Anne Freedman

Anne Freedman is managing editor of Risk & Insurance. She can be reached at [email protected]

Black Swan: Tsunami

Menace on the Horizon

The Pacific Northwest will never fully recover from this tsunami and earthquake.
By: | August 3, 2016 • 8 min read
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Scenario:  Fifteen to 20 minutes.

That’s all the time that tens of thousands of coastal residents and tourists will have to escape with their lives when the Cascadia Subduction Fault ruptures. It could happen tomorrow. Or in 50 years. No one is totally sure, since there is no way to predict when earthquakes occur.

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But when the 700-mile-long fault in the Pacific Ocean that stretches just 70 miles offshore from Cape Mendocino, Calif., to Vancouver Island, British Columbia, last erupted in 1700, the earthquake-powered tsunami was so powerful it drowned a forest of 150-foot-tall spruce trees on the Oregon Coast and swamped a feudal castle in Japan.

This time, the loss of life and infrastructure damage will be worse because so many more people live in the Pacific Northwest and there is so much more to destroy.

Large sections of the coastline will drop by nearly 5 feet, and the shaking caused by the magnitude 9 earthquake will last as long as five minutes, affecting 140,000 square miles, including Seattle, Tacoma, Portland and Olympia. Aftershocks will continue for months.

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The first tsunami wave — as high as 30 to 40 feet — will bury the coastal communities in unrelenting towers of water moving about 20 mph toward the shore, and as fast as 500 mph across the ocean. About 100,000 people live and work there, but the population grows by tens of thousands during tourist season.

Roads, bridges, railways and communication structures will be destroyed. Natural gas pipelines and water systems will be heavily damaged. There will be widespread, lengthy power outages in every city within 100 miles of the coast. Undersea transpacific cables will be severed.

Fatalities will total upwards of 13,000 — many more if the tsunami occurs during a weekend beach day in tourist season.

The coastline and low-lying areas of towns west of I-5, the main interstate on the West Coast, will be wiped out from Northern California to British Columbia. Higher ground will suffer moderate to severe damage.

Wood-frame buildings should withstand the earthquake, but not the tsunami. Masonry buildings may withstand the tsunami, but not the earthquake.

Fatalities will total upwards of 13,000 — many more if the tsunami occurs during a weekend beach day in tourist season.

The region never fully recovers.

Analysis:  Total global economic losses from natural and man-made disasters in 2015 were $92 billion, according to Swiss Re. When the Cascadia Subduction Fault ruptures, that alone will be higher.

Official projections put the economic damage at $49 billion for Washington, $41 billion for British Columbia, $32 billion for Oregon and $4 billion for California, but many experts believe losses will be higher. Maybe 20 percent to 25 percent of economic losses will be insured, experts said.

Residents and small business owners usually do not have flood or earthquake protection. And standard policies for small businesses have limited coverage for business interruption, or extra expenses required to rebuild and recover.

“The basis for the panic is pretty solid. It’s not a tinfoil-hat kind of thing. We are way past the minimum from geologic records, but we are not in any sense, overdue.” — Dr. Chris Goldfinger, director, active tectonics and seafloor mapping laboratory at Oregon State University

National or regional companies may see higher payouts. As sophisticated insurance buyers, they will have higher limits for business interruption, contingent business interruption and for extra expenses. But the damage will take months and years to fix. No business can outlast that. Not if they remain in the area.

Homes and businesses on the coast will be destroyed. Plus, the entire coastline will be isolated by the tsunami’s devastation, cut off from the rest of the country.

In the bigger cities, such as Portland, Eugene and Seattle, many properties will be destroyed by the earthquake. Residents and business owners will face at least a month without electricity, several months without water, and years before bridges and major infrastructure are restored. And those are the optimistic projections.

Oregon businesses were stunned to hear it would take months and years to resume operations, said Dr. Chris Goldfinger, director, active tectonics and seafloor mapping laboratory at Oregon State University, who has been charting the frequency and severity of the zone ruptures.

“They said after a few weeks, we would have to leave,” he said. “We can’t just sit here and wait for years for bridges to be rebuilt. That was a sobering moment.”

Everyone Has a Stake

The average time between earthquakes is 400 to 500 years, Goldfinger said. It can be as short as 200 years, as long as 1,000. It’s now 315 years since the last rupture of the Cascadia Subduction Fault.

