Claims adjuster to insurers: ‘Take your regular cat plan and throw it out the window’ if dealing with large earthquake

Earthquakes are different in some respects from weather catastrophes, and speakers at a panel Monday had several pieces of advice for insurance carriers who need to prepare for a major quake to affect Canada.

“The majority of adjusters, when an earthquake hits — it will be the first time they ever handled an earthquake claim,” said Tim Dempsey, director of catastrophe claims for adjusting firm Catastrophe Response Unit (CRU).

Dempsey made his comments Monday at CRU’s Toronto Earthquake Symposium.

Dempsey had managed operations of several catastrophes in the United States, including the January 1994 Northridge earthquake (named after the Los Angeles neighbourhood near its epicentre), while working for NCA Group.

The Northridge quake, which Dempsey noted was the “last major earthquake event in North America,” killed 57, caused about US$12.5 billion in damage and measured 6.7 on the Richter scale.

“An earthquake is a completely different animal” from other catastrophes, Dempsey noted. “You can see a hurricane coming across the ocean. You can prepare for it, you can get out of town. Tornadoes, they happen quite frequently. You might get some kind of warning, you go down to your basement and you try to prepare for it. An earthquake, on the other hand, is sneaky.”

Other speakers at the symposium included CRU president and co-founder Kyle Winston, who has a suggestion for insurance carriers.

 “Take your regular cat plan that you have and throw it out the window when it comes to earthquake,” Winston said. “The planning and the steps you put into place for an every-day catastrophe will not carry water if and when an earthquake hits, simply due to the voracity and size of the events, the timing and the infrastructure.”

Insurance carriers might not fully cover earthquake risk, for some properties, Winston suggested, though an earthquake could still cause claims arising from covered perils.

“When you have earthquakes, you have gas leaks, you have electrical wires down, and as a result you will have fires.”

He referred to a report from AIR Worldwide, titled Study of Impact and the Insurance and Economic Cost of a Major Earthquake in British Columbia and Ontario/Québec. That report, in which AIR modelled the effects of two hypothetical earthquakes affecting Canada, was commissioned by the Insurance Bureau of Canada.

“The IBC-commissioned report supports the growing scientific belief that within the very near future, Canada will experience a seismic event,” Winston noted.

Anthony Farrell, chief meteorologist for Global television in Toronto, noted that on the west coast, the Juan de Fuca plate was moving under the North American plate at four to five centimetres per year.

 “Recent measurements .. confirm that this is no longer moving,” Farnell said during the earthquake symposium. “So you are building up energy.”

The “most recent Cascadia subduction megathrust” event occurred off the west coast of Canada in 1700, Farnell noted. “Generally these occur every 500 to 600 years. We are not overdue but we are definitely due, in that area, for another big one.”

Farnell showed a map depicting earthquakes since 1627 in Canada. That map indicates there is a concentration of seismic activity in the Ottawa and Quebec areas, though the reasons are not well understood.

“Part of the cause of that is the earth is coming up after the last glacier,” he said. “Another part is there is a bit of a weakness in the middle of the plate.”

Near Quebec City, some earthquakes can hit more than 6 on the Richter scale, Farnell noted.

“You don’t have to be on the west coast to be worried about earthquakes,” Farnell added. “It is about time that one of these occurs in the near future.”

In the AIR report, one of the modelled earthquakes happens in the St. Lawrence River Valley nearly 100 km northeast of Quebec City.

Though damage to high-rise buildings in downtown Quebec City is expected to be light, AIR warns that “poorly-built masonry buildings in particular will experience serious damage as chimneys, loose plaster, cornices, bricks and tiles, upper walls and parapets fall.”

AIR Worldwide also predicts that in such a scenario the only bridges over the St. Lawrence River at Quebec City  “will be severely impacted.”

Closed or slow roads could occur after any earthquake, Dempsey suggested.

“In the Northridge earthquake, some of the major thoroughfares were gone and adjusters would sit in traffic for hours trying to get to their next loss location,” he said. “The engineers are going to do that too. This is different from any other thing you have ever been involved with.”

Claims adjusting expenses will be higher for earthquakes, Dempsey said, adding engineers would be involved in many claims.

“The adjuster can write a preliminary report and set a preliminary reserve, however the final … will be based on the engineer’s report,” Dempsey noted.

He emphasized the importance of training insurance professionals who receive the first notices of loss.

“Make sure they are experienced, make sure they know what they are doing,” he said, adding it is also important to manage policyholders’ expectations after a quake.

“Don’t let them give expectations to the insured that cannot be kept,” Dempsey advised. “Don’t tell them, ‘Oh yeah, your adjuster will contact you within 24 hours and inspect the loss three days later.’ That’s not going to happen. We can do that on a hail storm. An earthquake is completely different.”

Housing is also an issue both for policyholders and claims professionals, he noted.

“You can’t leave it all up to the insured,” he said. “The homeowner, the policyholder – they are going to be walking around in a daze, for several days and they are going to need all the help they can get. Is there going to be enough housing for adjusters coming in to help these people out? Are these adjusters going to be able to stay at hotels? If not, then we will have to activate people in RVs, campers and travel trailers.”