Our firm has had many questions on insurance related issues since Friday's Earthquake and Tsunami in Japan. The following outline is quick primer on insurance coverage related to natural catastrophes.
INSURING PROPERTY FOR CATASTROPHES
● Cost of Natural Disasters:
∙ Hurricane Katrina in 2005 cost insurers and reinsurers $62.2 billion.
∙ Hurricane Ike in 2008 cost the insurance industry $18.5 billion.
∙ 1995 Kobe Earthquake cost insurers about $3 billion.
∙ Current estimates for 3/11/11 Japan earthquake, excluding damage caused by tsunami, are 2.8 trillion yen ($34 billion)
∙ Largest component of insured loss will be covered by the property insurance market.
∙ $2 to $4 billion of total insured loss is expected to be covered by the Japan Earthquake Reinsurance Co. Ltd. pool.
∙ This pool covers residential buildings and can absorb losses as high as $67 billion per event.
∙ Businessinsurance.com reports Japanese insurance companies have appropriate levels of reserves and capital; the earthquake should not have significant impact on their business or claim payments.
∙ Japanese casualty insurers will pay claims totaling 10 billion yen ($122 million) to 20 billion yen ($245 million) to cover losses due to earthquake damage to cars and for fire.
∙ Japan helps underwrite residential and nuclear risks, but usually based on the reinsurers’ Japanese earthquake modeling scenarios.
∙ For this earthquake, reinsurers may be exposed to losses in rural areas that not covered by state-backed reinsurance.
● First Party Property Insurance
Protects property interests of insured.
∙ Types of property policies:
1) Named Peril Coverage – provides coverage for loss cause by name perils, i.e., wind, fire.
2) All Risk Coverage – provides coverage for all causes of loss except those excluded. Typically, earthquake, flood, etc. are excluded.
∙ Typical Insuring Agreement:
“We (the insurer) insure against risks of direct physical loss to property described in policy.”
∙ What constitutes “Physical loss” is not always clear.
∙ Total loss not required – just damage to property (i.e., gas fumes making home uninhabitable meant insured suffered physical loss).
∙ Land itself is general not covered under property policy.
∙ “Direct” loss – proximity between loss and damage.
Fortuity
· Insured cannot insure for loss that is a certainty.
∙ Insurance is for unexpected losses, not losses that are inevitable.
Insurable Interest
Any lawful or substantial economic interest in the safety or preservation of property from loss, destruction or financial damage.
Test – Would the insured suffer a financial loss if the property sustained damage?
● Property insurance can encompass many types of property and property-related losses:
1) Homes, contents
2) Vehicles, boats
3) Commercial buildings, contents, equipment, boilers and machinery
4) Business interruption
∙ Business Interruption covers the insured against losses arising from the inability to continue normal business operations due to a covered loss.
∙ Insured is paid for money losses due to the inability to continue to use the business premises.
- Flood insurance policies
∙ In US, the National Flood Insurance Program was created by Congress in 1968 because private insurance companies do not cover flood.
∙ In 2008, five million flood insurance policies issued.
∙ Some mortgage companies require flood insurance if within flood zone.
∙ Premiums for flood insurance range between $300 to $2,000 annually depending on which flood zone your home is located.
∙ Maximum coverage for residential property $250,000; maximum coverage for contents $100,000.
∙ Flood policy not effective for 30 days after purchase.
∙ Two helpful websites – www.floodsmart.gov; www.fema.gov.
- Hurricane Policies
∙ In Hawaii, residents can purchase separate hurricane policy.
∙ Policy provides coverage only for the peril of a windstorm during a hurricane.
∙ “Hurricane” means a storm that has been declared by the Central Pacific Hurricane Center of the National Weather Service to be a hurricane.
∙ Period of coverage begins when a “watch” or “warning” is issued until 72 hours following cancellation of “watch” or “warning.”
∙ “Windstorm” means wind or hail during a hurricane, which results in direct physical loss or damage to property.
∙ “Water damage” excluded from hurricane policy. So you must also have flood insurance.
● Earthquake Insurance
∙ Insurance can typically be added to policy by an endorsement.
∙ “The following are added to the Covered Causes of Loss”
a. Earthquake.
b. Volcanic Eruption
∙ Endorsement may also include all earthquake shocks or volcanic eruptions that occur for several days after a single Earthquake or Volcanic Eruption.
∙ But endorsement may exclude loss or damage caused by tidal wave or tsunami, even if attributable to an Earthquake.
● State Regulation
∙ In US, state laws regulate the types of property insurance policies that can be issued.
∙ Some states have standard form “statutory” polices, usually ‘fire policies.”
∙ The insurance company must provide at least as much coverage as the state’s statutory policy form.
