Earthquake and Windstorm: Find the Coverage Gap Before You Calculate a Payment

Introduction

Before you work out how much a property claim pays, answer a more basic question: does any of the person's policies cover what caused the damage? If none does, the person has a coverage gap: a kind of loss that their current insurance does not pay for. In that case there is nothing to calculate.

Earthquake and windstorm show two opposite starting points. A standard homeowners or renters policy does not cover earthquake damage, so the person needs extra protection. Wind is on the covered list of standard homeowners forms, but the actual policy wording still decides. Learning both patterns trains one habit: find the cause, confirm the coverage, then do the math.

What you will be able to do

• Explain why direct earthquake damage is a gap under a standard homeowners or renters policy, and name the two ways to fill that gap.
• Separate damage caused by the shaking from damage caused by a fire that follows an earthquake.
• Decide from stated policy facts whether wind damage is included, excluded or covered by separate protection.
• Separate wind damage from flood damage in the same storm.
• Apply a percentage deductible to the correct base, but only after confirming coverage.

Before you start

You should already be able to sort a homeowners loss into the right part of the policy, as taught in Map a homeowners loss to the right coverage. It also helps to know how a business's property coverage is assembled, from Commercial property: build the package, classify the loss. This lesson's examples use homes and renters, because the sources describe those policies.

A note on what this lesson is based on: the coverage patterns here are general policy patterns. They are not a Nevada statute. In every example, the policy facts that the example states decide the answer.

The three-question check: cause, coverage, then calculation

Use these three questions, in this order, on every loss in this lesson:

1. What caused the damage? The cause of a loss is called a peril. Fire, wind and earthquake are all perils. For more practice naming causes, see Read a loss scenario: peril, hazard and cause.
2. Does a policy cover that cause? Check the list of covered perils. Then check for an exclusion: policy wording that removes coverage for a named cause. Finally, check whether the person bought any added protection.
3. Only if the answer is yes: what does the policy pay? Apply the deductible and the limit.

The order matters. If you skip question 2, you can produce a confident dollar figure for a loss the policy never covered.

Earthquake shaking: a gap in a standard homeowners or renters policy

In plain terms: if the ground shakes and the shaking damages the house or belongings, a standard homeowners or renters policy does not pay. You can see this in the HO-3 form. That form covers the dwelling against every cause except the ones it lists, and earthquake is one of the listed exceptions.

Example. Ines owns a home insured only by a standard homeowners policy. An earthquake cracks the foundation, knocks down a garden wall and breaks dishes inside.

• Cause: ground shaking from an earthquake.
• Coverage: earthquake is excluded, and Ines bought nothing else.
• Calculation: none. This policy pays nothing for this damage.

The policy pays nothing because the cause is excluded. The size of the damage has nothing to do with it. Ines has a coverage gap for earthquake damage.

Change one fact: a fire starts after the shaking

Suppose the earthquake also breaks a gas line, and a fire burns the kitchen. The cause of the kitchen damage is now fire, not shaking. A standard policy generally covers fire that follows an earthquake. If that fire makes the home unlivable, the policy also generally covers additional living expenses: the extra costs of living somewhere else while repairs are made.

The tempting mistake is to label everything "earthquake damage" and stop. The name of the event does not decide coverage. Sort each piece of damage by its own cause. In Ines's case, the cracked foundation, fallen wall and broken dishes come from shaking and are excluded. The burned kitchen comes from fire and is generally covered.

Try this before reading on: an earthquake topples a bookcase onto a laptop. Separately, a candle knocked over by the same quake starts a fire that scorches a bedroom. The homeowner has only a standard homeowners policy. Which damage is a gap?

Filling the earthquake gap: an endorsement or a separate policy

There are two ways to buy earthquake protection:

• Endorsement. This is a written add-on that changes a policy the person already has. Here it adds earthquake coverage to the homeowners or renters policy. The protection lives inside the existing policy.
• Separate policy. This is a stand-alone contract that covers earthquake on its own, apart from the homeowners or renters policy.

