(June 2019)
The manner in which earthquake and volcanic eruption coverage is provided was changed when updated and new 02 19 edition endorsements were released. There are now five endorsements available.
All of these provide the same basic optional cause of loss. The differences are the manner in which it is provided, the way the deductible is computed, and the limit of insurance provided.
Throughout this discussion it is important to realize that none of these endorsements eliminate the Earth Movement exclusion in the Causes of Loss Form. They provide very specific coverage. When the earthquake/volcanic eruption coverage provided in this endorsement conflicts with the earth movement exclusion, only the specific part of the exclusion related to earthquake and volcanic eruption is eliminated.
None of these endorsements are stand-alone causes of loss forms. One of the other causes of loss forms (CP 10 10, CP 10 20, or CP 10 30) must also be included.
Related Article: Basic, Broad, and Special Causes of Loss Forms Analysis
The CP 10 40 has been used for many years to provide earthquake and volcanic eruption coverage. We will analyze this endorsement and the revisions made to it. Following that analysis, we will discuss each of the other endorsements by highlighting its similarities to and differences from the CP 10 40.
Changes made to the CP 10 40 from its prior edition are highlighted in bold.
A schedule has been introduced. One of the following sections must be completed:
A percentage deductible and limit
of insurance must be entered for each building or premises number for which
coverage is desired. A selection must also be entered as to whether or not the
masonry veneer option is to be included.
A limit of insurance must be entered for each building or premises number for which coverage is desired.
The schedule states that the policy fire deductible applies to this coverage.
This endorsement covers two causes of loss when earthquake and volcanic eruption coverage is selected as a covered cause of loss on the schedule:
Note: The term used is earthquake, not earth movement. This means that only earthquake is covered. No other type of earth movement is covered.
Volcanic eruption is defined as the eruption, explosion, or effusion of a volcano. Volcanic eruption covers virtually all aspects and effects of a volcano. Note that the exception in the earth movement exclusion covers some volcanic activity. This coverage extends beyond simply including the ground level and underground effects of volcanic activity. It contemplates earth movement associated with a volcano, along with earthquake as explained above. Seismic activity normally precedes a volcanic eruption. Any damage that results from underground shock waves in advance of an eruption is covered as part of CP 10 40.
When coverage for only Earthquake–Sprinkler Leakage is selected on the schedule, the earthquake and volcanic eruption coverage applies only to sprinkler leakage loss caused by or that results from earthquake or volcanic eruption.
An important part of this section is the 168-hour rule. All earthquake shocks or volcanic eruptions that occur within a 168-hour period are treated as one occurrence or as a single earthquake or volcanic eruption. The 168-hour time period can begin in the last hour of a policy period, end during the next policy period, and still be covered under the first policy period. This important distinction benefits both the insured and the insurance company.
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Example: Johnson Methods has a $2,000,000 earthquake coverage limit with a 5% deductible. An earthquake takes place on 03/01/19 and causes $250,000 in damage. The loss is covered but is subject to a $100,000 deductible ($1,500,000 X .05). An aftershock on 03/02/19 causes another $500,000 in damage. This loss is also covered but there is no additional deductible because of the 168-hour rule. A third aftershock on 03/03/19 causes $1,000,000 in damage and again no deductible applies. The total amount paid $150,000 for the first loss, $500,000 for the second and $1,000,000 resulting in total payment of 1,650,000. Without the 168 rule Johnson would have been subject to $300,000 in deductibles instead of only $100,000. |
1. The exclusions and limitations within any of the causes of loss forms apply to CP 10 40–Earthquake and Volcanic Eruption Endorsement except as items 2 and 3 below change.
2. The earth movement exclusion does not apply if it conflicts with the coverage CP 10 40 provides. In other words, CP 10 40 overrides the earth movement exclusion but only for earthquake and volcanic eruption.
3. The collapse exclusion in CP 10 30–Causes of Loss–Special Form and CP 00 70–Mortgageholders Errors and Omissions Coverage Form does not apply if either earthquake or volcanic eruption causes the collapse.
4. Additional Coverage–Collapse in CP 10 30–Causes of Loss–Special
Form, CP 10 20–Causes of Loss–Broad Form, and CP 00 70–Mortgageholders Errors
and Omissions Coverage Form does not apply to collapse that
CP 10 40 covers. In other words, only CP 10 40 covers collapse caused by or
that results from earthquake or volcanic eruption. No other form covers this
type of collapse.