“The basis for the panic is pretty solid. It’s not a tinfoil-hat kind of thing. We are way past the minimum from geologic records, but we are not in any sense, overdue,” Goldfinger said.

“Everyone has a stake in it,” he said. “We all have a responsibility to do something.” — Jay Wilson, Clackamas County (Oregon) resilience coordinator

With bridges, highways and communication down, emergency response will be limited. Rescue efforts will have to come from outside the affected areas.

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“The people we count on the most for smaller disasters and misadventures will be victims like the rest of us,” said Goldfinger.

Like many others in the Pacific Northwest, Jay Wilson, Clackamas County (Oregon) resilience coordinator, is working to reduce the number of victims. It’s a very site-specific exercise and an overwhelming task.

“Everyone has a stake in it,” he said. “We all have a responsibility to do something.”

“A Massive Planning Effort”

To aid tsunami survivors, the construction of about 43 “vertical evacuation structures” in coastal Washington have been discussed.

Nathan Wood, research geographer, U.S. Geological Survey

Nathan Wood, research geographer, U.S. Geological Survey

The first one — a refuge on the roof above Ocosta Elementary School in Westport, Wash., will be finished soon. It will hold 700 people. A planned berm — basically a big hill — behind  an elementary School in Long Beach, Wash., will save about 600 more.

Officials and community members are also caching relief supplies on high ground near the tsunami zone so survivors will have provisions while they await rescue, said Nathan Wood, research geographer, U.S. Geological Survey.

“It’s a massive planning effort,” he said, noting that Oregon and Washington emergency managers have involved hundreds of experts, legislators, business leaders and the public in regional resilience planning.

“It will be catastrophic,” Wood said, “but we can make it more resilient. People are not burying their heads in the sand. Can they make everything perfect in one day? No. But it was really impressive how they are pulling everybody together.”

Still, Wilson said, it’s a hugely expensive proposition that will take years, and new buildings and infrastructure are still not being constructed to a higher level of resilience, such as is common in Japan and Chile, or even California, where earthquakes and tsunamis are more common.

“Until the business community starts demanding it and elected officials campaign on it, it’s still backroom conversation by a bunch of policy wonks like me saying, ‘What can we do to make this happen?’ ”

VIDEO: More than 470 Washington National Guard personnel took part in the Cascadia Rising earthquake preparedness exercise in June. Report from iFiberoneNews

That’s not to say there hasn’t been progress. In June, “Cascadia Rising 2016,” a four-day earthquake and tsunami drill began in Washington and Oregon to test emergency response measures. About 20,000 people, including the U.S. National Guard, and federal, state and local emergency responders, practiced saving lives and delivering services while testing ways to communicate with no electricity or cell service.

The region will also be getting support from the 100 Resilient Cities initiative of the Rockefeller Foundation. Seattle and Vancouver were added to the roster in May. Both will receive financial support for a chief resilience officer as well as access to best practices, service providers and partners.

Wilson had been hoping Portland would be chosen as well.

Recovery will be an immense challenge. The U.S. already has a $1.5 trillion shortfall for infrastructure maintenance, said Alex Kaplan, senior vice president, global partnerships, Swiss Re, who works with the 100 Resilient Cities initiative.

Finding the Money

“Where will the money come from?” asked Jamie Miller, head of property for North America, Swiss Re Corporate Solutions. And when?

Jamie Miller, head of property, North America, Swiss Re Corporate Solutions

Jamie Miller, head of property, North America, Swiss Re Corporate Solutions

One year after Superstorm Sandy, about 75 percent of federal funding still had not been dispersed, he said.

The challenges settling claims following Sandy’s devastation will surely reoccur, Miller said. And there will be a “huge gap” between insured and economic losses for small business owners.

“Where a policy does not cover earthquake or flood, an insured’s coverage may only include ensuing losses, such as fire resulting from a burst gas pipe.”

Business income protection and coverage for extra expenses will not come close to covering the costs required to return to operation, he said.

For larger companies, even the most sophisticated risk manager will be challenged to calculate — or protect — the business income and recovery losses.

Access to gasoline will disappear rapidly, so emergency generators will become useless. Customers will be nonexistent.

