On June 23, a magnitude 7.4 earthquake struck the southern coast of Mexico, killing 10 and damaging thousands of houses and buildings. It was yet another reminder of the significant impact seismic events can have on an organization’s physical assets and business operations, and the need to proactively prepare to mitigate unfavorable outcomes.
Depending on an earthquake’s magnitude, a seismic event can damage business facilities and curtail power, transportation and communications networks. If the disruption persists for a long period of time, the impact on business revenue can be devastating.
A recent Chubb survey of more than 1,000 C-level executives at middle market companies in the United States indicated that 21% of these organizations have experienced some form of operational disruption, causing an 8.8% reduction in their annual revenue, on average. Only 77% of these businesses completely recovered.
To mitigate such dire outcomes, a company’s disaster plan should account for worst-case scenarios, beginning with a facility’s physical vulnerability to earthquake damage. The plan also must consider the impact of the event on the functions and processes performed by employees, and the ability of suppliers and other vendors to ship parts and provide services.
Once these assessments are completed, risk professionals can tailor their earthquake risk mitigation tactics and insurance programs to both the physical and operational exposures presented to facilitate business income continuity.
No two buildings are exactly alike in terms of age, design, construction materials and structural integrity. At the same time, building codes governing the design and construction standards for commercial facilities have evolved, becoming more stringent, particularly in earthquake-prone regions like Los Angeles.
The two earthquakes that rattled the Greater Los Angeles region in July 2019 did not cause substantial building damage because of its rural epicenter. However, that event did put the spotlight back on building integrity and safety. In the temblors’ aftermath, structural engineers drew up a list of 13,500 deficient buildings requiring seismic strengthening, many of them two-story commercial and residential structures with parking spaces located on the first floor.
To determine if a building needs to be retrofitted to withstand earthquake damage, risk managers can reach out to local government agencies for information on the region’s susceptibility to a seismic event. If the risk of a seismic event is moderate to high, the company should hire a structural engineer to inspect the building and provide advice on increasing its resilience.
Measures could involve the addition of steel bracing and sheer walls to the structural frame, which may be composed of wood. The building’s foundation and columns may also need to be strengthened, and unreinforced brick filler walls may need to be replaced.
Inspectors may also advise on the need to reinforce heating, ventilation and air conditioning (HVAC), plumbing, communications, and other nonstructural systems. Furthermore, items that may move or fall during an earthquake, such as heavy machinery, shelves, filing cabinets, light fixtures and tall furniture, may require bracing to secure them to the floor or walls. Windows may need to be retrofitted with safety glass to reduce injury risks.
Other important considerations involve fire sprinkler systems and gas lines. A seismic event can rupture the gas lines serving the facility. If gas is released, it may ignite because of the various catalysts created by the earthquake. Devastating explosions and fires are possible. The piping for a sprinkler system may also break part during an earthquake, causing severe water damage.
To reduce the risk of a gas-induced explosion and fire, the structural engineer may recommend the use of a UL-listed seismic gas shutoff valve on the main gas supply. The valve automatically shuts off gas service to the building when an earthquake of a sufficient magnitude occurs, preventing additional gas from flowing into the facility beyond the residual amount remaining in the piping.
Although sprinkler systems are braced to bear the static load of the pipes and the flow of water, a seismic event can easily cause excessive movement to the sprinkler system pipes. Modern fire sprinkler installation codes require elaborate lateral and longitudinal sway bracing techniques to mitigate the potential for breakage and sprinkler leakage. If the sprinkler bracing fails, the couplings connecting the sprinkler pipes can also break apart. To minimize this possibility, an inspector may also recommend the use of flexible couplings that allow individual piping sections to move differentially, reducing the breakage risk.
Other proactive tactics include storing copies of the building’s architectural drawings off-site to guide needed repairs that help to reduce the duration of the business disruption. Battery-operated or diesel-powered generators with adequate fuel supplies should be on hand as backup energy sources in the event of a power outage.
These risk mitigations can help get a business back on its feet quickly, but there are risks that may be beyond a risk manager’s control. For example, an earthquake may seriously damage area highways and roads, utility lines, shipping ports and distribution centers. Assuming this is the case, the ability of employees to travel to work and conduct tasks may be impeded, as is the transportation of supplies to the landing dock. In such situations, the company confronts the possibility of substantial business income losses.
Fortunately, a sizable portion of these losses can be passed on to insurers, assuming the property insurance policy in place provides broad business interruption and contingent business interruption insurance with limits of insurance and business restoration periods reflective of the values the business has at risk.
Additionally, risk managers should not underestimate the importance of extra expense insurance. Extra expense insurance provides commercial policyholders with immediate funding to absorb reasonable and necessary costs beyond their normal operating expenses—such as the need to temporarily relocate operations to another building while the current one is being repaired or replaced—so the policyholder can continue some or all of its business activities. Some insurers even include the cost to purchase or rent needed equipment and supplies to continue business activities during the period of recovery.
With the property insurance market hardening, insurers are reducing the limits of insurance they are making available, increasing deductibles and raising premiums. Some insurers are also restricting the amount of extra expense they are willing to provide, especially in catastrophe-prone areas. These hardening market conditions make it very important for risk managers to work with a broker that has a relationship with an insurer that offers limits of insurance, and policy terms and conditions commensurate with the needs of the business.
Every risk manager also must ensure the safety of employees during an earthquake. Crisis management plans and procedures need to define specific responsibilities in advance of an adverse event. The communications should also be designed to notify employees if and when they should come to work or to relocate elsewhere. Disaster drills should also be undertaken on an annual basis to ensure the plans perform as anticipated.
There is no way to prevent the next earthquake or even guess when it will occur and at what magnitude it might be. On average, roughly 500,000 detectable earthquakes occur each year, of which 100,000 can be felt and 100 cause significant property damage, according to the U.S. Geological Survey. However, risk professionals can proactively implement tested strategies that safeguard employees’ health and well-being and simultaneously minimize impact on the business and the bottom line.