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Volcano eruption highlights coverage gaps

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Volcano eruption highlights coverage gaps

The recent activity of the Kilauea volcano on Hawaii’s Big Island has highlighted the serious threat that volcanoes present worldwide.

While the Hawaii eruption itself is not expected to result in a major event for the insurance industry, eruptions in more populated areas could lead to catastrophic losses, industry experts say.

Therefore, companies should be aware of potential pitfalls that could thwart their efforts to receive coverage for business losses caused by volcanic activity under their insurance policies, they add.

The May 3 eruption led to the evacuation of more than 2,000 people on Hawaii’s Big Island and the destruction of roughly 27 houses in Leilani Estates. Lava from the volcano reached the Pacific Ocean, and one man was reported injured when spattering molten rock hit him in the leg.

So far, the insurance implications of the eruption have not been major, experts say.

Gary Marchitello, head of property broking for Willis Towers Watson P.L.C. in New York, said that “in the relative scheme of things, certainly over last 40 to 50 years, volcanoes have not been a big contributor to insured losses.”

“Hawaii, and especially the Big Island, is no stranger to volcanic eruptions,” said Balz Grollimund, Swiss Re Ltd.’s Toronto-based senior vice president for North America. “The type of eruption you’re seeing at the moment is not out of the ordinary. Of course, there’s an impact to those communities, but if we think about the insurance industry and certainly when it comes to the point of reinsurance, these are not exposures to be worried about.”

However, Kilauea “really brought us back to the question of what other volcanoes we would be concerned about,” he said.

In 2017, Swiss Re said seven of the world’s largest urban areas, representing over 1 billion people, are located within a 150 kilometer-radius of an active volcano and some of the largest cities are at risk of total economic losses of as much as $30 billion. The top 10 exposed cities include Tokyo, Naples, Manila and Jakarta.

“Kilauea is not a very explosive volcano, but there are many hundreds of volcanoes around Earth that are very explosive when they erupt,” said Greg Valentine, professor of earth sciences at the State University of New York at Buffalo. “Many millions of people are living in urban areas that are vulnerable to explosive volcanic eruptions.”

In May 1980, Mount St. Helens in Washington erupted, killing nearly 60 people, sparking a massive landslide and spreading volcanic ash across a dozen states. A report in May published by Munich Reinsurance Co. said that, adjusted for inflation, the insured losses from the eruption were $92 million.

Business owners seeking volcano coverage should be aware that earth shaking, which often accompanies volcanic activity, would be considered an earthquake, Mr. Marchitello said. They would have to buy an earthquake policy to be covered for the shake damage if the shake is caused by volcanic eruption, he said.

“You can buy an earthquake policy for additional premium that also covers earth movement associated with a volcano,” said Arthur Flitner, senior director of knowledge resources at the American Institute For Chartered Property Casualty Underwriters in Malvern, Pennsylvania. “So, there’s a way to cover it, it’s just that you have to buy a separate policy.”

Mr. Flitner added that “some people may see the exclusion of volcanic eruption and not look at the rest of the policy and assume ‘I don’t have any coverage for volcanic eruption,’ but that’s not true.” “You do have coverage for the volcanic action perils — the lava, the air blast, the particulate matter,” he said. “What you don’t have is the earth movement part of it.”

Barry Buchman, a partner in the insurance recovery practice group for Haynes and Boone L.L.P. in Washington, said in the case of volcanoes, business owners are typically looking at first-party property damage and business interruption coverage.

“The typical business owner who might not be steeped in insurance may think that ‘unless my property itself was damaged, then I’m not going to have a claim,’” Mr. Buchman said. “But what they don’t realize when you have significant evacuation orders, the disruption, the business loss from that may be covered under what we call the civil authority permissions of typical property damage policies.”

But Mr. Buchman warned business owners to “watch out for procedural booby traps.”

“A lot of first-party policies have very quick deadlines for things like documentation of loss,” he said. “There are these things embedded in property policies that could catch an unwary business owner off guard. Generally speaking, you want to be giving prompt notice of circumstance if you know you’re going to have a loss. You can always document it later, but you want to give quick notice.”


 

 

 

 

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