Commercial earthquake insurance

Commercial earthquake insurance is a type of specialty insurance that covers damage caused by earthquakes. It can be purchased as an endorsement, sometimes called a rider, to a standard property insurance policy, or as a standalone policy through specialty carriers, such as excess and surplus (E&S) lines carriers.

Because surplus lines carriers, also known as non-admitted insurers, are licensed only in their home state, they have greater flexibility in the policies they can sell. This includes coverage for catastrophic risks that standard (admitted) insurers won’t offer, such as:

• Difference in conditions (DIC) coverage: DIC insurance is a specialized, standalone policy that’s designed to fill in the gaps in standard property insurance, typically providing earthquake and flood coverage.
• Commercial property packages (CPPs): Similar to a BOP, a CPP bundles general liability with commercial property insurance to protect businesses with tailored coverage and coverage limits based on their specific needs—including adding earthquake insurance as an endorsement.

It’s important to note that non-admitted insurers aren’t backed by the state, meaning the state’s guaranty fund won’t cover claims if the carrier becomes financially insolvent.

Another option worth considering is parametric insurance. When a seismic event reaches a defined magnitude threshold, parametric coverage pays the policyholder a predetermined amount right after the incident. This quick cash can help small business owners stay afloat while they wait for their traditional insurance claims to be processed.

Commercial earthquake insurance provides high-limit business property coverage, which can include:

• Structural damage to commercial buildings, like broken windows, cracked foundations, and earthquake sprinkler leakage
• Lost or damaged business personal property, including equipment and inventory
• Business interruptions, such as income loss if the property is unusable
• Debris removal and cleanup costs

While commercial earthquake insurance provides crucial coverage for business property, there are some exclusions. Most earthquake policies won’t cover:

• Fires. Even if an earthquake triggers a fire, this damage is commonly covered by standard property insurance.
• Vehicles. Business cars damaged by an earthquake are usually covered by commercial auto insurance.
• Water damage. Like your property insurance policy, earthquake insurance doesn't cover flood damage.
• Man-made quakes. These are usually caused by fracking and are excluded from coverage.

Although earthquake coverage generally costs more than standard policies, it provides vital protection from the catastrophic damage earthquakes can cause.

For example, failing to secure coverage can result in:

• Massive out-of-pocket costs. Uninsured businesses must pay 100% of structural repair and asset reimbursement costs, which can easily amount to hundreds of thousands of dollars.
• No business interruption assistance. Should a building’s damage force a business to temporarily pause operations, there’s no insurance to cover payroll, rent, or loss of business income during the shutdown.
• Personal financial exposure for owners. If a business can’t recover, owners with personally guaranteed loans may have their own home, savings, and credit on the line.
• Permanent closure. According to the Federal Emergency Management Agency (FEMA), about 40% of small businesses never reopen after a natural disaster.

The cost of commercial earthquake insurance is affected by many key factors, such as:

• Location: Being close to known active fault lines and areas with softer soil conditions are substantial risk indicators, such as a waterfront restaurant built on soft bay mud.
• Building profile: A building’s age, number of stories, and type of construction materials impact risk. For example, a law firm's older office building or a food manufacturer’s unreinforced concrete tilt-up warehouse would cost more to insure.
• Replacement cost value: The cost to rebuild a structure and replace specialized equipment and inventory affects premiums, which may be higher for a hospital with expensive imaging equipment.
• Deductibles and policy limits: Earthquake insurance policies generally use high, percentage-based deductibles rather than flat fees. For instance, if a dental practice in a $2 million building has a 15% deductible, they have to pay $300,000 out of pocket before coverage kicks in.
• Claims history: Businesses with a history of property damage claims may see an increase in insurance pricing. For example, a commercial property in an earthquake-stricken area may carry a documented loss history that would affect a fitness center that opens after the incident.

Commercial earthquake insurance should be one part of your complete earthquake risk management plan. Here are some additional steps you can take to protect your business:

• Create a written emergency plan covering evacuation routes, emergency procedures, and designated staff handling emergency tasks.
• Assign workplace safety zones, such as under a sturdy table or desk, or against an interior wall away from windows and tall furniture.
• Train employees on earthquake safety procedures, namely drop, cover, and hold on, and conduct regular drills so everyone knows what to do in an emergency.
• Assemble emergency kits with water, food, first-aid supplies, flashlights, and fire extinguishers.
• Get emergency training, including first-aid classes and learning how to use a fire extinguisher.
• Fasten bookcases, file cabinets, and heavy equipment to walls or floors.
• Back up important data, software, and documents to a secure cloud or off-site location.