Excess/Surplus

Buyer Beware

That property in the foothills may look enticing, but climate change is driving an increasing occurrence of mudslides.
By: | April 7, 2017 • 7 min read

The steep slopes of the Rocky Mountains and the Pacific Northwest are prime real estate. But they also host an increasingly dangerous risk: landslides.

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Landslides wreak, on average, $1 billion to $2 billion worth of damage to properties every year, destroying buildings, roads, power lines, pipelines and even entire neighborhoods.

Mudslides, one of the most common types of landslide, are caused by extreme rainfall, earthquakes, wildfires and man-made disasters. They can strike quickly and they have increased in both severity and frequency in recent years.

Among the worst affected regions are the Appalachian Mountains in the East, the central Rocky Mountains and the western Pacific Coastal Ranges. These are  home to steep and hilly areas that suffered from years of drought, experienced forest fires and then got pummeled by flash flooding.

Jonathan Godt, program coordinator, U.S. Geological Survey

One of the deadliest mudslides in U.S. history was in Oso, Wash., in 2014. That slide was caused partly by logging activities in the area. When a denuded hill collapsed after weeks of rain, the resulting slide killed 43 people and destroyed 49 homes.

Most at risk are mining and logging companies with extensive operations at mountain bases and valleys in areas prone to heavy rainfall, flooding and earthquakes.

“Most of the landslides in the U.S. over the last 25 years have been driven by rainfall,” said Jonathan Godt, program coordinator at U.S. Geological Survey (USGS).

“A combination of steep topography, abundant material on the mountainsides and heavy rainfall all converge to create the perfect storm.

“With a growing population and less space in the cities, more people are moving home or business to the mountains and are putting themselves and their properties in harm’s way, thus increasing the likelihood of landslides.”

Mudslide vs. Mudflow

Gary Marchitello, head of property for North America at Willis Towers Watson, said that mudslides are primarily caused by excessive rainfall or snowpack on a slope, or an earthquake.

“A mudslide, by definition, implies that gravity has a part to play,” he said.

“The soil is loosened by the rain or snow, or the ground shaking, and gravity does the rest.”

Marchitello said that it was important to make the distinction between mudslides and mudflow, which is caused by river overflow and would typically be covered under standard flood insurance.

“If you have either flood coverage as part of an all risk policy or you buy it as a stand-alone peril, you should be covered for mudflow,” he said.

Coverage for damage from mudslides, however, doesn’t come as standard and requires a separate earth movement policy or difference in conditions coverage from a specialty insurer.

“Clearly, if there was a seismic event that caused a movement of earth to slide down the mountain, that would be covered under these separate policies, said Marchitello.

“But then there are other circumstances where you get an excess of rain or snowfall, which may not necessarily have anything to do with the earth shaking, in which case it could fall into earth movement or flood, depending on the approximate cause.”

Duncan Ellis, U.S. property practice leader, Marsh

Where a mudslide or mudflow occurs because trees and plants were damaged in an earlier fire and the area had never previously experienced flooding or mud problems, most properties will be covered as a fire loss, he added.

Duncan Ellis, U.S. property practice leader at Marsh, said that it is important to first establish if and how mudslides are covered under an all risk policy.

“You need to read your policy carefully and understand what you are covered for, if at all, in terms of earthquake, earth movement and flood because there are a lot of nuances,” he said.

“If you have a policy that has earthquake cover, for example, I would argue mudslides and mudflows would not be covered.”

Cindy Collins, assistant vice president and program manager for alternative markets at Zurich North America, said that most E&S insurers prefer to limit additional coverage to earthquake, however, they may choose to include earth movement such as landslide, mine subsidence and earth sinking, depending on the circumstance.

“When the decision is made to provide the additional coverage, it would likely have a sublimit to apply, anywhere from $1 million to $25 million or more,” she said.

Identify and Assess Potential Magnitude of Mudslides

Marchitello said that risk managers and companies first need to identify and assess the potential magnitude of any mudslides before coming up with a risk mitigation plan.

A good resource for this, he said, is the USGS and Federal Emergency Management Agency (FEMA), which provides advice on mudslides. He also recommends enlisting the help of a civil engineering firm.

Counties affected by mudslides also carry out hazard mitigation planning and zoning, while at a state level there are geological programs, surveys and geologists available, he said.

