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Earthquake Risk: Is Your Business Covered with a ‘Differences in Conditions’ Policy?

Many parts of the state are exposed to significant earthquake risk, and companies that don’t have proper coverage may not get the claims payments they expect if their business is damaged in a quake.  

Unfortunately, many business owners are surprised to learn after the fact that their commercial property policy won’t cover damage from an earthquake. To fill this gap, you can turn to a “Differences in Conditions” (DIC) policy.  

A DIC policy can be useful if you face either flood or earthquake risk in your area and your property carrier doesn’t offer coverage for these risks, cannot provide full limits to cover potential losses, or can only offer this coverage at rates that are essentially prohibitive. 

Most property policies are written on an “open perils” basis (meaning they will cover many types of claims resulting from acts of God), but they usually exclude flood and earthquake risk.  

Besides providing coverage for flood and quake losses, a DIC policy may also be used to provide excess limits over flood and earthquake coverages made available by endorsements to a commercial property policy or through the National Flood Insurance Program.  

Furthermore, because a DIC is often written as a type of inland marine insurance, it also may be used to address other risks that may not be covered in commercial property policies, such as property in transit, property overseas, or business interruption claims arising from an earthquake or transit loss. 

One thing you should know, however, is that a DIC policy is what’s known as a “non-filed” policy. That means insurers do not have to file rates for approval with state insurance departments, and they have greater flexibility in setting rates and drafting policy language. Insurers are often willing to negotiate coverages and limits with policyholders. 

Often, the terms and conditions in a DIC policy can vary in important ways from one insurer to the next, so you need to choose carefully. Opting for a DIC policy with terms and definitions that conflict with your underlying commercial property policy can cause coverage problems.  

Does your business need a DIC policy? 

You need to ask yourself if you need more protection than that provided by standard property insurance, especially with regard to flood and earthquake perils. If you live in an area that’s prone to temblors and your commercial property policy excludes such events, you may need it.  

This holds true especially for contractors, manufacturers, retailers and a variety of service and professional businesses.  

Since flood or earthquake losses can be catastrophic, no one insurer may be willing to write a DIC policy with the limits requested or needed by the insured. In such cases, two or more carriers may be willing to share the risk on a layered basis or through a quota share (an agreed-on percentage) approach.  

Summary of coverage

A commercial DIC policy can provide earthquake and/or flood coverage for: 

  • Buildings 
  • Tenant improvements and betterments 
  • Business personal property and/or stock 
  • Loss of business income, rental income or if you incur extra expenses 

We are here to help you comparing the coverages and exclusions of various DIC policies and to find the best one to fit your needs. We’ve been helping small businesses since 1935 and write $30 million in premiums annually. For more information, contact Shannon Wolford, Director of Membership and Sales at 415-710-0568 or shannon@visualmediaalliance.org. 

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