5. Loss or damage caused by or that results from tidal wave or tsunami is excluded, even when the proximate cause is earthquake or volcanic eruption.
6. There is no coverage for loss or damage caused by or that results from earthquake aftershocks or volcanic eruptions if the earthquake or volcanic eruption began before the policy inception date. This exclusion's intent is to avoid having two policies respond to loss or damage from the same earthquake or volcanic eruption simply because the event occurs during both policy periods.
7. The ordinance or law exclusion in the causes of loss forms still applies. The only exception is when CP 04 05–Ordinance or Law Coverage is attached.
8. Coverage does not apply to loss or damage to exterior masonry veneer attached to the wood frame of a building.
Masonry veneer is especially susceptible to earthquake damage. Coverage does apply if the declarations specifically include masonry veneer or if the masonry veneer makes up less than 10% of the building's entire exterior wall area. Having the option to include or exclude masonry veneer gives the insured some control over its pricing and allows the insurance company to control frequency. Note that stucco is not considered masonry veneer.
9. This is really a reminder to the insured. Property coverage
forms do not consider land to be covered property. The costs to excavate, grade, backfill, or fill are also considered
Property Not Covered. This means that the cost to restore land after a loss
occurs is the insured's responsibility. This can be a major cost factor to the
insured because construction cannot begin until and unless the ground is first
prepared.
1. The deductible provision applies to all coverage forms except:
2. When earthquake sprinkler leakage for a
specific location is the only insurance this coverage form provides, the
deductible for that coverage is the same deductible that applies to a fire. The
deductible described in paragraph 3. Below does not apply to
earthquake-sprinkler leakage coverage.
3. The deductible in CP 10 40–Earthquake or Volcanic Eruption Endorsement eliminates the deductible sections in the coverage forms. The deductible for earthquake and volcanic eruption is expressed as a percentage of the covered property limit, not as a flat dollar amount. It is calculated and applies separately to each building, personal property in each building, and personal property in the open, even if:
No payment is made until the amount of covered loss or damage exceeds the deductible amount. In addition to handling its portion of a loss as a function of the deductible, additional factors and provisions to be considered include:
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Example: Building limit: $200,000 Building value at the time of loss: $210,000 Building loss amount: $150,000 Personal Property limit: $100,000 Personal Property value at time of loss: $55,000 Personal Property loss amount: $50,000 80% Coinsurance 5% Earthquake and Volcanic Eruption deductible The building limit must be at least $168,000 ($210,000 x .80) and the personal property limit must be at least $44,000 ($55,000 x .80) to meet its coinsurance requirement. There is no coinsurance penalty because the limits carried are higher than the minimum limits required. The earthquake deductibles are calculated as follows:
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Example: Building limit: $80,000 Building value at the time of loss: $100,000 Building loss amount: $50,000 90% Coinsurance 5% Earthquake and Volcanic Eruption deductible
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If Coverage Extension–Newly Acquired or Constructed Property covers the damaged property, the deductible is calculated as a percentage of the property's value at the time of loss. The percentage is the highest percentage for any described premises on the declarations.
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Example: The three buildings on the policy have earthquake and volcanic eruption deductibles of 5% on buildings one and two and 10% on building three. The insured acquires a fourth building and it sustains earthquake damage. The highest deductible (10%) applies to the fourth building. |
If earthquake or volcanic eruption causes loss or damage, and additional loss or damage subsequently occurs because of an ensuing cause of loss (such as fire), only the earthquake or volcanic eruption percentage deductible is applied.
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Example: A 5% deductible for earthquake and volcanic eruption and a $1,000 deductible for all other covered causes of loss apply to the covered building and personal property. An earthquake damages the building and the aftershocks cause a number of lighted candles to fall off a table. The candles start a fire that damages both the building and the personal property. The earthquake and volcanic eruption applies to this loss, not the $1,000 property deductible for all other causes of loss. |
Coverage may be written subject to CP 13 10–Value Reporting Form. In that case, the deductible is the percentage on the schedule applied to the value in the most recent report of values filed with the insurance company. This is subject to two exceptions:
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Example: Covered personal property with a $150,000 limit has a 5% earthquake and volcanic eruption deductible. The loss amount is $50,000. The latest report of values was for $90,000 on personal property. However, after the loss, it is determined that the value for the latest report should have been $120,000. The deductible percentage is based on the value that should have been reported, not on the value that was reported.