“Clearly if you own a property at the base of a mountain you would think there is potentially a risk of a mudslide,” said Marchitello.

“Then it’s a case of carrying out your own investigation using techniques such as satellite imagery and looking at past events.”

Perhaps most importantly, companies should have an emergency and evacuation plan in place in the event of a disaster, added Marchitello.

“Short of moving your operation, there is very little you can do, however, to protect your property from a catastrophic event,” he said.

Michael Barry, vice president of media relations at the Insurance Information Institute, said that companies also need to look closely at land surveys and the property’s claims history.

“Risk managers must assess land surveys and the claim-filing histories of the properties their clients plan either to purchase, or operate their businesses on,” he said.

In terms of physical modifications to property, Timothy Chaix, president of R.E. Chaix & Associates, advised that businesses can add vegetation, or erect deflection barriers or retaining walls to divert a mudslide.

However, he warned that they would be liable if the diverted mud caused damage to a neighboring property.

“Right now, there is a tremendous amount of rain, particularly in California, and the area has become much more vulnerable to mudslides and earth movement because the ground was so dry before so it is not able to soak up the water as easily,” he said.

Landslides Being Added to Earthquake Models

Landslides have become so frequent and severe that modelers are making adjustments.

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Dr. Jayanta Guin, chief research officer at AIR Worldwide, said that the risk modeling firm recently added landslides into its earthquake model for Canada with plans to incorporate a similar component into its U.S. model this year.

The new module will cover the 48 mainland states and model damage caused by landslides resulting from earthquake ground shaking.

“Landslide risk is calculated based on a combination of slope information derived from Digital Elevation Model data, surficial and bedrock geographical features that determine how well the slope resists failure, and soil wetness, which varies depending on the time of year,” he said.

“The probability of a landslide actually occurring is then calculated based on the level of ground shaking.”

RMS also models the risk of landslides within its earthquake models.

“These models provide a landslide susceptibility class that is defined by local soil properties and the slope angle,” said Ben Reynolds, RMS specialist in earth sciences and earthquake modeling.

“This information can be used to identify more vulnerable locations, and would be automatically included as part of the earthquake risk modeling where we have identified significant risk of landslides.”

Wes Anderson, national property president at Risk Placement Services, said that combining mapping and working with FEMA to determine the property’s designated flood zone and elevation, enables businesses to decide on the appropriate insurance coverage and limits.

“The most valuable coverage you can buy is loss avoidance, especially when the catastrophic peril of landslide is the cause for discussion,” he said. &

Alex Wright is a U.K.-based business journalist, who previously was deputy business editor at The Royal Gazette in Bermuda. You can reach him at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Cyber Liability

Fresh Worries for Boards of Directors

New cyber security regulations increase exposure for directors and officers at financial institutions.
By: | June 1, 2017 • 6 min read

Boards of directors could face a fresh wave of directors and officers (D&O) claims following the introduction of tough new cybersecurity rules for financial institutions by The New York State Department of Financial Services (DFS).

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Prompted by recent high profile cyber attacks on JPMorgan Chase, Sony, Target, and others, the state regulations are the first of their kind and went into effect on March 1.

The new rules require banks, insurers and other financial institutions to establish an enterprise-wide cybersecurity program and adopt a written policy that must be reviewed by the board and approved by a senior officer annually.

The regulation also requires the more than 3,000 financial services firms operating in the state to appoint a chief information security officer to oversee the program, to report possible breaches within 72 hours, and to ensure that third-party vendors meet the new standards.

Companies will have until September 1 to comply with most of the new requirements, and beginning February 15, 2018, they will have to submit an annual certification of compliance.

The responsibility for cybersecurity will now fall squarely on the board and senior management actively overseeing the entity’s overall program. Some experts fear that the D&O insurance market is far from prepared to absorb this risk.

“The new rules could raise compliance risks for financial institutions and, in turn, premiums and loss potential for D&O insurance underwriters,” warned Fitch Ratings in a statement. “If management and directors of financial institutions that experience future cyber incidents are subsequently found to be noncompliant with the New York regulations, then they will be more exposed to litigation that would be covered under professional liability policies.”

D&O Challenge

Judy Selby, managing director in BDO Consulting’s technology advisory services practice, said that while many directors and officers rely on a CISO to deal with cybersecurity, under the new rules the buck stops with the board.

