Introduction
As the Napa Valley community begins the process of repairing damage and healing from injuries and losses related to the earthquake that struck on August 24, 2014, we extend our heartfelt wishes to those affected by the natural disaster.
Businesses throughout the Napa Valley and surrounding areas are feeling the effects of the 6.0 earthquake, the strongest in Northern California since the 1989 Loma Prieta earthquake. As a result of this earthquake, hundreds of people suffered injuries serious enough to warrant a visit to a hospital, and numerous residential and commercial properties were significantly damaged. The damage to property caused by the earthquake includes partially collapsed buildings and building facades, buckled pavement, and broken windows. And, as is expected in a premier wine growing region, wineries and other related businesses lost vast quantities of wine from broken bottles and barrels. According to news reports, some wineries have lost most or all of their 2013 vintages. The United States Geological Survey’s initial estimate of the property damage caused by the earthquake was $1 billion.
If your company was affected by this earthquake, you should assess your losses and decide whether your company needs to make an insurance claim. Alternatively, if your company was outside of the Napa area, this news may serve as a reminder to determine whether your company should obtain or maintain earthquake insurance coverage.
Does Your Company Even Have Earthquake Insurance?
Although your company likely has “all-risk” commercial property coverage, this type of policy does not cover property damage caused by earthquakes unless your company also has an earthquake coverage endorsement. Alternatively, your company may have a stand-alone earthquake insurance policy. Standard business or commercial property insurance policies exclude coverage for earthquake damage under the “earth movement” exclusion found in most property insurance policies. If you are unsure whether your business has earthquake insurance, then we can assist you in making that determination.
Damage to Real and Personal Property—Latent Damage
After an earthquake, damage to your company’s real and personal (e.g., equipment or inventory) property is often quite obvious. With respect to this type of damage, your company will want to make a detailed list of all damaged items, photograph and/or videotape damaged property, document the value of each damaged item and keep copies of all bills for repairs, cleaning, or any other costs incurred because of the earthquake.
However, earthquake damage to buildings and structures is not always noticeable at first. For example, damage to a building’s foundation or structure caused by earth movement can be hidden behind drywall or stucco or underneath carpeting or other flooring. Further, such damage may not become noticeable until months or years after the earthquake, as the ground slowly settles following the violent shaking.
Accordingly, if you suspect that your company’s buildings or structures were damaged in the earthquake, then you should insist that your insurer perform a thorough structural inspection of your property. Your company should also consider hiring an independent expert, such as a structural engineer, to inspect the damage. A structural engineer is a trained professional who can evaluate the damage to your property and can point out problems or issues caused by the earthquake of which you may not have been aware. You can then utilize this information and identify those particular issues to the insurance adjuster assigned to the claim.
Business Interruption Insurance Coverage
Companies located in Napa and surrounding areas may suffer losses resulting from the recent earthquake, not only because of physical damage to buildings, structures and goods but also from the suspension of business activities and subsequent loss of income. Further, businesses that have had to suspend operations due to the earthquake may affect other companies that either have facilities located in Northern California or that depend upon suppliers or customers located there. If your business experiences a loss of income due to the recent earthquake, the business interruption (BI), contingent business interruption (CBI) or extra expense (EE) provisions of your property policy may reimburse your company for such losses.
If your business’s facility or equipment is located in Northern California and was physically damaged by the earthquake, any profits that were lost due to an interruption of your business may be covered under the BI provision of your property policy. BI coverage, also known as business income insurance, reimburses the policyholder the amount of profit it would have earned during the period of interruption had the covered event and the ensuing physical damage never occurred. This type of coverage is not sold as a separate policy but rather is added as a separate grant of coverage onto a property policy or included in a comprehensive package policy.
To recover a BI loss, the insured must prove that (i) it sustained damage due to a covered loss, (ii) there was an interruption of business (e.g., suspension of operations) caused by the property damage, (iii) there was an actual loss of business income during the period of time necessary to restore the business, and (iv) the loss of income was caused by the interruption of business and not some other factor.
