While any damage from Fridays earthquake that struck southwestern British Columbia is likely minor, the quake is a reminder of a potential problem for many British Columbians: the split nature of earthquake insurance as set out under provincial insurance laws.
Damage from an earthquake results from two events: the obvious initial ground shaking and fires ignited as a result of the earthquake. But BCs insurance regulations make a distinction between damage caused by the ground shaking and fires ignited following an earthquake. Fire protection is part of standard home insurance packages, while earthquake coverage must be purchased separately.
The painful lesson of what can happen with split insurance coverage can be seen in the aftermath of Hurricane Katrina in 2005 when 1,300 to 1,500 people were killed and more than $57 billion (U.S.) in insured losses resulted. In Katrinas case, wind damage was covered under standard private home insurance policies, which excluded flood damage, while flood coverage was available separately through a U.S. government program. Many victims of Hurricane Katrina had coverage only for wind damage.
This separation in insurance coverage made life more painful for both policyholders and their insurers following Katrina. Settling individual insurance claims became an arduous process. It began with insurers trying to determine the extent of damage caused by wind versus the damage caused by flooding; it frequently ended with action in courts and other venues as customers challenged their insurers decisions. In many cases, flood waters washed away any evidence, leaving only a concrete slab where a home used to exist.
Some state governments reacted by initiating legal action in a misguided effort to force insurers to pay for flood damage, even though the insurers clearly never collected a premium for such coverage. The inevitable result was some insurers scaled back on providing coverage in those states, thus reducing the coverage available to consumers and increasing the price of insurance that was available.
Here in BC, the insurance industry is capable of providing comprehensive earthquake insurance that covers both ground shaking and fire following damage. The industry has even expressed a preference for offering this coverage. However, provincial legislation compels the industry to offer coverage for a fire following earthquake within standard home insurance policies, and offer coverage for damage resulting from the ground shaking separately, resulting in many consumers having partial coverage against an earthquake.
The BC government is examining this issue as part of a review of its Insurance Act but has signalled it will maintain the status quo and not make amendments on the basis that basic fire coverage would be reduced.
It is easy to envision the problems following an earthquake as a result of split coverage. Where the cause of damage is not clear, insurance adjusters will need time to assess whether damage was caused by ground shaking or fire. Claims may be held up in dispute resolution and/or court cases where the customer disagrees with the insurers opinion. Delays in payments will mean individual hardship as people try to cope with the damage and the broader economic recovery will be slowed because it will take longer for people to receive funds they need to rebuild homes and businesses.
The same factors that cause delays in payments also result in higher costs for industry and their customers (i.e. higher adjustment and legal costs will be passed on to consumers in higher premiums, higher deductibles or both). Legal disputes might put added strain on the court system and dispute resolution mechanisms.
Following a disaster, it is critical that the affected people receive insurance cheques quickly to both avoid unnecessary hardship and to expedite wider recovery of communities. The sheer volume of claims and ground conditions after a disaster can create challenges for insurers in resolving claims expeditiously and cost effectively. Public policies that minimize coverage disputes will ease the process.
Katrina showed us that split insurance coverage for a natural disaster should be avoided where possible. Allowing insurers to offer comprehensive coverage against damage from ground shaking and fire following an earthquake will allow us to avoid the delays consumers faced en masse following Katrina.
Signed, Neil Mohindra
(Neil Mohindra is the Director, Centre for Financial Policy Studies at the Fraser Institute and author of the Study, Preventing Disaster after a Disaster; Lessons for Canada from US Experience)