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3. CP-10-40

Form CP 10 40: Earthquake and Volcanic Eruption Endorsement

1. What the form is

The CP 10 40, Earthquake and Volcanic Eruption Endorsement, is a crucial endorsement in Commercial Property insurance. Its primary purpose is to add earthquake and volcanic eruption as covered causes of loss to a commercial property policy. Standard commercial property policies typically exclude damage from earth movement, including earthquakes and volcanic eruptions. This endorsement overrides that exclusion for these specific perils. A key feature is the 168-hour rule, which stipulates that all earthquake shocks or volcanic eruptions occurring within a 168-hour period will be considered a single event for coverage and deductible purposes. The expiration of the policy does not shorten this 168-hour period. It's important to note that while this endorsement provides coverage for direct physical loss from these events, it has its own specific exclusions, such as for tidal waves or tsunamis, even if they are attributable to an earthquake or volcanic eruption. The endorsement also includes its own deductible, which is typically a percentage of the property's value or the limit of insurance, rather than a flat dollar amount.

2. Classes of business it applies to

This endorsement is vital for any business that owns or is responsible for commercial property located in areas prone to seismic or volcanic activity. This includes a wide array of industries. Examples include:

• Real Estate Owners and Developers: Owners of office buildings, retail centers, industrial parks, and multi-family residential buildings in earthquake-prone regions like California, the Pacific Northwest, or areas near the New Madrid Seismic Zone. For instance, a commercial building owner in San Francisco would heavily rely on this endorsement.
• Manufacturing Companies: Facilities with significant investments in buildings, machinery, and inventory located in seismically active zones. Damage to such property could lead to substantial financial loss and business interruption.
• Hospitality Industry: Hotels, motels, and resorts in tourist destinations that are also in earthquake or volcanic zones. For example, a resort in Hawaii might need this coverage for volcanic eruption risks.
• Healthcare Facilities: Hospitals and clinics that need to remain operational even after a seismic event would require this coverage to repair structural damage.
• Educational Institutions: Schools, colleges, and universities with extensive campuses.
• Tenants with Improvement and Betterment Responsibilities: Businesses that lease space and have invested significantly in tenant improvements or are contractually obligated to insure the building.

Essentially, any business with significant physical assets in an area with even a moderate risk of earthquake or volcanic activity should consider this endorsement.

3. Special considerations

There are several important considerations when utilizing the CP 10 40:

• Deductible: The deductible for earthquake coverage is usually a percentage of the limit of liability or the value of the property at the time of loss, not a flat dollar amount. This can result in a very substantial out-of-pocket expense for the insured. For example, a 5% deductible on a building insured for $10 million would be $500,000. The deductible applies separately to buildings, personal property in each building, and personal property in the open.
• Exclusions: Critically, the endorsement typically excludes loss or damage caused by tidal wave or tsunami, even if resulting from an earthquake or volcanic eruption. It also excludes the cost of restoring or remediating land. Loss to exterior masonry veneer may also be excluded unless specifically endorsed or if it constitutes less than 10% of the building's exterior wall area.
• Sprinkler Leakage: The endorsement can be used to provide coverage for sprinkler leakage resulting from an earthquake or volcanic eruption. In some versions of the form, the percentage deductible applicable to direct earthquake damage may not apply to loss caused solely by earthquake-related sprinkler leakage (EQSL); instead, the policy's standard fire deductible might apply to EQSL.
• Collapse Coverage: The endorsement includes coverage for collapse caused by earthquake or volcanic eruption. The standard additional coverage for collapse found in some property forms does not apply to earthquake or volcanic eruption when this endorsement is active.
• Policy Inception: The CP 10 41 Earthquake Inception Extension endorsement can be important to avoid a coverage gap if an earthquake or volcanic eruption begins shortly before the policy's inception. It covers damage occurring on or after the new policy's inception from an event starting within 72 hours before the new policy takes effect.
• Ordinance or Law: The standard ordinance or law exclusion in property forms still applies unless the CP 04 05 Ordinance or Law Coverage endorsement is also attached.

4. Key information for agents and underwriters

Agents and underwriters need to be particularly diligent when dealing with the CP 10 40:

• Risk Assessment: Thoroughly assess the geographic location of the property and its proximity to fault lines or volcanic areas. Consider soil conditions, building construction type, age of the building, and adherence to building codes. For example, unreinforced masonry buildings will have a much higher risk profile. Underwriters should utilize geological surveys and catastrophe modeling to accurately assess the risk.
• Pricing: Pricing for this endorsement is highly dependent on the assessed risk. Factors include location, construction, occupancy, and the desired deductible level. Higher deductibles will generally result in lower premiums but higher retained risk for the insured. Capacity in high-risk zones can be limited, leading to higher pricing.
• Coverage Gaps: Agents must clearly explain the exclusions, particularly the tsunami/tidal wave exclusion and the percentage deductible, to clients. Discuss the need for separate flood insurance if tsunami is a concern (though flood policies also have their own limitations regarding earthquake-triggered events). Also, address potential gaps related to ordinance or law and the need for the CP 04 05 endorsement.
• Underwriting Guidelines: Underwriters will have specific guidelines based on construction (e.g., frame, joisted masonry, non-combustible, masonry non-combustible, modified fire resistive, fire resistive) and occupancy. Certain high-risk construction types or older buildings not retrofitted to current seismic codes may be ineligible or subject to very high rates and deductibles. The underwriter's goal is to select risks that are reasonably predictable. Ensure that values reported are accurate, as the percentage deductible applies to these values.
• Business Income/Extra Expense: Remember that this endorsement applies to direct physical loss. If Business Income and Extra Expense coverage is desired for earthquake or volcanic eruption, the CP 10 40 must be attached to the policy that includes these time element coverages. The deductible provisions of the CP 10 40 generally do not apply to Business Income or Extra Expense forms.
• Masonry Veneer: Pay close attention to the presence of exterior masonry veneer. If significant, ensure it's either specifically covered or the client understands the limitation. Stucco is not typically considered masonry veneer.