Recent earthquakes highlight business interruption issues: Marsh

Insurance issues with three major recent earthquakes have included policies that do not cover code upgrades after a disaster, interdependency issues with contingent business interruption and allocating loss when there is more than one peril, suggests a new report by the British unit of brokerage and risk management firm Marsh LLC.

Marsh U.K. published Tuesday a report titled “Comparing Claims from Catastrophic Earthquakes.” The report compares claims experience from the March 11, 2011 earthquake off the coast of Japan that swamped the Fukushima nuclear power plant; the Jan. 27, 2010 earthquake southwest of Santiago, Chile; and the Feb. 22, 2011 near Christchurch, New Zealand.

The New Zealand quake, which measured 6.3 on the Richter Scale, had $23 billion in economic losses and $15.6 billion in insured losses, including life. All figures are in United States dollars. The New Zealand tragedy, which resulted in 185 dead or missing, was tied for second place, with the January 1994 California quake, in a list of earthquakes with highest insured losses.

Marsh noted that after the Christchurch earthquake, some carriers said some mandated building code upgrades were not covered, either because the proposed upgrade was to an undamaged part of the building, because there was “debate and litigation on the degree of seismic strengthening that the City Council is lawfully able to order” or because the clients “wanted a higher degree of strengthening than was required by law.”

In Japan, there were “many CBI/interdependency issues, with the automobile and semiconductor industries particularly impacted,” Marsh stated of the 2011 quake and tsunami. On March 11 of that year, a magnitude 9.0 quake struck 373 kilometres northeast of Tokyo, a tsunami traveled 10 kilometres inland in some places and an 11-metre wave hit the Fukushima Daiichi nuclear power plant, leading to a contamination leak.

“Many standalone earthquake policies excluded CBI due to capacity and pricing issues,” Marsh noted. “For some industries it was difficult to track the root cause and link it back to the policy.”

Marsh added there can also be problems allocating physical damage and business interruption, when there is “more than one peril, acting either simultaneously or sequentially.”

In Japan, Marsh noted, there were “multiple perils of earthquake, tsunami, and radioactive contamination,” and possibly government intervention.

“Insurers provided different opinions, sometimes in respect of the same wordings.”

More than 19,000 were dead or missing after the March, 2011 catastrophe, which was ranked the costliest earthquake in history when measured by insured losses, including life, of $35.7 billion.  Marsh noted there were economic losses of $210 billion, an unknown number of commercial claims totalling $12.2 billion and nearly 896,856 non-commercial claims totalling $14.1 billion.

By comparison, the Jan. 27, 2010 earthquake off the coast of Chile resulted in 562 dead or missing. The insured losses, including life, were $8.4 billion, with 32,117 commercial claims totalling $6.4 billion. It measured 8.8 on the Richter Scale with an epicentre off the west coast, about 335 kilometres southwest of Santiago.

“Chile’s experience was that losses were investigated quite quickly,” Marsh stated. “There were delays in the first few days because clients wanted time to establish the facts, but once that was completed inspections were rapid. Access was not a particular issue.”

Other coverage elements discussed in the report include “denial of access” clauses, which cover clients for the inability to access an insured property as a result of an insured peril.

“In Japan, the principal issue for denial of access was the nuclear accident at Fukushima,” Marsh stated. “Due to the restriction zone, access was certainly a problem, but nuclear accidents are generally excluded from coverage. Consequently, considerable effort was made to establish when denial of access resulted from the earthquake and when it resulted from the nuclear event.”