Midwest Moratorium On Earthquake Insurance

By Mark E. Ruquet

NU Online News Service, June 30, 10:26 a.m.EDT?A temblor that rattled windows but did little damageMonday in Illinois will likely shake the area market for earthquakecoverage, insurance industry professionals said.

Homeowners wishing to purchase quake coverage in the Midwest maysee a short-term problem obtaining the coverage, theyexplained.

The state was hit by an earthquake measuring 4.5 in magnitude alittle after 1 a.m. CDT, causing no apparent damage or injury. Thequake, according to the U.S. Geological Survey, was located eightmiles Northwest of Ottawa, Ill., and 71 miles west-southwest ofChicago.

Don Griffin, vice president of Commercial Lines for the PropertyCasualty Insurers Association of America based in Des Plaines,Ill., said insurers always place moratoriums on writing newbusiness after a catastrophic event.

The Illinois earthquake, while not a catastrophe, would probablysee a moratorium. Insurers, he explained, do not want to placeinsurance on property where aftershocks could still cause damage.They also want time between the last tremor and the binding of anew policy to be comfortable that any damage reported was not froman old event.

Only a few states have regulations covering the moratoriums, butwhere there are none, companies must file their moratorium ruleswith regulators, he added.

"The actuarial odds of it happening here [in Illinois] arewithin reason, and carriers feel they can go ahead and insure therisk, unlike other areas [such as California] where its moreprobable and they worry about it more," said Chuck Schramm, aproducer with the insurance firm Lamb Little & Co. Ltd., inRolling Meadows, Ill., and a teacher of insurance education coursesin the state. "But if you think about the hedge [carriers] havewith the deductible, it's not a bad bet for them to take."

The deductible is based on the value of the property and canusually run in increments of two, five or 10 percent. The insurancecoverage typically does not cover homes with masonry veneercovering more than 10 percent of the house. However, he said, itcan be purchased as an add-on to coverage.

On the commercial side, structures of more than four storieshave to wait one week for the coverage to take effect and aresubject to the same deductible coverage based on property value, henoted. The policy is written as a separate cause of loss, unlikehomeowners insurance where it is an endorsement.

According to the USGS's Web site, Illinois has seen a number ofearthquakes over the centuries, primarily in the area of the NewMadrid fault. The most famous earthquake to hit the Midwest was inthe early 19th century. The event was so severe that seismicactivity caused the Mississippi River to appear to flow backwardsfor a number of days.

The New Madrid fault line begins in Cairo, Ill., and runs souththrough the state for 120 miles into Arkansas, and parts ofKentucky and Tennessee. Monday's earthquake hit further north,which is rare, and was felt into neighboring Wisconsin.

Dennis Garrett, executive vice president for the ProfessionalIndependent Insurance Agents of Illinois, said that earthquakeinsurance is something that is on the minds of many homeownersbecause of the New Madrid fault.

Mr. Garrett said earthquake insurance is available to homeownersbut only as an endorsement on the policy. Some companies refuse towrite it, especially where the homes are located in the south ofthe state in the vicinity of the fault. The alternative is throughexcess and surplus lines, which he noted can prove to be veryexpensive.

Mr. Schramm, said that when there is an event, whether it is anactual earthquake or just a prediction of one, "all the insurancecompanies get cold feet and they want to wait" before they resumewriting new business.

Within six months to a year companies ease up on theirrestrictions, "and become pretty open," to writing policies again,he said.

Gary Kearney, assistant vice president for Property ClaimServices, a division of Jersey City, N.J.-based Insurance ServicesOffice Inc., said that from all indications there was little damagefrom the quake, but there remains the threat of something biggerhappening at some point, unlike California where the threat appearsto be more imminent.

So far this year, despite storm damages in Wisconsin and otherMidwest states, losses have been less than last year.

However, some see the potential for catastrophic damage from anearthquake as very real, if not imminent.

"When you think about the historical issue, at some point intime the New Madrid fault will move again with a big quake, that iswhat all the scientists say," observed Mr. Schramm. "It is going tobe horrendous event. It's not a question of if, but when."