NAPA -- Last month’s Napa earthquake served as a wake-up call for everyone in the Greater Bay Area. It was a reminder that the odds of an even more damaging earthquake in Northern California over the next 20 years are high. Businesses need to re-evaluate whether they should buy earthquake insurance and, if they have it, need to know how best to maximize its benefits.
Earthquake insurance is expensive. Premiums can be high even for a policy that has a deductible of 10 or 15% of the loss. For that reason, few businesses and homeowners currently have earthquake insurance. But it is worth testing the market periodically in light of market conditions, the value of your business and property and the company’s available cash.
Earthquake insurance may also be available separately on stock or inventory, as opposed to buildings. Insurance for this risk is often more readily available and inexpensive.
A business could feel that it is better to take the money it would otherwise spend on premiums and invest it, or use it to upgrade the property structurally. But if the company’s choice is to “go bare,” it needs to have a contingency plan, whether it is quake-proofing a building, or setting aside reserves, or knowing where it can get a loan if the worst happens. A business also needs to have its own “earthquake kit” -- a plan for continuing operations if an earthquake makes it impossible to operate out of a location for a period of time.
If you have earthquake coverage and the quake has hit, you need to take a number of steps, beyond cleaning up the debris, to ensure you get the most out of your policy.
Notify your insurer immediately. Insurers have experience handling disasters of all types. They have a large pool of consultants and experts who can help minimize the effect of the earthquake on your business – by providing resources to help with clean-up, estimating the extent of the damage, finding contractors quickly, and generally helping you through the crisis period and getting your business back up and running. The insurer may also be able to make an early estimate of the loss and provide an initial payment.
If the loss is limited to a building, the task of assessing the loss and arranging for repairs may be relatively straightforward. But commercial earthquake policies may cover losses to your equipment and inventory. They may also cover “business interruption” or “business income” losses – i.e., profits that your business lost because it was not able to operate during the post-earthquake period, plus the added costs of expediting repairs to get your business running again.
For these losses, it is important for a business to be prepared to document their value. Insurance companies don’t know your business nearly as well as you do. Insurance adjusters will sometimes try to impose “cookie-cutter” solutions on unique situations. (We have seen this from time to time with non-earthquake property losses in the Wine Country, for example, where the value of wine was at issue.)
Business income and inventory losses tend to be more complex and spawn more disputes than other types of property insurance. Business income coverage is non-standard and policy wording should be checked very carefully by an insurance expert so that you can maximize your legitimate recovery. Early assistance from an accountant or other consultant to help document losses and plan how the business is going to return to operation is not only money well spent, but itself may be an insurable cost.
The burden is on the insured to prove any losses. Accounting records, budgets, invoices and receipts, inventory records, sales projections and payroll records all should be collected and saved. Keeping accurate records is essential to presenting your claim.
You may also find that other components of your earthquake insurance have been triggered by the earthquake, even if your own property is not damaged. (And you should think about these when assessing the cost/benefit of earthquake insurance.) “Contingent Business Interruption” insurance reimburses your financial losses if the quake interrupts business at a supplier, distributor or customer. “Civil Authority” and “Ingress/Egress” coverage apply where access to your property is restricted by a governmental directive or other peril, and “Service Interruption” coverage insures against loss of utility services.
An earthquake will almost certainly happen. Regularly re-assess the costs and benefits of earthquake insurance. Have a plan to deal with the physical and financial consequences of a disaster. If you have insurance, get your insurer involved early, document losses, and get expert help to get the most out of your insurance.
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Dennis Cusack is an insurance coverage partner at Farella Braun + Martel, a law firm with offices in San Francisco and St. Helena. He can be reached at dcusack@fbm.com or 415-954-4475.