Contingent Business Interruption and Extra Expense Insurance Coverage
If your business does not have property in Northern California but still experienced a loss of income because of the earthquake, then it may be entitled to reimbursement of lost profits under the policy’s CBI provision. CBI coverage compensates the policyholder for lost revenue resulting from an interruption of business that stems not from damage to its own property but from damage to property that belongs to a covered customer or supplier located elsewhere. For example, if your business depends upon goods produced by a California winery that was forced to shut down, then any loss of income that your business experienced during the period of interruption due to the failure of that California winery to supply your business with the necessary goods may be covered under your business’s CBI provision.
In order for the business interruption damage to be covered, the type of peril and type of physical damage sustained to the third party’s property must be the same type of peril and damage insured under the controlling policy. In other words, your business’s insurance policy must provide coverage for earthquakes as well as for damage to property, such as buildings or production facilities. EE coverage may also come into play. This type of insurance indemnifies the policyholder for expenses in excess of normal operating expenses that the insured incurs in order to continue business while its damaged property is being repaired or replaced. Similarly, contingent extra expense insurance reimburses the policyholder for expenses that result from a contingent loss, such as a CBI loss.
If Your Company Does Not Have Earthquake Insurance, Should You Get It?
Companies often take news of a major earthquake as a cue to reevaluate their position on earthquake insurance. In recent years, many businesses have forgone earthquake insurance for a variety of reasons, including the relatively high deductibles. For example, commercial earthquake property insurance policies often have a 10%-15% deductible of the value of the property insured. Thus, if your property is valued at $1 million, the policy’s deductible could be $100,000 or $150,000. Further, earthquake policies can contain separate deductibles for each category of property (e.g., dwellings, structures and personal property). For these reasons, earthquake insurance is best seen as insurance against a catastrophe rather than as insurance against small or even medium-size losses.
Despite the high deductibles and premiums, it may be in your company’s best interest to purchase earthquake coverage because of the risk of catastrophic damage. Furthermore, California law (Insurance Code § 10088) states that if your company does not have earthquake insurance, then your company’s regular commercial property insurance will not provide coverage for any loss caused in part by earthquake and caused in part by any other peril, except for a fire.
Ultimately, the question of whether to maintain earthquake insurance depends on the specific circumstances of each business, including, but not limited to, the location of the property. The U.S. Geological Survey has Seismic Hazard Maps and other information available on its website to help businesses determine their need for earthquake insurance.
Notice, Proof of Loss and Filing a Claim
If your company suffered earthquake damage or a loss in profits and has earthquake insurance, then your company will want to promptly provide notice of your company’s claim to its insurer. In California, all property insurance policies require the policyholder to perform certain duties within a specific period of time following the so-called “inception of the loss.” For example, most California property insurance policies require the insured to (i) give a notice of claim as soon as practicable; (ii) submit a proof of loss within 60 days of the loss; and (iii) if necessary, file suit against the insurance company within one year of the loss. With respect to item (iii), this one-year deadline is tolled as long as the insurance company is investigating the claim.
In California, the inception of the loss—the date that starts the clock running on these deadlines—is when the policyholder becomes aware of its loss, not when it becomes aware that its loss might be covered by insurance. For an event like an earthquake, the inception of the loss is usually, but not always, considered to be the date of the earthquake or other event.
Failure to comply with these technicalities and timelines may operate as a complete bar to coverage. If your business intends to submit a claim for business interruption and/or damage to real or personal property but is unable to meet the deadlines specified in the policy, then it should contact the insurance carrier immediately and ask for an extension.
Conclusion
If your company experienced damage to property, or has good reason to anticipate a loss in profits resulting from the recent Napa earthquake, then it may be entitled to indemnification from its business or commercial property insurance policy. In order to secure coverage, it is important that your company submit a timely notice of claim and proof of loss and, if necessary, initiate any legal action against its insurance carrier within the specified period of time.
Moreover, news of the Napa earthquake should make companies consider or reconsider the purchase of earthquake insurance.
To ensure coverage, it is recommended that your business confer with an attorney who specializes in insurance coverage issues and claims. Perkins Coie’s Insurance Recovery group regularly advises policyholders on insurance coverage issues, including first party losses from natural disasters, and litigates on behalf of its clients in courts all across the country.
