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Insured losses from Napa earthquake could reach $1 billion


The magnitude 6.0 earthquake that shook the Napa Valley region last week caused up to $1 billion in insured losses, with damage centered in the city of Napa enabling the nearby wine industry to emerge mostly unscathed.

Indeed, despite being close to the epicenter of the strongest earthquake to hit Northern California in 25 years, most of the region's wineries kept operating, and those that were affected suffered limited losses.

Most of the damage was localized in historic downtown Napa, where the city's building inspectors are working to evaluate damaged structures. Thus far, the city has deemed 170 buildings uninhabitable due to damage from the quake, while listing 652 more where caution should be used when entering the buildings.

Alexander Allmann, head of Geo Risks for Corporate Underwriting at Munich Reinsurance Co. in Munich, Germany, said most of the structural damage resulting from the quake was to unreinforced masonry and older buildings. “If you look at the damage information and the pictures so far, you see exactly these types of structures,” he said.

Steve Marohn, San Francisco, California-based senior vice president and Western Zone Officer for CNA Financial Corp., said the insurer opened a catastrophe operations center on Aug. 25 in Napa Valley to manage claims related to the earthquake, which rumbled through the area the day before.

“While it is still too soon to report on specifics, we are seeing claims fall within the three broad areas that we expect to see from an earthquake of this magnitude: damages from the shake itself, leakage from sprinklers and fires following the quake,” Mr. Marohn said.

Oakland, California-based catastrophe modeling firm Eqecat Inc. estimated insured losses from the quake at $500 million to $1 billion, but acknowledged a degree of “uncertainty” concerning the extent of business interruption or contents losses. Eqecat said it figured its estimate by using a “proxy event,” a simulation from its historical database which closely resembled the actual quake.

Karen Clark & Co., a Boston-based catastrophe modeling firm, estimated insurable, or economic, damages of $1 billion using its new U.S. earthquake model.

Paul Little, president of Eqecat, said one source of variability in loss estimates was the prominence of the wine industry in the local economy.

“Certainly the wine industry is going to be the biggest driver of uncertainty in terms of how much the loss could potentially increase,” he said.

The wine industry in Napa County generates $13 billion in annual revenue and employs 46,000 people, according to the trade group Napa Valley Vintners.

Bill Merget, Petaluma, California-based principal in the North Bay property/casualty practice of brokerage Edgewood Partners Insurance Center Inc., said nearly all of his clients in the wine industry were unharmed from the earthquake. “I've only had one winery report damage,” he said.

Likewise, The Napa Valley Vintners said “the vast majority” of its roughly 500 winery members reported that they are already open for business in the aftermath of the quake.

Bob Aldridge, chief operating officer and chief financial officer for Napa, California-based Sequoia Grove Winer8y and Santa Rosa, California-based St. Francis Winery, said his company's facilities suffered only minimal damage.

“We had one barrel at Sequoia Grove roll off a shelf, and we did lose some glassware in a tasting room, but we made it through unscathed,” he said.

Mr. Aldridge said one reason for the scant losses was that his company had taken a variety of precautions to secure its inventory against shaking from seismic events.

“At our wineries we strap our barrels in so they can't roll back and forth,” he said. “Also we only stack our barrels four high to avoid problems.”

The earthquake should serve as a potent reminder of the seismic risk wine companies operating in the Napa and Sonoma County region face, said Joshua M. Marrow, San Francisco-based principal and technical director of the structural engineering group at engineering firm Partner Engineering and Science Inc.

“Risk managers need to really think about how their tanks are anchored and about barrel storage,” Mr. Marrow said.

In addition to properly securing tanks and barrels, Mr. Marrow suggested that wineries establish fortified safety areas in wine cellars that can shelter employees in the event of an earthquake. While the Napa quake caused no fatalities, Mr. Marrow said that a falling wine barrel can easily kill a worker.

Wineries also need to secure specialty insurance to cover their unique exposures.

While many businesses in the region choose to forgo earthquake insurance for cost reasons, Mr. Merget said many wine makers opt for stock throughput coverage, an enhanced cargo coverage that covers the product from grape to consumer.

“A stock throughput policy is a seamless cover for wine inventory through its life cycle, from loading grapes at the vineyard through delivery of the bottled product at the final destination,” he said. “What we like about it is that it has a low fixed deductible, and it covers earthquakes.”

However, even with stock throughput insurance in place the peculiarities of the wine business itself can make it difficult to assess damages. Mr. Aldridge said wineries often will have multiple vintages of wine in various stages of production on the property at the same time.

Garry Edwards, executive broker with Wells Fargo Insurance Services USA in San Francisco, said these unique features of the wine business can sometimes lead to a lengthy claims process, especially when rare and expensive vintages of wine are at issue.

“The insurance company will want to nail down the price of a vintage bottle based on what it was selling for before the earthquake, but now that vintage bottle, with less around, will increase in value, so I do think there will be some difficult adjustments here,” Mr. Edwards said.

Nonetheless, the prevailing attitude in Napa Valley is that while the damage from the earthquake is not inconsequential, the industry as a whole was fortunate with the timing of the quake, Mr. Aldridge said.

“If this had happened a month from now and caused real structural problems, not only would we have lost our 2013 vintage, we would have been unable to take in our 2014 harvest,” he said, noting the primary disruption his operations faced from the quake came from giving employees time to attend to damages to their homes.

Small businesses in the region also incurred damage, and operations were disrupted.

Yusuf Topal, owner of Tarla Mediterranean Grill in downtown Napa said that in addition to broken glassware and some food spoilage, the restaurant will suffer business interruption losses.

“For us, it's less about damage from the earthquake than the fact that we won't be able to open for a few days,” he said.