Construction crews will be overwhelmed and face labor shortages; their price will dramatically escalate, assuming it’s even possible to hire a crew, Miller said.

Built-in redundancies to use nearby facilities to get back in business will be useless since the entire region will be affected, and receiving supplies, impossible.

Plus, with the popularity of just-in-time supply chains, companies will likely have few resources on hand to facilitate production.

At the same time, U.S. and Asian companies that rely on goods from the devastated area will go lacking.

“The big question is, what are we going to do about it?” — Jay Wilson, Clackamas County (Oregon) resilience coordinator

After the Thailand floods in 2011, some car manufacturers delayed production for months because of a lack of components, while computer industry companies saw shortages and adverse impacts for six months to a year.

When large commercial enterprises file insurance claims, they may be dealing with as many as 20 companies.

“Getting them all to agree on an adjustment is a big challenge,” Miller said.

Insurers that did not adequately manage risk aggregation will face bankruptcy. That, in turn, will leave third-party vendors and service providers unpaid and work undone.

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Steven Jakubowski, president, Aon Benfield’s impact forecasting team, said insurer solvency will be an issue. “We saw that in Northridge,” which was a 6.7 magnitude earthquake that hit Los Angeles on Jan. 17, 1994.

According to the Insurance Information Institute, Northridge caused $15.3 billion in insured damage, topped only by Hurricane Katrina, the attacks on the World Trade Center and Hurricane Andrew.

“We are so big on public/private partnerships because of this,” Miller said. “The resiliency initiative is all about creating awareness of overall risk.”

Swiss Re’s global partnerships business focuses on building long-term resilience, while helping governments transfer risk away from taxpayers and into the private market, aiming to reduce over-dependence on an increasingly strained federal disaster budget, Kaplan said.

Wilson said the aim of emergency planning is to create a two-to-four week recovery window. Right now, it’s months and years.

“We haven’t had anything this big in our country before,” he said. “For me, I just accept it. It’s gonna happen,” said Wilson. “The big question is, what are we going to do about it?” &

Anne Freedman is managing editor of Risk & Insurance. She can be reached at [email protected]
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The Law

Legal Spotlight

A look at the latest legal cases impacting the industry.
By: | August 3, 2016 • 4 min read
You Be the Judge

$102 Million Excluded From Coverage

PNC Financial Services Group Inc. agreed in 2010 and 2012 to pay $102 million to settle six class-action lawsuits that claimed the bank manipulated transactions to increase revenues from overdraft charges.

Following the settlements, PNC sought indemnification from its insurers, Houston Casualty Co., which had issued a $25 million liability policy; and Axis Insurance Co., which issued a $25 million excess policy for claims that exceeded $50 million. PNC self-insured the first $25 million.

People at ATMBoth insurers denied coverage, saying the settlement was a refund of overdraft fees and was excluded as they were “fees, commissions or charges for Professional Services paid or payable to an insured.”

After PNC sued the insurers in 2013, the U.S. District Court for the Western District of Pennsylvania concluded that the Professional Services exclusion applied to the $102 million settlement payment, with the exception of about $30 million for attorneys’ fees, which were covered by the policies.

Houston and PNC settled their dispute in 2015.

On May 2, the U.S. 3rd Circuit Court of Appeals ruled that none of the $102 million was covered by the Axis policy. It noted that the settlement agreements explicitly provided that attorneys’ fees were to be paid from the settlement funds — meaning that PNC was not paying the attorneys, the class-action plaintiffs were.

Scorecard: The insurance company did not have to pay a $102 million claim to PNC.

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Takeaway: The Professional Services clause unambiguously excluded third-party losses that constituted fees or charges for professional services.

Lack of Prior Consent Voids Claim

A fatal worksite accident in July 2007 delayed work on a construction project, leading general contractor Mortenson to file suit against Stresscon Corp., a subcontracting concrete company, for the interruption.

Stresscon sought indemnification from Travelers Property Casualty Co. of America.

On Dec. 31, 2008, Mortenson and Stresscon entered into a settlement agreement without consulting Travelers. Stresscon still had not informed Travelers of the settlement when it filed suit in March 2009 against the insurer and others for bad faith in unreasonably delaying or denying its claim.

