07/24/2018

Top 10 Misconceptions About Placing California Earthquake Insurance Coverage

One of the biggest misconceptions regarding California Earthquake coverage is the widely held view that it is a straightforward and elective coverage. With the lowest frequency in the CAT space, this peril is the least tested and, as a result, often misunderstood. While frequency is minimal, one large event with subsequent aftershocks would have brokers and insureds taking a closer look at what is truly being offered.

The amount of capacity, alternative capital, and the number of carriers and MGAs continues to grow. This increased number of choices creates competition and flexibility in coverage. However, this competition also makes it easy to place coverage without fully understanding what is provided.

Below are the top 10 misconceptions about placing CA Earthquake coverage.

  1. Only the basic data is needed to generate accurate CA Earthquake modeling results. If you input basic data without asking about missing information regarding construction, year built, engineering, etc., your results will reflect this. Scrubbing your data and taking the time to obtain more detailed information, along with identifiable secondary characteristics, could produce a much better result. Simply using the most basic information often results in the model “defaulting” and advising an inaccurate, worst-case scenario. Additional information provides underwriters with a better comfort level and, often, more room to negotiate.

     

  2. A CA Earthquake policy fills the gap in an All Risk policy excluding Earthquake. Many times, the two policies will have a different definition of Earthquake. There may be gaps in coverage if the excluded definition in the All Risk is not the same as what the Earthquake carrier is offering.

     

  3. CA Earth Movement coverage is basically the same thing as CA Earthquake. CA Earthquake typically limits coverage to a tectonic event, while some Earth Movement definitions can be as broad as to include ANY Earth Movement, including a tsunami. When an insured requests Earth Movement coverage, a broker should clarify intent and make recommendations based on the nature of their exposure.

     

  4. CA Earthquake application of deductibles are always clearly defined and outlined. The application varies based on the carrier’s definition and what the deductible is tied to. There are various forms of application of deductible, including applying on a per unit, per building, per location or per TIV basis. It is important for client to understand how the deductible applies on their risk. It should be noted that, often, clients believe that the percentage deductible applies to the loss amount, when in fact it applies to the values at risk at time of loss.

     

  5. A copy of the Primary All Risk Form is not needed when placing Excess CA Earthquake. Many Excess CA Earthquake carriers utilize their own company form sitting above the All Risk policy for the peril they are covering, without concurrency or consistency. Without manuscripting to clearly outline how the CA Earthquake coverage would respond should the All Risk policy be affected in the event of a loss, gaps in coverage can exist.

     

  6. CA Earthquake Recommendation reports are the same as Seismic CA Earthquake Engineering reports. Many times, Loss Assessment reports are provided, advising steps to be taken to implement from a life safety perspective. These are different than an Engineering Report, which provides exact details of Loss Control implementation, with firm dates and measures taken to stabilize. Carriers can better review and credit risks when they have an Engineering report.

     

  7. All carriers use the same CA Earthquake model. Most carriers utilize RMS, while others use AIR, along with proprietary modeling. Knowing the model that each carrier utilizes will allow a broker to structure a competitive placement and provide different layering options.

     

  8. All CA Earthquake carriers quota sharing a placement offer the same coverage. Many carriers have different definitions of Earthquake, occurrence, deductible, and stepdown/dropdown provisions, which can create inconsistencies in the event of a loss. This is especially true of shared and layered placements. It is imperative that brokers achieve concurrency in wordings, as coverage gaps caused by different definitions will ultimately fall on the placing broker.

     

  9. Business Income/Extra Expense values will not have a significant impact in the event of a claim. A failure to understand these values could have the greatest impact in the event of a loss. It is important to know if there are locations that are contingent upon others and whether the reported values represent 6-month, 12- month, or 24-month values.

     

  10. Sample policy forms are not necessary when issuing a CA Earthquake quotation. Brokers may believe that they can explain the coverage over the phone or in email, if there are questions. While there may be a general understanding of the coverage provided, without referring to the policy itself, details can get lost in translation. It important to deliver a fully executed policy with respective forms outlined – not merely a three-to-four-page quote –for client review. At a minimum, the underwriter and broker must agree on the Earthquake or Earth Movement definition in advance.

 



About the Author

This article was written by Greg DeFuria, property broker with AmWINS Brokerage in Woodland Hills, CA.

Contact Us

To learn more about how AmWINS can help you place coverage for your clients, reach out to your local AmWINS broker.  If you do not have a contact at AmWINS, please click here.

Legal Disclaimer. Views expressed here do not constitute legal advice. The information contained herein is for general guidance of matter only and not for the purpose of providing legal advice. Discussion of insurance policy language is descriptive only. Every policy has different policy language. Coverage afforded under any insurance policy issued is subject to individual policy terms and conditions. Please refer to your policy for the actual language.

(c) 2017 AmWINS Group, Inc.

Most Popular Insights

Insurance Commissioner Orders Carriers to Pay for Mudslide Damages

03/22/18

The Thomas Fire, the largest fire in California's history, subsequently led to a mudslide on January 9, 2018, which caused a massive amount of damage in Santa Barbara and Ventura counties. The California Insurance Commissioner has issued a formal notice reminding carriers to pay for damage, citing the "efficient proximate cause doctrine." This article takes a closer look at the doctrine and how it has been challenged in court over the years.

Ordinance or Law Insurance Coverage

01/11/18

Ordinance or Law insurance coverage provides limited protection for costs associated with repairing, rebuilding, or constructing a structure when physical damage to the structure by a covered cause of loss triggers an ordinance or law. Compliance with ordinances and laws after a loss can add 50% or more to the cost of a claim. This article will help you educate your insureds on exclusions and limitations and help them take a proactive approach to their insurance program.

Employment Practices Liability in the Age of #MeToo

01/11/18

In 2017, the issue of sexual harassment – especially in the workplace – gained greater awareness as accusations of harassment by high-profile individuals were constantly in the news. In many cases, sexual harassment lawsuits seriously impacted businesses and their respective insurers. Employment Practices Liability Insurance not only provides protection against employee lawsuits, but can also help your clients mitigate their sexual harassment risks.

Why Your Employees' Driving Record Can Be a Reflection on Your Company

10/31/17

Due to the Doctrine of Negligent Entrustment, the consequences of allowing an employee with a poor driving record to operate any motor vehicle for work purposes extend beyond a possible traffic violation or accident. These seven tips will help you to proactively manage your drivers and maintain your CDL files as part of your fleet safety program.

8 Areas in which the Electronic Logging Mandate will Impact Trucking

The Federal Motor Carrier Safety Administration mandate which requires nearly all U.S. truck operators to use electronic logging devices (ELDs) to track duty status has been upheld in court and will take effect December 16, 2017. The mandate will impact not just the trucking industry, but the trucking insurance sector as well.

Additional Insured Endorsements – Which Apply?

Additional insured endorsements are not a universal remedy and coverage is contingent on making sure a written agreement or contract is in place, with the named insured specifically adding the people or organizations included.

Sign Up For Our Monthly Newsletter

Sign Up