Both routes can fill the same gap. The difference is which document you read to find the coverage. Both are options for renters as well as homeowners.

Whichever route the person chose, read what that protection actually covers. Earthquake protection may divide coverage into categories, such as the home's structure, the belongings inside and living expenses, and each category can have its own terms. Coverage exists only for the categories the person actually selected.

Example. Ines adds an earthquake endorsement that covers her dwelling only. A later quake cracks the foundation and breaks her dishes. The foundation is now covered under the endorsement's terms. The dishes are not covered, because she did not choose belongings coverage. She filled part of her gap, not all of it.

Try this: Marco rents an apartment and has only a standard renters policy. Marco is worried that an earthquake could destroy their belongings. What gap exists, and what are their two options?

The earthquake deductible: a percentage of the policy limit

A deductible is the part of a covered loss that the policyholder pays before the insurer pays anything. A deductible is often a fixed dollar amount. Earthquake protection can instead use a percentage deductible: a deductible set as a percentage of an amount the policy names. For earthquake protection, that named amount can be the policy limit, which is the most the coverage will pay. In some locations, catastrophe deductibles in general are set as percentages instead of dollar amounts.

The key skill is to apply the percentage to the base the policy states, not to the size of the loss. For the general mechanics of deductibles and limits, see Calculate deductibles, limits and coinsurance.

Worked example. Assumed policy terms: an earthquake endorsement has a dwelling limit of $250,000 and a deductible of 10% of that limit. An earthquake causes $40,000 of shaking damage to the dwelling.

1. Coverage: the endorsement covers shaking damage to the dwelling. Go ahead.
2. Deductible: the base is the limit. 10% × $250,000 = $25,000.
3. Payment: $40,000 − $25,000 = $15,000.

Check your work: the deductible depends on the limit, so it stays $25,000 whether the damage is $40,000 or $200,000.

The tempting mistake: taking 10% of the loss gives 10% × $40,000 = $4,000, and a payment of $36,000. That figure uses the wrong base. The policy said "10% of the limit," not "10% of the loss."

Change one fact. Suppose the damage is $18,000. That is less than the $25,000 deductible, so the endorsement pays $0.

Change a different fact. Suppose the damage is $40,000 again, but there is no endorsement. The payment is also $0, but for a different reason. There is no deductible to apply, because nothing covers the loss.

These two zeros are not the same. The first is a covered loss that fell below the deductible. The second is a coverage gap.

The 10% and $250,000 figures are assumptions for this example. A real policy states its own percentage and its own base, and those stated terms control.

Try this: assume a separate earthquake policy has a limit of $300,000 and a deductible of 5% of the limit. Shaking damage is $22,000. What does it pay?

Windstorm: included in standard forms, but the wording decides

A windstorm peril means damage caused directly by strong wind. Hail is usually listed with it, as "windstorm or hail." In the standard homeowners forms HO-1, HO-2, HO-3, HO-4, HO-6 and HO-8, windstorm or hail is on the covered list. That is the opposite of earthquake. Policies still vary, so the actual policy decides. Some homeowners policies do exclude windstorm and hail, and when one does, the owner needs separate protection to cover that risk.

When you read wind coverage, the policy facts point to one of three results:

• Included. Wind is a covered peril, and no exclusion removes it. Move on to the deductible and limit.
• Excluded. The policy contains wording that removes wind coverage. Wind damage is a gap under that policy.
• Separately arranged. Wind coverage comes from a different document, either an endorsement or a separate policy. Read that document for the coverage and for its deductible.

Example. Assumed facts: wind tears shingles off Priya's roof. Her homeowners policy lists windstorm as covered and has no wind exclusion.

• Cause: wind.
• Coverage: included.
• Calculation: go ahead under the homeowners policy.

