Why Buy Earthquake Insurance?
By Cliff Hockley, President, Bluestone & Hockley Real Estate Services
Many of our clients have asked us over the years if they should purchase earthquake insurance. This is a difficult question to answer specifically because every property is constructed differently (i.e. wood, masonry, concrete, metal) and is located on different soil(i.e. clay, rock, sand). The height of the building also makes a difference. Imagine the impact on a one story building versus a thirty story unreinforced masonry building. The age of the building, and the code requirements in every state and city, need to be taken into consideration as well.
Most importantly, building owners want to know what risks their buildings face located in the Cascadia subduction zone, a seismic area that encompasses the coastal areas of Northern California to Vancouver Island and inland to I-5.
The Impending Risk
In the cover story in the July 2015 edition of the New Yorker Magazine titled,“TheReally Big One: An earthquake will destroy a sizeable portion of the coastal Northwest.”Author Kathryn Schulz pointed out, “we now know that the odds of the big Cascadia earthquake happening in the next fifty years are roughly one in three. The odds of the very big one are roughly one in ten.”
Chris Goldfinger, professor and paleoseismologistat Oregon State University, is an expert in seismic and tectonic studies and one of the main sources of the New Yorker article. In 2011, he also authored a comprehensive study on the Cascadia subduction zone for the US Geological Survey based on 13 years of research that exposed a pattern of earthquakes reflected in the region’s earthquake history.
“Over the past 10,000 years, there have been 19 earthquakes that extended along most of the margin, stretching from southern Vancouver Island to the Oregon-California border,” Goldfinger noted in a 2012 OSU news release on the paper. “These would typically be of a magnitude from about 8.7 to 9.2 – really huge earthquakes. We’ve also determined that there have been 22 additional earthquakes that involved just the southern end of the fault,” he added. “We are assuming that these are slightly smaller – more like 8.0 – but not necessarily. They were still very large earthquakes that if they happened today could have a devastating impact.”
Jay Patton, a co-author on the study, added, “By the year 2060, if we have not had an earthquake, we will have exceeded 85 percent of all the known intervals of earthquake recurrence in 10,000 years. The interval between earthquakes ranges from a few decades to thousands of years, but we already have exceeded about three-fourths of them.”The last major earthquake along the Cascadia subduction zone was estimated to have occurred in approximately 1700.
The Predicted Impact
What that mean to owners of Pacific Northwest properties is that there is a risk and we need to prepare for it. A 2011 Cascadia earthquake study by the Federal Emergency Management Agency (FEMA) estimated that only 20 percent of the buildings located in the Portland Metro region would escape damage; the other 80 percent would suffer damage from slight to complete loss.
Table 1: Analytical Baseline Study for the Cascadia Earthquake and Tsunami (Source: FEMA, November 18, 2011)
Statewide, the report predicted that about 27 percent of commercial buildings would survive without damage, and 22 percent would suffer slight damage. The remaining buildings which would suffer moderate damage (31 percent) or extensive damage (16 percent)or will be completely destroyed(4 percent)will not be unusable for commercial purposes. More importantly, the Oregon and Washington coastline will most likely be swamped with a tsunami.
It predicted that the most dangerous impact at the 9.0 scale will be felt all along the Oregon coast and be particularly devastating to the coastal communities of Crescent City, California; Cannon Beach and Warrenton in Oregon; as well as the Moclips/Westport area in Washington. It will include a tsunami and the following impacts along the I-5 corridor.
This major FEMA study also included significant details regarding the infrastructure impact of such a large earthquake:
- Electric power: Extensive electric power outages would be experienced throughout the region. Outages could last several weeks along coastal areas but most customers in other areas are expected to have power restored within 1 to 8 days.
- Natural Gas: Damage to both the transmission and distribution pipeline networks in the affected region could cause the majority of customers in western Washington and western Oregon to lose natural gas service. Many homes may lose all sources of heating due to the combined effects of natural gas and electric power outages.
- Telecommunications: Major undersea transpacific cables are likely to be severed; disrupting communication service to East Asia as well as between Alaska and the contiguous United States, with a two- to three-month expected restoration time.
- Transportation Fuels: A significant number of pump stations along the Olympic and Oregon Line refined-product pipeline system, as well as a substantial number of refined product terminals in the region, are expected to sustain considerable damage; the inability to store and distribute fuels locally is likely to have a major impact on regional fuel supplies.
- Road Transportation: Significant damage to roads can be expected, particularly those along the coast and connecting the coast to the I-5 corridor. U.S. 101 is expected to suffer substantial damage due to both ground shaking and tsunami, resulting in a limited capacity to carry traffic for several months. Nearby coastal areas may be isolated for a short period.
- Water Transportation: Tsunami damage at the mouth of the Columbia River is likely to impact navigation and the ability to export agricultural commodities.
- Rail Transportation: Long-term rail traffic disruptions along the I -5 corridor and a complete loss of key rail bridges in the Olympia and Seattle area and downtown Portland are expected.
- Banking and Finance: Loss of major transpacific undersea cable capacity would affect transoceanic commerce, settlement, and transpacific financial market exchanges.
- Emergency Services: Widespread damage to police stations, fire stations, and hospitals along the coast is expected.
