TSUNAMI!

Rough Notes, May 2005 by Boone, Elisabeth

For questions about coverage, specialty carrier RLI has answers

In the wake of the massive tsunamis that devastated South Asia and killed nearly 200,000 people last December, both agents and their clients in earthquake-prone areas have been on heightened alert. The tsunamis were triggered by a magnitude 9.0 earthquake off the coast of Indonesia that sent walls of water crashing in all directions, sometimes traveling as fast as 500 miles per hour. Could a tsunami happen here in the United States? Would we have any warning? Is tsunami damage covered by commercial insurance policies?

For answers to these and other questions about the tsunami risk, many agents turn to wholesalers who represent RLI Insurance, an A rated specialty carrier based in Peoria, Illinois. RLI offers earthquake and flood insurance, as well as difference in conditions (DIG), for commercial risks.

Kevin McDonough, vice president of underwriting at RLI, brings to his position years of experience in the commercial earthquake insurance market, managing RLI's portfolio in northern California and the Pacific Northwest. Understandably, he notes, the demand for earthquake coverage is based on insureds' geographic location-and here, McDonough observes, perception of the risk doesn't always square with geological reality. "People in Oregon, for example, seem to think they're immune to earthquakes, so they don't buy the coverage," he says. "This holds true even though there's been a 7.0 earthquake near the northern California border. This perception changes again when you cross the border into Washington."

The risk of earthquake and following tsunami is taken very seriously in America's 49th and 50th states. In January 1964, a tsunami triggered by an earthquake off the coast of Alaska resulted in more than 100 deaths in Alaska and killed four people in Oregon and 13 in California, in addition to causing some $100 million in property damage. Hawaii faces a double-barreled threat. First, it's located in the path of tsunamis that are unleashed in the Pacific Ocean's volatile Ring of Fire, where the shifting of tectonic plates can trigger powerful earthquakes; and second, it's vulnerable to massive mudslides generated by volcanic eruptions, which also can cause tsunamis.

Nor is the East Coast of the United States immune to the tsunami threat. Scientists warn that a volcano in the Canary Islands, located off the coast of Morocco, could erupt and send a wave of tsunamis speeding through the Atlantic Ocean, possibly causing 50-foot waves to hit the U.S. East Coast.

Evolving Coverage

What kinds of exposures are covered by the difference in conditions policy, and how is the coverage structured? "DIC originally was a wraparound or supplement to a named peril fire policy," McDonough explains. "As the industry evolved and all-risk became the basis for property coverage, DIG was relegated to the status of coverage for earthquake and flood." The reason for this shift, he says, was that "most of us had treaties with reinsurers that specifically said we wouldn't write earthquake or flood risks as such. The mechanism to provide this coverage became the DIG policy. It still serves the purpose of picking up the unknown perils that people haven't thought of or experienced yet, but that tends to be very rare."

In the RLI policy, McDonough explains, an earthquake is defined as a seismic event; water-related exposures are picked up by the policy's flood coverage. In addition to arranging primary DIG coverage for retail agents' clients via wholesalers, RLI also provides excess capacity on large commercial accounts. In this case, McDonough says, "The coverage is written on the brokers' manuscript forms. Those policies tend to be earth movement policies, which includes man-made earth movement, mudslides, and subsidence." RLI also covers damage from volcanic action, which is a particular threat for Hawaii and the Pacific Northwest.

For business owners who face the risk of tsunami damage, the most pressing concern is: "Can I get coverage?" At RLI, the answer-subject, of course, to terms and conditions that reflect the exposure-is a qualified "yes." The premium for DIG coverage is based on the rates for earthquake, flood, and other perils. The rates may be adjusted for layered policies (first loss or excess). Minimum premiums reflect current conditions and expenses, including but not limited to catastrophe reinsurance capacity, portfolio probable maximum loss analysis, and individual risk evaluation and exposure to known earthquake faults, flood zones, and other risks. Coverage is available for commercial and high-value residential property and inland marine exposures.

RLI offers earthquake coverage of up to $10 million on any one policy or risk. Using approved facultative reinsurance allows RLI to provide full limits up to $15 million. Coverage applies to both direct damage and loss of business income. Coverage is available in all 50 states and is offered through wholesale brokers located throughout the country.