A Colorado district court awarded Stresscon damages, and that judgment was upheld by an appellate court. Both courts ruled against Travelers’ argument that it had no duty of indemnification because the insurance policy stated that the insured could not assume any obligation or expense “without our consent,” known as the “no voluntary payments provision.”

The courts ruled the insured should have the opportunity to demonstrate that the insurance company was not prejudiced by the late notice. The Colorado Supreme Court disagreed.

On April 25, in a 4-3 opinion, it ruled the issue of whether the insurer was prejudiced by the late notice did not overrule the no-voluntary-payments clause, and it ordered the lower court to direct a verdict in favor of Travelers.

Scorecard: Travelers will not need to indemnify Stresscon for payments the contractor made without its consent.

Takeaway: The ruling may convince more insureds to litigate claims when they can’t convince their insurers to settle a claim.

Insurers Don’t Need to Pay $20 Million

In January and February 2009, King Supply Co. sent about 670,000 faxes to about 143,250 recipients advertising its services.

CE Design Ltd. and Paldo Sign and Display Co. were lead plaintiffs in a federal class-action lawsuit against King, alleging violations of the federal Telephone Consumer Protection Act (TCPA) and violations of the Illinois consumer fraud act.

printer and copying machineKing sought defense and indemnification from its insurers, National Fire Insurance Co., and Valley Forge Insurance Co., which had issued commercial general liability policies covering those timeframes, and Continental Casualty Co., which had issued an umbrella liability policy. All of the insurers were part of CNA Financial (CNA).

King and the plaintiffs eventually settled the lawsuit for $20.2 million. The agreement called for King to pay $200,000 and its insurers to pay the remaining balance of $20 million.

The insurers denied coverage, citing a policy exclusion for material distribution in “violation of statues.”

CE Design and Paldo filed suit in Lake County, Ill., seeking an order that the insurers had a duty to defend and indemnify King. That court dismissed the case, citing the exclusion. The 2nd District Appellate Court of Illinois upheld that decision on May 2.

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The appeals court found the exclusions were properly approved by the Texas Department of Insurance, where the policies were issued. It also rejected a claim by CE Design and Paldo that the faxes were not in violation of the TCPA.

Scorecard: The insurance companies do not have to pay $20 million toward the settlement.

Takeaway: Because the insurers could show that regulators had approved of the “violation of statues” exclusion, they were allowed to deny the claim.

Anne Freedman is managing editor of Risk & Insurance. She can be reached at [email protected]
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Education Risk Management

Insuring Feathers, Fur and Football Tradition

Using live animals as sports mascots requires a focus on risk mitigation.
By: | July 18, 2016 • 5 min read
football fan

Lions, tigers and bears. Oh my!

Not to mention the buffalo, a ram, horses, a falcon, an owl and various dogs. The animals that pump up sports fans at universities across the United States range from a gamecock and an eagle to a bulldog and a bluetick coonhound.

“There are quite a few of them out there,” said Vincent Morris, executive director of the higher education practice at Arthur J. Gallagher & Co.

“It’s the tradition and pageantry of it all. The pounding hooves before a football game, the raptor soaring around the stadium, the tiger growling … .

“Mascots are so different,” he said.

“What one does with a University of Georgia bulldog is different from what one does with a University of Colorado buffalo.”

But they all need to be insured for mortality as well as potential property damage or bodily injury. Plus, the animals need to be cared for, whether it’s ensuring they have proper nutrition and living quarters to making sure they are humanely and adequately restrained from harming fans.

Universities with mascots also must accept that there will be objections by animal rights groups.

Vincent Morris, executive director, higher education practice, Arthur J. Gallagher & Co

Vincent Morris, executive director, Higher education practice, Arthur J. Gallagher & Co

“Nothing says ‘Go, team!’ less than an unhappy animal, and with athletes and coaches so prone to raising a ruckus on and off the field, there’s no reason to subject a real animal to the stress of being a mascot,” writes People for the Ethical Treatment of Animals (PETA) on its website.

“There’s a lot of pressure from people who say we shouldn’t have animals living like that,” Morris said. “There’s a kind of movement in the country that is concerned about caged animals … not in their natural habitat.”

He noted that most universities do not have live mascots. Of about 3,500 schools, fewer than 50 use live animals for mascots.

