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January 31, 2019
Hope for the best; plan for the worst. Property owners in the Northwest have a unique opportunity to mitigate their risks by studying the damages incurred by property owners in Alaska and California after the catastrophes that hit the West Coast in 2018.
It is difficult to grasp the scope of these disasters and the impact they have on our economy.
Last year, California took a huge leap and surpassed the United Kingdom to become the fifth largest economy in the world. Moreover, California's 2018 wildfire season was the most damaging and deadly on record — scorching nearly 2 million acres and claiming over 100 lives. Analysts have opined that the 2018 fires have caused more than $3.5 billion in damages. This number is subject to change as the scope and extent of the fires' damages are ascertained.
Our northern neighbors also sustained significant damages after the 7.9 magnitude Gulf of Alaska earthquake and the more recent 7.0 magnitude Anchorage earthquake.
The Anchorage earthquake caused substantial damage to the state's more densely populated areas. The airports were forced to close, portions of the Glenn Highway were destroyed, and numerous buildings were structurally compromised and soaked with water from broken fire suppression systems.
The increased occurrence and severity of these disasters have caught the attention of state legislators as they head into their regular sessions this month. Owners should watch for future legislation requiring them to seismically retrofit potentially vulnerable structures, especially those built with unreinforced masonry and other less flexible building materials. Likewise, solution-oriented representatives will likely seek to expand the use of developing technologies like cross-laminated timber, which provides buildings with increased fire protection and seismic resistance, according to proponents.
In the meantime, property owners should take advantage of the lessons learned from other West Coast owners before the next disaster hits. Only 10 percent of the owners in Alaska carried earthquake insurance, and many of those owners were unaware of what their insurance covered or the types of damages their buildings and businesses would incur.
Prudent owners should meet with their insurance brokers, attorneys and accountants now to identify potential losses and ensure that those risks are reasonably mitigated by the appropriate coverages. Likewise, they should confer with their building operations and maintenance teams to either review or create an emergency response plan.
What could get damaged
The most common types of damages incurred by owners include, but are not limited to, compromised structural integrity of their building; water damage and mold caused by broken fire suppression system pipes and water mains; spilled chemicals and related contamination; broken mechanical and electrical systems; relocation and temporary leased space costs for continued operations; damage to equipment, supplies and inventory; lost revenue; general repair costs; and potential personal injury or death.
A quick review of your annual operating budget can help illuminate the categories of damages you may sustain in the event of a natural disaster, and help you gauge the types, limits and durations of coverage that you should purchase.
In general, commercial property insurance provides owners with coverage for several types of natural disasters. Unfortunately, earthquakes are typically not included on that list. In fact, most policies specifically exclude coverage for earthquakes.
Therefore, if your property is located in a region that is prone to earthquakes, you may want to consider investing in commercial earthquake insurance. These policies usually provide coverage for structural damage caused by seismic activity, demolition costs and loss of income. That said, earthquake coverage can be cost prohibitive because deductibles can range from a few percentages to 20 percent of the value of the building.
Owners should assess their building's location, age and condition, and determine whether basic seismic upgrades may be a worthy investment.
By extension, owners may want to shop for commercial fire insurance policies that provide coverage for commercial property and casualty. Most commercial property policies cover damage to your building and equipment. Commercial casualty policies cover unexpected losses like loss of revenue and relocation expenses.
Other tools to consider
Other tools owners should consider implementing include emergency response and business continuity plans. Even a simple checklist can help ensure a building's occupants stay safe and steps are taken to limit further damage to the building.
Owners should implement clear protocols for where occupants should go in the event of an emergency, when and how to sweep the building to identify imminent threats to life and safety, and how to shut down the building's central security, fire alarm, fire suppression, plumbing, heating and electrical systems to prevent further damage.
The best emergency response plans also provide direction for how to handle events like aftershocks and emergency repairs.
Owners should store their emergency response plan, insurance policies, as-built drawings and contact information for their insurance broker away from the building, but in a place that is easily accessible in the event of an emergency.
After the emergency has subsided, the owner may need to engage professionals to assist with submitting insurance claims and repairing the building. The team should include consultants that can identify and document the scope and extent of the damage, construction professionals to repair the building, and attorneys with expertise in insurance and construction law. Then, the owner can work through the claims process to secure its insurance coverages and, to the extent merited, pursue claims against the building's developers, contractors, design professionals, manufacturers and suppliers.
The uncertainty and risks associated with natural disasters are great. Fortunately, owners can mitigate their potential losses by purchasing the correct types, limits and durations of coverage, and preparing an emergency response plan that will provide a blueprint for handling the immediate dangers posed by the disaster before the owner's team of professionals is called upon to assist.
Loni Hinton is an attorney in the Construction and Design practice group of Stoel Rives LLP in Seattle.