Is Commercial Earthquake Insurance Worth It?
Damage to a commercial building after the Northridge earthquake. Source: USGS
Earthquakes are among the most common natural disasters, yet standard property insurance rarely covers them. Property owners in high-risk areas often need separate earthquake insurance, which provides financial protection for rebuilding, repairs, and other expenses.
While the risks of earthquakes are well-known in high-seismic zones like California and Alaska, few realize that 75% of the United States faces some level of earthquake risk. This widespread threat leaves property owners grappling with how best to protect their investments.
In this article, we’ll examine the benefits and limitations of commercial earthquake insurance, discuss common building vulnerabilities, and explore a proactive alternative for commercial and industrial properties.
Why Insure Your Commercial Property Against Earthquakes?
Earthquake insurance provides a critical layer of protection against the unpredictable nature of seismic events.
Here are four key benefits of acquiring earthquake insurance for your business:
Peace of Mind
Knowing your business is protected against seismic events provides confidence and reduces anxiety about potential financial losses.
Business Continuity
Earthquake insurance facilitates recovery by covering repair costs and compensating for lost income, enabling operations to resume more swiftly after a disaster.
Enhanced Financing Opportunities
Some lenders require earthquake insurance in high-risk areas. This coverage can improve financing options and terms, as it demonstrates proactive risk management.
Comprehensive Asset Protection
Beyond structural damage, comprehensive earthquake insurance can cover the loss of valuable assets and business interruption. This ensures that your business’s contents, equipment, inventory, and income are safeguarded against the impacts of an earthquake.
While earthquake insurance offers significant benefits, it’s important to consider the associated challenges and costs before deciding if it’s the right choice for your business.
What Does Commercial Earthquake Insurance Cover?
Commercial earthquake insurance policies vary but typically cover the following:
- Building coverage: Protects the physical structure located on the insured premises.
- Business personal property: Covers business equipment, inventory, and other contents inside the building.
- Loss of business income: Provides compensation for income lost due to interruptions in operations caused by an earthquake.
- Ordinance or law coverage: Covers additional costs to rebuild or repair the structure to meet updated local building codes.
- Underground utilities: Protects sewer, water, and gas lines beneath the property.
- Sprinkler leakage: May include coverage for damage caused by leaking sprinkler systems triggered by an earthquake.
These benefits can help property owners recover financially from a disaster. However, understanding the associated costs and limitations is critical before purchasing a policy.
Why Many Businesses Skip Earthquake Insurance
Despite the protection offered by earthquake insurance, many property owners face challenges that make it a less practical option for their needs.
- High premiums and deductibles: In high-risk states like California, premiums are costly, and deductibles often range from 10% to 20% of the building’s value. For example, a $1 million building may require $200,000 out of pocket before coverage begins.
- Separate policies: Unlike fire or flood insurance, earthquake insurance must be purchased as an add-on to standard property insurance, adding complexity and cost.
- Retrofit requirements: Some insurers mandate seismic retrofits for commercial and industrial buildings before granting coverage, adding upfront costs for property owners.
- Limited recovery for operational losses: While insurance may cover some lost income during reconstruction, it does not compensate for the clients or opportunities lost due to extended downtime. For many businesses, this can result in lasting financial and reputational harm.
- Lengthy payout process: Collecting insurance payouts can be slow, especially when widespread damage overwhelms insurers.
For many business owners, these factors make earthquake insurance feel more like a financial burden than a viable safety net. Exploring additional measures to reduce risks, such as improving your building’s resilience, can help provide more comprehensive protection.
Common Structural Vulnerabilities in Commercial Buildings
No one who has experienced a major disaster regrets having adequate insurance coverage. However, understanding the specific vulnerabilities of your building is just as crucial.
Commercial property owners should know about the following common structural weaknesses that increase earthquake risks.
- Inadequate wall anchorage: Many buildings constructed before 1996 lack sufficient connections between walls, floors, and roofs. This can cause walls to detach and fail during seismic events.
- Unreinforced masonry structures (URM): Masonry walls made from brick, stone, or concrete blocks without internal reinforcement tend to crack or collapse under the stresses of an earthquake. These materials are brittle and less flexible compared to modern reinforced designs.
- Insufficiently reinforced concrete: Tilt-up concrete walls and columns built before 1996 often lack proper steel reinforcement, putting them at risk of catastrophic failure when subjected to seismic forces.
- Weak ground-level stories: Soft-story buildings with parking or retail spaces on the ground floor are prone to collapse if the lower levels lack the strength to support the structure during an earthquake. Tuck-under parking areas, common in older apartment complexes, were heavily damaged during the 1994 Northridge earthquake.
Understanding and addressing your building’s vulnerabilities through retrofitting can significantly reduce risks, improve safety, and help lower earthquake insurance costs.
The Role of SEL and SUL in Earthquake Risk Assessment
Insurance companies evaluate earthquake risk using metrics like Scenario Expected Loss (SEL) and Scenario Upper Loss (SUL). These scores estimate the potential damage to a building during an earthquake and are critical factors in determining insurance premiums.
Buildings with high SEL or SUL scores:
- Face higher insurance premiums or reduced policy options.
- Are less attractive to buyers and lenders due to higher perceived risks.
Retrofitting is one of the most effective ways to lower these scores, making properties safer, insurable, and more marketable.
Seismic Retrofitting: A Smart Complement to Earthquake Insurance
For commercial and industrial property owners, seismic retrofitting offers a proactive way to protect investments and reduce insurance costs.
Retrofitting strengthens a building’s structure to better withstand seismic forces, helping lower SEL and SUL scores while safeguarding occupants and property.
Common retrofitting measures include:
- Roof-to-wall connections to unify structural components
- Reinforced steel materials to improve durability
- Shear walls, foundation bolting, and fiber reinforcement to enhance stability
While retrofitting is a proactive investment, insurance may still be a suitable option in lower-risk areas. Consulting both an insurance provider and a retrofitting expert can help determine the best approach for your property.
Protect Your Commercial Building with Saunders Seismic
At Saunders Seismic, we specialize in retrofitting commercial and industrial buildings to reduce seismic risks and protect your investments.
Our team has nearly four decades of expertise, providing customized solutions for soft-story structures, tilt-up concrete, non-ductile concrete, steel frame, and URM buildings.
It’s wise to take proactive steps to safeguard your property. Whether you invest in earthquake insurance, retrofitting, or both, acting now can save you from future expenses and risks.
Contact Saunders Seismic today to learn more about how we can help secure your building.