Change one fact: Priya's policy has the same covered-peril list but adds a wind exclusion. Now the roof damage is a gap under the homeowners policy. The next question is whether Priya arranged wind protection somewhere else. If she did, that document decides coverage and the deductible.

There are two tempting mistakes here. The first is assuming wind is always covered because standard forms list it; an exclusion in this policy changes the answer. The second is assuming a large storm must be excluded. Neither "always" nor "never" works. Read the stated facts.

Same storm, two causes: wind versus flood

One storm can cause damage through more than one peril. Flood damage, meaning in plain terms water from outside rising onto the land and into the building, is excluded under standard homeowners and renters policies. Flood protection is available as a separate policy from the National Flood Insurance Program (NFIP) and from some private insurers. For the details, see NFIP flood insurance: separate the event, property and limit.

Example. A storm's wind snaps a tree branch through a window. The same storm also sends water from a nearby overflowing creek into the basement. The homeowner has a standard homeowners policy with windstorm covered and no flood policy.

• Window: caused by wind, which is included. Go ahead and calculate.
• Basement: caused by flood, which is excluded. This is a gap unless the homeowner has separate flood protection.

The word "storm" does not tell you the answer. Each piece of damage follows its own cause.

Try this: a severe storm drops hail that dents gutters, and runoff from a flooded street pours into an attached garage. The homeowner has a standard homeowners policy with windstorm or hail covered and no exclusions for those perils, and no flood policy. Classify each loss.

Commonly confused terms, side by side

• Exclusion vs. coverage gap. An exclusion is wording in one policy. A gap is the person's overall situation: no policy they hold covers the loss. An exclusion creates a gap only if no endorsement or separate policy fills it.
• Endorsement vs. separate policy. Both can add earthquake (or wind) protection. An endorsement changes the existing policy. A separate policy is its own contract. The question to ask is which document holds the coverage.
• Shaking vs. fire following an earthquake. These come from the same event but have different causes. Shaking is excluded under a standard policy. Fire is generally covered.
• Wind vs. flood. These can come from the same storm but have different causes. Wind is on the standard covered list unless the wording removes it. Flood is excluded and needs separate protection.
• Percent of limit vs. percent of loss. The policy names the base. "10% of the limit" is not "10% of the damage."
• Zero below the deductible vs. zero from a gap. The first is covered but too small to pay. The second is not covered at all.

Practice on your own

Problem 1. An earthquake knocks a homeowner's water heater over, flooding the laundry room with water from the tank, and also cracks the driveway. The homeowner has only a standard homeowners policy. Which damage is a gap? Explain using the cause.

Problem 2. Assumed terms: a homeowner has a separate earthquake policy with a dwelling limit of $180,000 and a deductible of 15% of the limit. Shaking causes $50,000 of dwelling damage. What does the policy pay? What wrong answer would come from the most common base error?

Problem 3. Assumed facts: a homeowners policy lists windstorm as a covered peril but contains a wind exclusion. The owner also bought a separate wind policy. Wind rips off part of the roof. Which document do you read to decide coverage and the deductible, and why?

Problem 4. An earthquake cracks a chimney. A fire then starts and makes the house unlivable for a month. The owner has a standard homeowners policy and no earthquake protection. List what is generally covered and what is a gap.

What to remember

• Ask three questions in order: What caused it? Does a policy cover that cause? Only then, what does it pay?
• Earthquake shaking is excluded under standard homeowners and renters policies. An endorsement or a separate policy can fill the gap, and coverage exists only for the categories actually chosen.
• Fire that follows an earthquake is a fire loss and is generally covered, including additional living expenses if the home becomes unlivable.
• Windstorm or hail is on the standard homeowners covered lists, but the actual wording decides whether wind is included, excluded or covered by separate protection.
• One storm can cause wind damage and flood damage. Flood is excluded under standard homeowners and renters policies and needs separate protection.
• Apply a percentage deductible to the base the policy states, such as the limit, never automatically to the loss. A zero payment can mean "below the deductible" or "not covered." Know which one it is.