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Earthquakes Are Spreading – Is Your Insurance Program Ready?

North Texas never felt an earthquake until 2008. Since then, well over one hundred have been recorded—including a whopping five earthquakes confirmed in a single day in April 2015. Oklahoma had 585 earthquakes of magnitude 3 or greater in 2014, which rose to 907 in 2015. Areas spread across the central and eastern United States, from Colorado to Ohio, are experiencing increased seismic activity and the increased risk of earthquake-related property damage that comes along with it.

Many policyholders in these areas have not historically purchased insurance coverage for earthquakes. Most commercial property insurance policies exclude coverage for “earth movement.” Depending on the policy’s terms, this may include earthquake, landslide, mudflow, mine subsidence, earth sinking, and/or earth rising or shifting. Many policies also include “anti-concurrent causation” wording that attempts to exclude coverage for damage resulting from an excluded peril (such as earth movement) even if the loss is also caused by a covered peril (such as, for example, negligence). Further, these policies typically only insure business interruption loss if there is covered property damage. Policyholders with property in areas experiencing an increasing number of earthquakes could therefore find their insurance claims denied or reduced on the basis of earth movement exclusions if their insurers believe seismic activity contributed to their property damage.

Property owners can purchase either an endorsement to their commercial property policy that adds back coverage for “earth movement” or a standalone earthquake insurance policy. However, it is important to understand what coverage the earthquake insurance actually provides. For example, deductibles for earthquake coverage usually range somewhere between 2 to 20% of the covered property’s total insured value, instead of a set dollar amount. Earthquake coverage may also be subject to sublimits that provides a lower amount of coverage for earthquake damage than the policy’s total limit.

There are also potential coverage issues specific to areas with recent spikes in earthquakes. In interpreting insurance policies, some courts have distinguished between man-made and naturally occurring earth movement, finding that only naturally occurring “earth movement” qualifies as such under policy coverage grants or exclusions. Disputes about whether fracking and injection wells are causing increased seismic activity could therefore lead to disputes about whether resulting damage is covered, excluded or subject to different terms such as earthquake sublimits. In March 2015, for example, the Oklahoma Insurance Commissioner issued a bulletin stating that fewer than 10% of Oklahoma earthquake claims filed in 2014 had been paid and expressing concern that insurers are denying claims under exclusions for man-made damage “based on the unsupported belief that these earthquakes were the result of fracking or injection well activity.” Insurance coverage for loss from earthquakes in these areas therefore may depend on a number of variables, including (i) developments in the study of these earthquakes, (ii) theories and outcomes of lawsuits seeking liability or coverage for allegedly fracking-related earthquakes, and (iii) differences and developments in policy language relating to earthquake loss.

Seismic activity is an increasing reality across the central and eastern United States. It is important to understand the risks relating to earthquake damage—and how to protect against those risks—before it occurs.