What a tsunami teaches us about coastal insurance risk

The massive 8.8-magnitude earthquake that occurred off the coast of Russia’s Kamchatka Peninsula on July 8 served as a potent reminder that coastal communities face heightened insurance risks. The quake triggered tsunami alerts for coastal areas all along the US West Coast, and residents on the island of Oahu in Hawaii were urged to evacuate low-lying areas.

Ultimately, the waves triggered by the July 8 quake brought minimal damage to residents in the U.S. But history shows that things could have been much different. For instance, in 1964, a 9.2-magnitude earthquake that occurred in Alaska brought five tsunami waves to the U.S. West Coast. The $14 million in damage caused in Crescent City, California — more than $150 million in today’s money — was unprecedented at that time.

For homeowners, tsunamis pose a unique risk. Not only does the flooding they bring generally fall outside of the coverage provided by a standard homeowners policy, but tsunamis can also cause secondary damage that isn’t covered by flood policies.

Addressing the gaps needed for tsunami coverage

Securing flood insurance is the first step in addressing gaps in coverage for tsunamis. When determining the amount of coverage needed, homeowners should consider not only the potential for damage to structures but also to the contents of those structures. In most cases, coverage for contents must be added to flood policies.

Obviously, avoiding policies with tsunami exclusions is also important to address gaps in coverage. Flood policies can include exclusions for a wide variety of items and events, such as damage caused to property stored in basements, which is usually not covered by flood insurance policies. Damage resulting from landslides caused by floods is also often excluded from these policies.

However, the losses caused by a tsunami can ordinarily be considered covered by the policy if the term “tsunami” is not explicitly excluded from it. The ambiguous terminology in such cases generally works in favor of coverage for the insured.

Understanding the issues with secondary damage

Flooding can result in a variety of impacts that policies consider primary damage, including structural damage like impacts to a home’s foundation, and damage to essential systems such as electrical and plumbing. Losses to personal property can also be considered primary damage.

Secondary damage, which occurs after a flood but is not directly caused by inundation, is typically not covered by flood insurance and can include rust and rotting wood that appear in the aftermath of a flood. Mold and mildew are common examples of secondary damage that can result from the flooding a tsunami can cause.

Policies exclude secondary damage because they consider it avoidable if the proper steps are taken to clean up properties after a flood. Yet flooding can often trigger evacuation, which keeps homeowners away from their property in the days when remediation can have the biggest impact.

Secondary damage can be covered by endorsements added to flood policies. Loss of use coverage and mold remediation are common endorsements for policyholders in flood-prone areas. “Increased cost of compliance” endorsements, which cover additional expenses needed to bring properties up to code during repairs, are also common.

Homeowners with policies that cover secondary damage should review them to understand the sub-limits or restrictions imposed on claims. In some cases, the policies can cap the amount available for restoration work, such as mold mitigation.

Flooding, whether caused by tsunamis or other natural causes, has affected homeowners in nearly every county in the U.S. during the past several decades. Yet only a small amount of homeowners — 4%, according to the General Accounting Office — have the coverage needed to cover flood-related losses. As homeowners seek to address the risk of loss by extending their coverage to flood damage, they must take steps to ensure all potential gaps are understood and addressed.

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Theodore “Ted” Patestos is co-founder and CEO of Tiger Adjusters. Contact him at [email protected].