- Health Care: The potential of 15,000 to 30,000 casualties and the expected loss due to damage of 15-27 hospitals comprising 524-1708 regular beds and 60-228 critical bed facilities concentrated near the coast would be sufficient to saturate the excess capacity of other hospitals within a 250- mile range of the worst damage.
- Water and Wastewater: Disruptions to potable water supply are expected with restoration times of three weeks to seven months with the greatest damage and restoration times occurring near the coastline.
It is clear that the impact for a 9.0 earthquake will affect many businesses. Many small companies, because they lack the financial resources to survive, will be put out of business. This will have a direct impact on residential and commercial investments since businesses leasing commercial space might fail due to a lack of power, fuel, and communications. If some commercial tenants fail due to the earthquake, then many people will be left without the income to pay residential rent with.
I believe all properties should be covered by earthquake insurance. In that vein, we have included some tips to consider when shopping for earthquake insurance.
Understanding Earthquake Insurance
There are typically three (3) main parts of the basic earthquake coverage, your property coverage which covers your property up to a certain amount, called the limit; personal property coverage; and loss of rents coverage.
Property coverage needs to be researched, as do deductibles. In Oregon, unlike California, there is no regulated coverage and only a limited pool of providers. Choose a company that is strong,rated by A.M. Best or check with the Oregon insurance commissioner. Note that earthquake insurance may not cover landscaping, pools, fences, masonry, and out buildings like storage or garages. If you rent or own a condo, you do not need this coverage as long as you make sure your association has the coverage.
Loss of rents coverage should be on an ”actual loss guaranteed basis” and extend for at least 24 months, preferably 36 months(if you can find it). The longer the better since after a major earthquake you may have trouble finding tenants.
Other coverages to consider include building code upgrade coverage or coverage for limited debris removal, land restoration, and emergency repairs.
It is also important to know what your earthquake insurance policy does not cover. All insurance policies have exclusions. Have your insurance agent help you understand your policy. In general, earthquake insurance usually does not cover anything that your normal building insurance policy already covers. You definitely need to check with your insurance agent to confirm where fire and liability insurance leave off and where earthquake insurance kicks in. Common exclusions include:
- Fire: Even if an earthquake causes the fire, your building insurance policy covers fire damage.
- Land: Usually, earthquake insurance does not cover damage to your land, such as sinkholes from erosion or other hidden openings under your land. You may be able to buy limited additional coverage to restore or stabilize land.
- Vehicles: Earthquake insurance does not cover damage to your vehicles or your tenants’ vehicles. If you have a fleet of vehicles that might be damaged you may want to check into additional insurance.
- Flood: Even if you live near a lake that floods your home after an earthquake, water damage from floods, including those caused by a tsunami, are covered by flood insurance, not earthquake insurance.
When purchasing earthquake insurance, you may need to buy on a secondary market. Ask your insurance agent to scour the market and make sure that you are getting the best deal you possibly can. Don’t be surprised if the deductibles run from 15 – 25%. Consider how much cash you will have on hand to jump start a repair process. After a 9.0 earthquake it may take 6 – 8 months before the city will clear your building for occupancy.
Earthquake insurance premiums vary depending on many factors, including the age of your building, the rent collected, the location, the kind of soil, the cost to rebuild, and the deductible. Don’t be shocked if it is expensive.
What else can you do to protect your property and manage your risk from a major earthquake?
- Bolt the property to the foundation.
- Brace any chimneys.
- Strap water heaters to the wall.
- Put in automatic gas shut-off valves.
- Advise tenants to screw bookshelves and book cases into the wall.
- Research the location of the property on a local hazard map to assess your risk.
- Follow government issued earthquake proofing recommendations.
- Reserve funds for earthquake proofing capital projects.
- Tie the roof to the studs during roof replacements.
- Tie the roof structure to the wall structure.
The main recommendation in all documents regarding the impending Cascadia earthquake stress preparation and planning. We may not have the power to prevent the earthquake, but we do have the knowledge and technology to reduce the damages it may inflict. Even if you own one of the 20 percent of properties not affected, you still will be faced with the infrastructure problems such as a lack of power and telecommunications for days or weeks resulting in tenants unable to pay the rent. All buildings will be affected and all building owners need to prepare. The first step to mitigating your risk is to buy earthquake insurance.
The Oregon Resilience Plan https://multco.us/em/oregon-resilience-plan
The City of Portland Hazard Map: https://www.portlandoregon.gov/pbem/58572#maps
Story: Historic Earthquakes, Teara: The Encyclopedia of New Zealand https://www.teara.govt.nz/en/historic-earthquakes/page-13
The Really Big One: An earthquake will destroy a sizeable portion of the coastal Northwest, The New Yorker https://www.newyorker.com/magazine/2015/07/20/the-really-big-one
Turbidite Event History—Methods and Implications for Holocene Paleoseismicity of the Cascadia Subduction Zone, U.S. Geological Survey https://pubs.usgs.gov/pp/pp1661f/ 13-year Cascadia study complete – and earthquake risk looms large, OSU News & Research Communications https://oregonstate.edu/ua/ncs/archives/2012/jul/13-year-cascadia-studycomplete-%E2%80%93-and-earthquake-risk-looms-large
Analytical Baseline Study for the Cascadia Earthquake and Tsunami, Department of Homeland Security https://www.bluestonehockley.com/wp-content/uploads/2016/01/FEMA-earthquakestudy.pdf