Several natural events which occur without any preventable possibility on man’s part are so large in their magnitude, insurance companies have by contract specifically excluded them from coverage. One need only look at this last year with its earthquakes, floods, tsunamis, wildfires, and volcanic eruption to see how difficult it is for insurance companies to actuarially determine how to build into their premium calculations which would meet the financial needs brought about because of them.
Wildfires
Wildfires seem to have accelerated dramatically causing huge economic loss across the South, West and Northwest especially. The societal shift of building homes in forested areas, which were never considered plausible as home sites when insurance companies began offering fire coverage, is causing a rethinking of what to include in the definition of fire.
So far this challenge is being met by the use of fire protection categories to meet the increased exposure. No significant limitations on exposure to wildfires are found within most insurance companies contracts. It will be interesting to see how the industry will respond in the future to this ever increasing risk exposure.
Floods
Flood coverage is available through FEMA (Federal Emergency Management Agency) and a couple of other companies specifically geared to charge premiums commensurate with the risk. These policies are not cheap and have very strict definition as to what constitutes a flood. The one thing which is very difficult to understand is why these companies continue to cover risks in areas which are prone to loss. Perhaps they are maintaining profitability with the premiums being collected from areas which never have losses. It is amazing how many mortgage companies require flood insurance even in areas which have never had a flooding problem. I had one case in point where an insured lived next to a river on a knoll 40 feet in elevation above the high water mark. He had an engineer verify the water would have to raise at least 50 feet just to get to the foundation, but he was still was required to purchase the insurance. If he were to cancel or nonrenew the flood insurance, he would be in breach of the contract and suffer the consequences of not maintaining proper insurance on the home. The mortgage holder would then be at liberty to purchase insurance and cause the insured to pay for it. If he didn’t, the mortgage holder could foreclose on the loan or place a lien on the property so when the house sold they would be reimbursed for the premium paid. Needless to say, my client found a different lender who did use some common sense and waived the flood insurance requirement.
Volcanic Eruptions
Recent volcanic eruptions in Mexico and Bali, along with the continuing volcanic lava flows in Hawaii, remind us nature is very much alive and thriving. It is an amazing display of nature to see the hot lava spewing from a fissure in the earth and to watch it flow along the ground destroying everything in its path. How eerie to see how the path of the lava moves through a village destroying some houses while leaving others completely unscathed, one side of a road now unserviceable while the other side is just fine. The pictures in the news of the volcanoes erupting is even more awesome as one observes the plume of smoke and ashes reaching so high in the sky even airplanes must take evasive action to avoid catastrophic damage to engines due to the intake of ashes.
Many insurance companies provide volcano insurance coverage on a limited basis. Volcanic eruption brings with it potential land shock waves, landslides, mud flows, tidal waves, flooding, earth sinking or rising or shifting, theft, breakage of glass, and fire. All of these events are excluded from coverage except direct loss by fire, theft, or breakage of glass. Again, read your policy and if you have questions, speak to your insurance carrier. They may be able to get you another policy which includes flood and earthquake coverages.
Earthquakes
Another major natural event is the earthquake. This one comes with its own unique characteristics–not the least is its unpredictability, area affected and magnitude of loss. Having been in two really small earthquakes, one in New Zealand and one in North Idaho, with the fear I felt I have great empathy for those who have lived through quakes which cause structural damage and loss of life.
According to an article by the British Geological Society in April 2010, large magnitude quakes have increased from 9 in the 50’s to 13 in the 60’s to 51 in the 70’s to 86 in the 80’s to more than 100 in the 90’s. FEMA reports earthquakes measuring 4.0 to 9.9 were recorded to be 14,421 in the year of 2016. Out of those 14,421 only 1,507 would have been severe enough to cause structural damage.This means they would have been a magnitude of 5.9 and above. Of those 1,507, the United States had only two.
The debate as to what is causing the increase in activity is informative. It runs the spectrum of fulfillment of biblical prophesy to us just being aware of these quakes due to worldwide communication and increase in scientific methods used to detect them. The British Geological Society feels earthquake activity is controlled by the motion of the earth’s tectonic plates driven by heat generation from the decay of radioactive elements deep inside the planet. In order for there to be an increase in activity there must be an increase in the earth’s internal energy supply, and the concept of thermodynamics apparently makes it difficult for that internal energy source to be replaced, but alas I do digress. How does the insurance apply if at all?
In most policies you will find under exclusions a section regarding “earth movement.” It will read somewhat like the following: Earth movement, including but not limited to earthquake, landslide, mine subsidence, mudflow, earth sinking, rising, or shifting. Direct loss by fire, explosion, theft, or breakage of glass, resulting from earth movement is covered if these perils apply to your covered property.
In a nutshell, if there is an earthquake you better hope there is a subsequent fire; otherwise, you are on your own to rebuild a house that may be completely off its foundation. In my 42 years of being in insurance sales, this peril was the least insured against. As more and more awareness is given to the catastrophic nature of earthquakes and the increase in losses incurred,this may become a more popular coverage to obtain. Right now though, it appears most of the buying public away from noted earthquake zones are willing to play Russian roulette.
In conclusion, seeing these limitations in standard homeowner policies, one can see insurance is not a panacea for all things we face in our ownership of our homes.
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