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Example: Covered personal property with a $150,000 limit is written on a reporting basis, subject to a 5% earthquake and volcanic eruption deductible. The full value of the personal property is $80,000 at the time of loss but a report was not filed. The amount of loss is $50,000.
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If coverage is written on a blanket basis and is not subject to value reporting, the deductible is calculated as a percentage of the specific buildings' or personal property's value in the most recent statement of values filed with the insurance company. If coverage is written on a blanket basis and is subject to value reporting, the deductible is calculated as a percentage of the value of the property at the time of the loss.
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Example: Building one is valued at $100,000, building two at $150,000, and building three at $250,000, for a total of $500,000. These values are listed on the most recently filed statement of values. Personal property is on a reporting basis with a $500,000 limit. The latest reported value was $300,000. All three buildings and the personal property at building one sustain damage due to volcanic eruption. The deductible and loss payments are calculated as follows:
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If coverage is written on
CP 00 20–Builders’ Risk Coverage Form and is not subject to value reporting,
the deductible is calculated as a percentage of the property’s actual cash
value at the time of loss. If coverage is written on
CP 00 20–Builders’ Risk Coverage Form and is subject to value reporting, the
deductible is calculated as a percentage of the actual cash value on the most
recent report of values filed with the insurance company subject to two
exceptions:
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Example: A builders’ risk policy has a $500,000 limit and a 5% deductible on earthquake and volcanic eruption. The actual value at the time of loss is $120,000. However, the value on latest report of values is $100,000. The amount of loss is $50,000. The deductible is $5,000 ($120,000 X .05). The insurance company pays $50,000 - $6,000 = $44,000. |
The period of restoration is changed on any and all coverage forms and endorsements. The period of restoration starts either when the direct physical damage occurs or a number of hours afterwards. All such beginning dates are subject to the 168-hour rule when earthquake and volcanic eruption is the cause of loss.
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Example: The initial earthquake occurs at 8:25 am on 07/02. A number of aftershocks occur over the next three days. The period of restoration begins at 8:25 am on 07/02. The aftershocks do not introduce additional restoration periods. |
This form is identical to the CP 10 40 except for the following:
There is no schedule within this endorsement so CP DS 06–Earthquake – Volcanic Eruption Coverage Schedule (Sub-Limit Form) must be completed.
CP 10 45 contains two additional sections.
This endorsement eliminates the coinsurance requirement because coverage is based on a sub-limit of insurance. As a result, coinsurance does not apply.
This section provides this endorsement's distinguishing features. These are very important because of the numerous restrictions beyond those of a simple sub-limit. Each of its six important subparts is summarized below.
o General
Information
The limit of insurance for this cause of loss is on the CP DS 06. It is not the same limit of insurance that applies to the other causes of loss.
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Example: Mongo LLC's commercial property coverage form has a $1,000,000 building limit and a $250,000 personal property limit. Mongo selects a $750,000 combined building and business personal property sub-limit for earthquake and volcanic eruption coverage. |
o Annual
Aggregate Limit
Standard property coverage forms are occurrence-based. Each occurrence is separate from other occurrences with its own set of limits and those limits are reinstated after each loss. The limits from one occurrence do not affect the limits available for the next loss. However, CP 10 45's aggregate limit is reduced each time a loss occurs during the annual policy period. If an earthquake event begins at the end of one policy period and continues into the next, only the remaining aggregate limit for the expiring policy period when the loss began is available and applies, even if that limit is depleted.
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Example: Mongo’s policy period begins on 01/01/19 and ends on 01/01/20. An earthquake occurs on 01/02/19 and $500,000 of its $750,000 combined annual aggregate sub-limit is used to repair the damage and get Mongo back into business. On 12/03/19 another earthquake event occurs and the remaining $250,000 of the annual aggregate sub-limit is applied to the $400,000 loss. On 12/30/19, yet another earthquake strikes with subsequent aftershocks that continue until 01/03/17. Most of the damage occurs on 01/02/20. The last earthquake began during the 01/01/19 to 01/01/20 policy year, after the annual aggregate sub-limit was already exhausted. As a result, the $250,000 loss was not covered. |
o Increased Annual Aggregate Limit Option
There is an option available that increases the aggregate to two times the annual aggregate sub-limit. This means that a single event is limited to the sub-limit on the declarations. If other events happen during the policy period, they too are subject to the sub-limit on the declarations. However, the cap that applies over the sum of all events during the policy period is twice the sub-limit on the declarations.
