Property and Casualty Insurance · Property Insurance · 6 min read
Catastrophe Options and Residual Markets
- Differentiate how standard property policies, endorsements, and standalone coverages address earthquake, windstorm, and other catastrophe perils.
- Explain the purpose, structure, and general operation of residual property markets, including FAIR Plans and coastal wind pools.
- Describe the function, typical characteristics, and placement of Difference in Conditions (DIC) policies in commercial catastrophe risk management.
Earthquake Coverage and Deductibles
Standard ISO homeowners and commercial property forms generally exclude earthquake damage. However, these underlying policies may cover resulting fire damage if an earthquake breaks a gas line and ignites a blaze. To obtain protection for ground shaking, you can purchase earthquake coverage as an endorsement to an existing property policy or as a separate standalone policy. A standard ISO earthquake endorsement covers direct physical loss caused by earthquake, subject to its exclusions and conditions; the commercial property version also adds volcanic eruption, which standard homeowners forms already cover. It excludes flood and tsunami damage, and it generally does not cover resulting fire damage because the underlying property policy covers that fire.
Deductibles for earthquake coverage work differently than standard property deductibles. Instead of a flat dollar amount, earthquake deductibles are often a percentage of the applicable coverage limit or insured value. On a homeowners earthquake endorsement, percentage deductibles may apply differently to the dwelling and personal property, making it essential to review the endorsement deductible provision. Furthermore, Difference in Conditions policies and standalone catastrophe forms also carry significant deductible structures.
Earthquakes often produce multiple shocks over several days. Under standard earthquake forms, one or more earthquake shocks occurring within a specified period of hours are considered a single earthquake event. The earthquake occurrence window varies by form. A standard ISO homeowners earthquake endorsement uses 72 hours, while an ISO commercial earthquake endorsement uses 168 hours. Treating all shocks within that window as one event limits repeated event-based deductibles for the policyholder, although separate deductibles may still apply to different properties or coverages.
| Provision | ISO Homeowners Endorsement | ISO Commercial Endorsement |
|---|---|---|
| Perils Covered | Earthquake, including tremors tied to a volcanic eruption | Earthquake and volcanic eruption |
| Fire Resulting from Earthquake | Covered by underlying policy, not endorsement | Covered by underlying policy, not endorsement |
| Occurrence Time Window | 72 hours | 168 hours |
| Deductible Type | Percentage of coverage limit or insured value | Percentage of coverage limit or insured value |
Common mistakes
- Assuming that an earthquake endorsement covers fire damage resulting from an earthquake, when in fact the underlying basic property policy covers the fire.
- Calculating percentage windstorm or hurricane deductibles from the total loss amount instead of calculating them from the applicable coverage limit or insured value.
- Believing that FAIR Plans provide comprehensive package protection identical to a standard homeowners policy, overlooking that FAIR Plans generally offer limited peril coverage and exclude personal liability.
- Treating Difference in Conditions (DIC) policies as standardized forms with uniform exclusions, rather than recognizing them as nonstandard forms whose terms, deductibles, and catastrophe coverages vary by insurer.
Key points
- Standard property policies generally exclude earthquake, but coverage can be added by endorsement or standalone policy; resulting fire damage remains covered under the underlying policy.
- Standard ISO earthquake endorsements group all shocks within a set window into a single event: 72 hours for homeowners and 168 hours for commercial forms.
- Coastal windstorm deductibles are typically calculated as a percentage of the policy coverage limit rather than a flat dollar amount or the loss total.
- Residual markets, including state FAIR Plans and windstorm pools, provide essential property insurance to applicants unable to obtain coverage in the voluntary market.
- FAIR Plans generally offer limited peril coverage and do not include personal liability in basic property coverage; their service areas and eligibility rules vary by state and may consider both location and physical property hazards.
- Difference in Conditions (DIC) policies are nonstandard commercial policies used to fill coverage gaps, frequently providing catastrophe protection for flood and earthquake with high deductibles.
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