“The common refrain I hear from directors and officers is ‘we have a great IT guy or CIO,’ and while it’s important to have them in place, as the board, they are ultimately responsible for cybersecurity oversight,” she said.

William Kelly, senior vice president, underwriting, Argo Pro

William Kelly, senior vice president, underwriting at Argo Pro, said that unknown cyber threats, untested policy language and developing case laws would all make it more difficult for the D&O market to respond accurately to any such new claims.

“Insurers will need to account for the increased exposures presented by these new regulations and charge appropriately for such added exposure,” he said.

Going forward, said Larry Hamilton, partner at Mayer Brown, D&O underwriters also need to scrutinize a company’s compliance with the regulations.

“To the extent that this risk was not adequately taken into account in the first place in the underwriting of in-force D&O policies, there could be unanticipated additional exposure for the D&O insurers,” he said.

Michelle Lopilato, Hub International’s director of cyber and technology solutions, added that some carriers may offer more coverage, while others may pull back.

“How the markets react will evolve as we see how involved the department becomes in investigating and fining financial institutions for noncompliance and its result on the balance sheet and dividends,” she said.

Christopher Keegan, senior managing director at Beecher Carlson, said that by setting a benchmark, the new rules would make it easier for claimants to make a case that the company had been negligent.

“If stock prices drop, then this makes it easier for class action lawyers to make their cases in D&O situations,” he said. “As a result, D&O carriers may see an uptick in cases against their insureds and an easier path for plaintiffs to show that the company did not meet its duty of care.”

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One area that regulators and plaintiffs might seize upon is the certification compliance requirement, according to Rob Yellen, executive vice president, D&O and fiduciary liability product leader, FINEX at Willis Towers Watson.

“A mere inaccuracy in a certification could result in criminal enforcement, in which case it would then become a boardroom issue,” he said.

A big grey area, however, said Shiraz Saeed, national practice leader for cyber risk at Starr Companies, is determining if a violation is a cyber or management liability issue in the first place.

“The complication arises when a company only has D&O coverage, but it doesn’t have a cyber policy and then they have to try and push all the claims down the D&O route, irrespective of their nature,” he said.

“Insurers, on their part, will need to account for the increased exposures presented by these new regulations and charge appropriately for such added exposure.” — William Kelly, senior vice president, underwriting, Argo Pro

Jim McCue, managing director at Aon’s financial services group, said many small and mid-size businesses may struggle to comply with the new rules in time.

“It’s going to be a steep learning curve and a lot of work in terms of preparedness and the implementation of a highly detailed cyber security program, risk assessment and response plan, all by September 2017,” he said.

The new regulation also has the potential to impact third parties including accounting, law, IT and even maintenance and repair firms who have access to a company’s information systems and personal data, said Keegan.

“That can include everyone from IT vendors to the people who maintain the building’s air conditioning,” he said.

New Models

Others have followed New York’s lead, with similar regulations being considered across federal, state and non-governmental regulators.

The National Association of Insurance Commissioners’ Cyber-security Taskforce has proposed an insurance data security model law that establishes exclusive standards for data security and investigation, and notification of a breach of data security for insurance providers.

Once enacted, each state would be free to adopt the new law, however, “our main concern is if regulators in different states start to adopt different standards from each other,” said Alex Hageli, director, personal lines policy at the Property Casualty Insurers Association of America.

“It would only serve to make compliance harder, increase the cost of burden on companies, and at the end of the day it doesn’t really help anybody.”

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Richard Morris, partner at law firm Herrick, Feinstein LLP, said companies need to review their current cybersecurity program with their chief technology officer or IT provider.

“Companies should assess whether their current technology budget is adequate and consider what investments will be required in 2017 to keep up with regulatory and market expectations,” he said. “They should also review and assess the adequacy of insurance policies with respect to coverages, deductibles and other limitations.”

Adam Hamm, former NAIC chair and MD of Protiviti’s risk and compliance practice, added: “With New York’s new cyber regulation, this is a sea change from where we were a couple of years ago and it’s soon going to become the new norm for regulating cyber security.” &

Alex Wright is a U.K.-based business journalist, who previously was deputy business editor at The Royal Gazette in Bermuda. You can reach him at [email protected]