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Example: Using the example above, all of Mongo’s losses would have been covered because no loss exceeded the $750,000 sub-limit and the sum of all of the earthquake events was $1,150,000 which was less than $1,500,000. |
o Additional Coverages and Coverage Extensions
The coverage form to which this endorsement applies may include additional coverages and coverage extensions, such as newly acquired property and valuable papers and records. These coverages usually have specific limits of insurance. However, those additional limits do not increase the sub-limit for this cause of loss.
o Limitation
Blanket coverage is often used to cover up problems with inadequate insurance to value. That approach does not affect this endorsement. The most paid for loss or damage to covered property written under blanket coverage is the limit for that property on the statement of values.
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Example: Pete’s Place has blanket coverage on buildings and business personal property at three locations. The blanket limit is $5,000,000. The statement of values reflects values of $1,250,000 for each building and $400,000 for personal property at each location. Pete purchases earthquake coverage with a $2,500,000 combined sub-limit. An earthquake event destroys one of the locations. The values at that location at the time of loss are $2,000,000. Even though a $2,500,000 earthquake sub-limit applies, the loss paid is limited to the $1,250,000 building value and the $400,000 business personal property value on the statement of values, for a total payment of $1,650,000. |
o Ensuing
Loss
The earth movement exclusion has an exception for damage that an ensuing fire or explosion causes. The total loss for a combination of earthquake and the ensuing loss is the limit that applies to the ensuing loss, not the total of the two limits.
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Example: Russet’s building limit is $500,000 with an earthquake sub-limit of $200,000. An earthquake damages the building. The loss investigation determines that $350,000 of damage is due to the earthquake and $100,000 is the result of the ensuing fire. The loss settlement is $200,000 for the earthquake damage and $100,000 for the fire damage, for a total payment of $300,000 instead of the $450,000 total loss amount. |
The deductible section has a slight but significant change. The percentage deductible is based on the value according to the statement of values. This means a statement of values is required whenever this endorsement is used.
The only difference between this endorsement and the CP 10 40 is the deductible. The flat deductible applies per location. All loss of property at a single scheduled location is subject to the single deductible entered for that building. When scheduled property is damaged by earthquake or volcanic eruption at a location and another covered cause of loss also occurs, only the earthquake deductible is applied.
The only difference between this endorsement and the CP 10 45 is the deductible. The flat deductible applies per location. All loss of property at a single scheduled location is subject to the single deductible entered for that building. When scheduled property is damaged by earthquake or volcanic eruption at a location and another covered cause of loss also occurs, only the earthquake deductible is applied.
This simple endorsement can prevent a gap at the beginning of the policy. It provides coverage for an event that starts prior to the earthquake-volcanic eruption coverage inception date but that continues into the current coverage period but only if the event started within 72 hours of the inception date. However, the only loss covered is that which happens after the inception date.
This endorsement can be attached to any of the earthquake-volcanic eruption coverages.
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Example: Mary decided to add the CP 10 40-Earthquake and Volcanic Eruption Coverage with Percentage Deductible to her renewal on 10/1/2019. Scenario 1: An earthquake occurs on 10/2/2019. Mary has coverage. Scenario 2: An earthquake occurs on 9/30/2019. Mary has no coverage for any earthquake damage due to that earthquake or any of its aftershocks. Scenario 3: The earthquake occurs on 9/30/2019. Because the CP 10 41 is attached, Mary has coverage for the aftershocks that occur on 10/1/2019 and 10/2/2019. She does not have coverage for damage due to the initial earthquake though. |
This schedule is required when either CP 10 45–Earthquake And Volcanic Eruption Coverage (Sub-Limit Form With Percentage Deductible) or CP 10 29–Earthquake And Volcanic Eruption Coverage (Sublimit-With Flat Dollar Deductible) is attached.
This schedule is similar to the CP 10 40 schedule except for the following:
Description of
Premises or Locations
All of the premises or locations that are to be part of the sublimit in the form must be entered. Multiple schedules can be attached if there are multiple sublimits.
Blanket Limit
The blanket limit is entered and the coverages that are part of that sublimit are selected.
An unusual aspect of this blanket is that the time element coverages can be selected along with the direct damage coverages and placed in one blanket sublimit.
Separate Limits
A specific sublimit can be entered by premises and be coverage. When blanket and separate are used, the items shown in the separate limits should be removed from the blanket limit.
Increased Annual Aggregate
Limit Option
The sublimit is an aggregate sublimit, not an occurrence sublimit. When Yes is selected for the Increased Annual Aggregate Limit Option, the aggregate is doubled.