Unlike other insurance products, workers’ comp carriers cannot exclude certain perils from coverage. An employee who is injured on the job can make a workers’ comp claim, whether the cause is something as mundane as a fallen box or as rare as terrorist attack.
For California a.k.a. “earthquake country” this means that workers’ comp carriers must cover employee injuries resulting from earthquakes, something that non work comp carriers often exclude. To deal with this reality, the California State Compensation Insurance Fund (SCIF) purchased a catastrophe bond from Golden Gate Re Lit. in the amount of $200 million, which takes effect in the event of a 5.5 earthquake or greater. This is a commendable step towards preparation, but there’s a problem: in the event of a major earthquake, California could be looking at closer to $25 billion in claims, which would devastate the workers’ comp industry. And we have reason to believe that such a quake could be coming soon.
The Risk of Major Earthquakes in Southern California
The last major earthquake in Southern California occurred in the late 1600s, and the tension has been building in area faults throughout the centuries since then – which means that there’s a 63 percent chance of a major earthquake along the San Andreas Fault in the next 22 years, according to David Schwartz of the U.S. Geological Survey.
Similarly, scientists are growing concerned about the Puente Hills Thrust Fault. Discovered in 1999, the fault sits directly beneath LA. The fault projects upward and in the event of a quake would cause massive damage to the densely populated area.
No one can say for sure when the next major earthquake will hit Southern California, but it seems likely that the region will experience one soon. If it happens during normal business hours, the workers’ comp industry will take a major hit.
How Can an Earthquake Devastate the Workers’ Comp Industry?
If Southern California experiences a massive earthquake (e.g., 8.0 or greater) during work hours, the region could easily see a million injured workers. If the average claim amounts to $25,000, the total cost of earthquake-related claims would reach roughly $25 billion. SCIF’s catastrophe bond covers only $200 million – far less than would be needed.
Also, consider that SCIF only insures about 1 in 5 businesses, which leads us to ask: what will the other workers’ comp carriers do to pay their claims? So far, it does not appear that the other carriers are re-insuring their earthquake exposure.
Generally, when a workers’ comp carrier becomes insolvent, the California Insurance Guarantee Association (CIGA) takes it over. However, in the event of this hypothetical earthquake, we could see 10-15 carriers become insolvent very quickly. CIGA was not designed to handle such a massive event and would itself become insolvent.
Does that mean the federal government would bail out CIGA, or SCIF, or the individual carriers? It’s hard to say, but it does not seem likely. In the years following Hurricane Katrina – a disaster that caused $108 billion in damage – both Republicans and Democrats have challenged the idea of bailing out insurance carriers in such events.
In Washington, many believe that US taxpayers should not have to foot the bill for individuals or businesses who fail to purchase the insurance they need. As a result of all of these factors, we could see a collapsed industry and many thousands of workers who may not receive the treatment they need.
A Lesson from the Past
It may seem like speculation, but this would not be the first time that a large-scale disaster led to a sharp uptick in workers’ comp claims. There is the aforementioned example of Katrina, but we can also look at the result of the tragic attacks on September 11, 2001. Experts say that over 40,000 responders registered for workers’ comp benefits following 9/11. These estimates are a couple of months old, and many more may have signed up before the September 2014 deadline. According to the WTC Health Program, the total number of people eligible for such benefits could be over 100,000.
The point is not to grow hysterical or become alarmists about the situation. Rather, the point is that workers’ comp carriers need to be aware of the risks that a massive earthquake – or any large-scale disaster – could pose to the industry. If we take precautions now and prepare for the worst, we could avoid devastation later on.