“When you are talking about risk management,” Morris said, “you are talking about loss control, keeping bad things from happening  — and knowing how to pay for them when they do. You don’t want to have a buffalo rampaging through the marching band.

“You have to worry about the animal being stolen or escaping,” he said.

“There have been pranks. LSU’s tiger has been released or kidnapped on more than one occasion. Arkansas’ razorbacks have gotten out on more than one occasion and killed other animals.”

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“Normally,” said Mitchel Kalmanson of the Lester Kalmanson Agency, which specializes in rare and unusual risks, especially animals, “commercial animal liability is broken down into either domestic or exotic.”

Domestic animal liability would cover, for example, dogs (mascots for Eastern New Mexico University, Texas A&M, University of Georgia, University of Tennessee and Yale), horses (Southern Methodist University, University of Oklahoma and University of Southern California),  or goats (Naval Academy).

Exotic coverage would be necessary for a bear (Baylor University), razorback (University of Arkansas), African lion (University of North Alabama), buffalo (University of Colorado, Boulder) or tiger (Louisiana State University).

“I insure [mascot owners] all the time,” Kalmanson said, noting that he also owns 18 “big cats” — tigers, lions and leopards — that are hired to appear at fairs, schools and special events.

“Sometimes mascot animals live with handlers,” Morris said.

“Some live on a farm nearby. Some live with a designated family or sometimes, athletic staff.”

Some like Mike, a Siberian Bengal tiger, lives in a specially built 15,000-square foot habitat with a waterfall, stream and foliage on the campus of Louisiana State University, according to “Hear Me Roar: Should Universities Use Live Animals as Mascots,” a 2011 article by Jessica Baranko for the “Marquette University Sports Law Review.”

Baylor University’s bear mascots, all named “Judge” followed by a surname, also live in a campus facility with a waterfall, pond, cave, rocks and foliage. Students call it “The Pit,” Baranko writes.

Usually, Kalmanson said, the university is not the owner of the mascot animals, but is added “as an additional insured on the owner’s liability policy or commercial animal owners’ liability policy.”

Mitchel Kalmanson, principal, Lester Kalmanson Agency

Mitchel Kalmanson, principal, Lester Kalmanson Agency

“You want to make sure the owner’s liability policy is exhausted before it goes into the university’s,” Kalmanson said.

Nonetheless, it’s important for universities to have written guidelines and procedures related to the mascots. They should ensure the owner has the proper state, federal and local permits and licenses to own and exhibit the animal, and ensure proper nutrition and medical care is provided.

When animals are transported, the trailer or truck must be properly ventilated, he said. Inside, the animal’s enclosure, for a big cat, for example, should be made of Lexan, a bulletproof polycarbonate, and steel instead of a less secure wire cage. Plexiglas, he noted, will crack and break if used for big cats.

When the animals are taken onto the field, handlers — and back-up handlers for cases of emergency — must be properly trained and make sure the buffalo, for example, is tethered to a safety cable to keep it from jumping into the crowd, Kalmanson said.

Animals should be brought to the fields before actual games so they can become used to the area, lights and noise. There should be an “exit strategy,” in case something goes wrong and the handlers need to move the animal to a secure area, he said. Sedation equipment should also be available.

Policy deductibles can range from $2,500 to $10,000 or more per claim, depending on the “exotic nature of the animal” and whether it is exhibited or whether it is galloped, for example, down the field.

Too often, he said, universities do not have set guidelines, and handlers or families “take too many shortcuts” about safety procedures. “There’s nobody looking over their shoulder saying they should follow the guidelines. There should be standard operating procedures available.”

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That’s good for the animal as well as the reputational brand of the university, he said.

Kalmanson said liability coverage should be for a minimum of $1 million per occurrence aggregate. Deductibles can range from $2,500 to $10,000 or more per claim, depending on the “exotic nature of the animal” and whether it is exhibited or whether it is galloped, for example, down the field.

If properly written, it will include coverage for bodily injuries or property damage caused by the animals. The policy would not, however, be triggered if PETA or some other animal rights group filed a lawsuit alleging mistreatment.

“There’s not much recourse but to defend that on its own merits,” Kalmanson said. “That would not be a covered hazard.”

Anne Freedman is managing editor of Risk & Insurance. She can be reached at [email protected]
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