As if tornadoes, hurricanes and flooding aren’t enough to worry about, an earthquake in the Midwest in mid-April was a reminder that there is a risk of damage from seismic activity in the South, particularly near the New Madrid fault zone that runs toward Northwest Mississippi.
Earthquakes can cause huge amounts of damage, but they are such rare events that even in the most seismically active areas of the country, the number of policyholders with earthquake coverage is only approximately 12%. In most of the country, it is in the single digits.
Bearing in mind the many thousands of homeowners on the Gulf Coast who didn’t have flood insurance and flooded with Hurricane Katrina, Mississippi Insurance Commissioner Mike Chaney recently put out a press release urging people to consider earthquake coverage.
“The threat of an earthquake striking Mississippi is very real, with the northwestern part of the state being particularly vulnerable,” Chaney said. “What many do not realize is that most homeowner policies contain an earthquake exclusion clause very much like the flooding exclusion clause many coastal residents encountered following Hurricane Katrina. We don’t want history repeating itself in the event of another natural disaster in our state caused by an earthquake.”
The Mississippi Insurance Department regulations require insurance companies to inform policyholders, in writing, of the existence of flood and earthquake exclusions.
In order to be covered for home or businesses losses such as earth movements, tremors and aftershocks, property owners must obtain a separate earthquake endorsement or special earthquake policy.
An earthquake can strike at any time, and some experts have said the New Madrid fault zone is overdue for a major earthquake. Millions of people and vital infrastructure such as highway and rail transportation exists along the fault zone.
In addition to coverage for earthquake damage to a structure, Chaney said it might be prudent for business owners to also include coverage for business interruption. Cars and other vehicles are covered for earthquake damage under the comprehensive part of the auto insurance policy.
Earthquakes are more common than most people realize with approximately 5,000 quakes recorded each year. The vast majority, however, only cause minor damage such as the recent earthquake in Illinois April 18. Although it was one of the largest earthquakes ever recorded in the state, measuring 5.2 on the Richter earthquake scale, damage was minor. Major aftershocks were alarming to people, but again caused only minor damage.
Chaney said since 1900, earthquakes have occurred in 39 states and caused damage in all 50.
“The Northridge earthquake, which struck Southern California on January 17, 1994, was the most costly quake in U.S. history, causing an estimated $20 billion in total property damage, including $12.5 billion in insured losses,” Chaney said. “The San Francisco Earthquake of 1906, caused direct quake losses of about $24 million and fire losses of about $500 million, according to the National Geophysical Data Center. That would be about $11 billion in 2007 dollars, a small portion of the potential cost of damage from a similar earthquake today. The quake caused $235 million in insured losses, which would be about $5.2 billion in 2007 dollars.”
Chaney said the potential cost of earthquakes has been growing because of increasing urban development in seismically active areas and the vulnerability of older buildings, which may not have been built or upgraded to current building codes.
Barry Bouchillon, a State Farm agent in Southaven, said he hasn’t had a lot of calls inquiring about earthquake insurance since the earthquake.
“I thought the phone would buzz,” Bouchillon said. “But ever since I have been an agent, for 30 years, we have always promoted earthquake coverage and most people in our area take earthquake. I would estimate about 80% of homeowners and renters take out earthquake insurance. There is an exposure there.”
Bouchillon said most people who are from the area are aware of the risk. And agents are careful to point out to the risk to newcomers.
Desoto and Tunica counties have the highest risk of earthquake damage in the state, but prices for coverage are low. For a brick or masonry house, coverage is approximately $71 per year for a $100,000 home. For a wood house, the rate is $60 per year for $100,000 in coverage. Elsewhere in the state, rates are lower because exposure is less.
Mike Barry, vice president of media relations, Insurance Information Institute (III), said since the hurricane the III has been fielding media inquires from throughout the country about earthquake coverage. Earthquake insurance in areas not very seismically active is relatively inexpensive.
“As you get away from California, it is significantly less expensive,” Barry said. “California and Washington states are number one and two in purchasing earthquake insurance. But even in California, only 12% of people have earthquake insurance. That has dropped dramatically in large part because the last earthquake there was in 1994. Two of the states along the New Madrid Fault —Missouri and Tennessee — are three and four, but it is still in the single digits.”
Barry said businesses need to consider earthquake coverage including coverage for business interruption.
“In the event of an earthquake causing you to be out of business a week or more, that would certainly pose a significant economic threat to your company,” he said. “It is something to bring up in a discussion with your insurance agent.”
The low percentage of people who have earthquake insurance in states near the New Madrid fault zone comes as no surprise to Barry.
“What the consumer is saying, perhaps correctly, is, ‘What are the odds of me as a homeowner in the Midwest incurring earthquake damages to my home?’” Barry said. “‘Is this a good investment on my part?’ Then. oftentimes they say it is not. The last time there was major damage from the New Madrid fault zone was 1812. You have to go back almost 200 years to find a significant earthquake event.”
Contact MBJ contributing writer Becky Gillette at firstname.lastname@example.org.