’s earthquake preparedness month, organizations can take steps to reduce and mitigate earthquake coverage problems.

Estimates for 2010 were the most expensive contract ever for economic losses from natural disasters of about $ 3 trillion, according to one estimate. In particular, earthquakes pose a constant threat to California, but most commercial insurance policies are not covered, and according to data from the Department of Insurance, less than 10% of state commercial buildings are covered by earthquake insurance.

This indicates a general lack of preparedness and significant exposure to risks. Insurance professionals must tackle this problem with seismic strategies at a cost that companies can afford.

California’s April earthquake preparedness month should prompt companies to take a proactive approach to disaster preparedness and study current insurance coverage to identify gaps. Insurance professionals can be key strategic partners by encouraging organizations to obtain coverage and taking steps in a comprehensive approach to disaster preparedness, enhancing risk management and business continuity.

California’s misfortunes

It can be said that California has become the most difficult state to provide insurance due to frequent disasters ranging from seasonal forest fires to mudslides. The last major earthquake to hit a populated area in California was the 2014 South Napa earthquake, but the devastating fires of 2017 and 2018 largely exceeded the memory of the first.

In July 2019, the Ridgecrest earthquake in southern California had foci located in the densely populated Mojave Desert, but it caused blackouts and sparked thousands of tremors in the surrounding area, more than 100 miles away. This incident highlighted the threat of multi-fault faults that affect a large area, including densely populated areas.

Away from concerns about natural disasters themselves, the insurance market faces a host of hurdles, including the burden of hurricane payments from Harvey, Irma and Maria in 2017; the bankruptcy of PG&E; the constantly changing regulatory landscape; and a shortage of skilled construction workers resulting in increased costs .

These issues have made it difficult for insurance companies to provide coverage at a reasonable rate. However, earthquakes remain a major risk in California, so strategic solutions are needed to provide affordable commercial insurance policies.

Look beyond price when considering earthquake coverage

Significant increases in installments can discourage firms from obtaining earthquake coverage, rendering them unprepared and prone to disaster. However, “excessive” seismic coverage can bankrupt a company with significant economic damage from earthquakes.

Companies must carefully examine both earthquake exposure and coverage options to make a careful decision on whether to purchase earthquake coverage. The decision should not be based solely on whether coverage appears to be too expensive.

An important consideration for policyholders is that earthquake insurance often has a deductible rate based on the property’s risk assessment and business income, as opposed to a fixed deduction. Consequently, obtaining coverage is not a panacea if paying the percentage of deduction will overburden the policy holder.

Other aspects that document holders should review in detail include policy exceptions and reimbursement thresholds for some items, coverage of covered use loss and unobserved losses that are not calculated in the discount. Some earthquake coverage may be available in an “all risk” commercial policy or it may be provided through a separate separate policy or “difference in circumstances”. Insurance professionals can play a major role in increasing absorption by helping companies understand coverage options clearly.

Prepare for the massive earthquake

Willingness is a virtue, and it will provide comprehensive benefits to businesses in the short and long term. Insurance companies that are aware of the positive consequences of disaster preparedness can better price risk and build stronger relationships with trust-based organizations. Insurance needs will vary depending on the type of organization and industry, but best practices for companies to manage risk and increase readiness include:

Identifying business weaknesses: Check processes and processes to identify areas of vulnerability before a disaster strikes, then develop a plan to minimize damage (should be a top priority to prevent gas leaks, dangerous spills and electrical fires) and enable rapid response. Earthquake structural retrofit can be justified if the customer has an older building (and therefore more vulnerable to earthquake damage) which is critical to its operations. An organization that promotes agility and flexibility in its operations is likely to have continuity in the aftermath of a disaster.
Confirmation of third party readiness: Every supply chain link is vital to operations and deliverability. It is imperative to gain knowledge about the vulnerability and willingness of suppliers, vendors and customers to promote best practices, plan contingencies and prepare recovery efforts. Diversity of suppliers and production sites can help protect the overall supply chain.
Develop a response plan: Proactive investment in preparation can reduce costs after an accident as well. Companies must select a response team to lead recovery efforts, manage communications, reduce additional damage and injuries, maintain contemporary documents after crises, and set milestones to recover the claim. This helps to ensure that staff and stakeholders have the training, equipment, supplies and information they need to support the response.
Insurance policy check: Natural disasters are unpredictable in terms of timing and extent of damage.

Firms should work with an insurance professional to develop a comprehensive understanding of their coverage and should measure the policy periodically according to their needs and estimates of maximum potential loss and priorities to calculate expected recovery expenses.

Although the physical impact of these disasters is felt at the regional level, related disturbances and the impact on the insurance market can be felt widely. Companies can use the above steps to engineer flexibility by identifying and removing weaknesses, as well as enhancing risk management and training programs.

It can be difficult for companies to spend resources on willingness – as benefits often don’t appear until later – but developing flexibility is crucial to ensuring business continuity. Insurance professionals can enhance this value proposition for companies with effective strategies that guarantee against risks and foster recovery.

Drew Olson, CPA, CFF, is a BDO partner in forensic investigations and litigation services with over 15 years of experience helping clients with accounting and forensic services. It can be accessed at [email protected].

Chris Scheffler, CBCP, SCRM, is Vice President, Property Risk Engineer and Business Continuity Specialist at Woodruff-Sawyer, an insurance brokerage and risk consulting firm.

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