The earthquake insurance for any building plays a significant role when the owner of the property or the loan itself changes. Due to the recent mortgage meltdown in the United States, the banks, investors and underwriters require having earthquake insurance for commercial properties when the Probable Maximum Loss PML of the building is evaluated above 0.20 (a so called magic number not to have earthquake insurance calculation of PML is based on a non engineering program, which can be done by a structural engineer by answering the questions such as:
- Type of construction and the year the building was built (prior or after 1976). The earthquake equations were introduced for the first time in the Uniform Building Code of 1976.
- Soil conditions under the building (USGS provide the earthquake coefficient for the building design based on the location of the building in the United States).
- How close the building is to major fault lines.
- How many stories the building has.
- What kind of resisting elements the building has in the event of major earthquakes, such as steel frame, concrete frame “ductile or non-ductile“.
Then the structural engineer may propose some seismic retrofit work to be performed in order to bring the PML number close to 0.20 or lower. This can be an engineering judgment and does not have any back up with any engineering calculation, therefore the PML could be any number.
The question is, what should building owners do? Buy or do not buy earthquake insurance? The answer can sometimes not be that easy to determine. It depends on several factors.
- Type of the building. steel, concrete, brick or wood structure.
- Number of stories, low rise, mid rise or high rise.
- Shape of the building, square, rectangular or other shape.
- Year built, before or after 1976.
- Commercial, industrial, residential apartment or single family residence.
- Insurance company type, domestic (corporated in California), foreign (corporated outside of California but in the United States), alien (corporated outside of the United States).
- Annual premium amount.
- Deductible amount (per occurrence or aggregate), usually $20,000 up.
- Cost of replacement (not just market value).
For commercial, industrial and apartment units, it is beneficial to do seismic retrofitting, The cost of retrofitting usually is less than the premium paid for earthquake insurance within three to four years.
For one or two story single family homes, the house bolting could be enough, since the building weight is not large and the forces which generate due to major earthquake is the function of the weight of the building, therefore the damage can be minimal and does not exceed the amount of deductibles and it may not be necessary to buy the earthquake insurance.
In the event of catastrophic earthquake, most of the insurance companies or their subsidiaries possibly could not be able to handle the massive cost of coverage, therefore could ultimately go into bankruptcy (especially foreign and alien insurance companies).
Consult with us before purchasing any earthquake insurance.