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By MATTHEW BRODSKY, senior editor/Web editor of Risk & InsuranceŽ

Nearly 12 days after the massive magnitude 8.8 earthquake struck Chile on Feb. 27, as many as nine aftershocks struck the same fault line, though further north, on March 11--two of those aftershocks as strong as magnitude 6.9.

Although anecdotal, a report from one earthquake expert on the ground in Chile suggests worsening of the situation.

"They are actually big earthquakes by themselves. We have watched the big cracks in our hotels get bigger," Peter Yanev reported to Risk & InsuranceŽby e-mail. Currently a director for Global Risk Miyamoto, Yanev has devoted more than 40 years to structural engineering and is currently on his 45th on-site earthquake investigation.

If indeed these aftershocks have caused more damage to commercial and industrial properties, risk managers could have issues on their hands with quake limits and claims adjusting.

ERODED SUBLIMITS?

Generally speaking, in their property-catastrophe insurance programs, corporate risk managers are likely to have an earthquake "event" defined as a 72-hour period. No matter how many shocks occur in one 72-hour period, they would be covered by one deductible. Yet yesterday's aftershocks occurred nearly two weeks later. What could that mean?

Potentially, insureds could be looking at another deductible. That is, if they have any coverage remaining for Chile quake at all. Global catastrophe programs--again, generally speaking--tend to have a separate limit for quake, with annual aggregate sublimits applying to higher-hazard regions or countries, like Chile or California. Say such a sublimit for Chile is $10 million.

"If the sublimit was eroded, it would be gone for your policy term," explained William W. Schneider, senior vice president of market management and communications for Allianz Global Corporate & Specialty.

Or if both occurrences burn through your entire earthquake limit, you'd be bare the world over for the remainder of your policy period.

"The total damages from the first period and second occurrence would serve to erode the total aggregate limits for the policy term," Schneider said, adding that in such a case risk managers would have to weigh the benefit of buying additional limits for the remainder of the policy term.

That said, it is crucial for insureds to understand how their policy will perform and whether they could be exposed to earthquake risk for the remainder of their policy period, advised George Stratts, president and CEO of Chartis Global Marine and Energy.

CONFUSING CLAIMS?

Assuming that an insured had a loss from the first quake and got hit by these aftershocks, how is it possible to determine which event caused what damage? Figuring out a loss for one event alone can take time, especially when business interruption is considered.

"Losses develop and they tend to develop more adversely than in the other direction, particularly when more than one event is involved," said Stratts.

The first crucial step, he said, is getting adjusters and structural engineers at an insured's facilities to get an accurate picture of what happened.

"You start to see cracks and fissures once you get boots on the ground," Stratts said.

Added Tony Clark, vice president of claims at Allianz Global Corporate & Specialty, "frequent and immediate communications" after the Chile events between the risk manager and his insurer will be critical, as are those between the risk manager and his boots on the ground. Make sure someone is taking pictures and documenting possible damage to properties.

"We might not be able to get there for a week or 10 days due to transportation or infrastructure issues," Clark explained. "So be as precise as you can and document everything you can to assist us in making a proper determination in what might be covered and recoverable under your policy."

Difficulties might arise. For instance, a property might have had structural damage in one part that spread to another part of the building with the aftershocks.

But in many cases, insureds and insurer can bring in engineering experts to do forensic work and come to a "pretty reasonable situation" as to what damage came from what event, Clark said.

The insurance bill from the Feb. 27 event could add up to between $4 billion and $7 billion, according to Swiss Re and Munich Re.

March 12, 2010

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