Earthquakes in Peru: a necessary review of insurance coverage
Professional participants
Themes
Introduction
Earthquakes are not a remote risk for Peru. On the contrary, the Peruvian Geophysical Institute has repeatedly warned of the possibility of a major earthquake due to the accumulation of energy generated by the interaction of the Nazca and South American tectonic plates.
Recent seismic events in various Latin American countries have brought this issue back into focus. As a result, many individuals have begun reviewing their contingency plans, preparing emergency kits, and adopting preventive measures to protect the lives and health of their families.
However, there is one question that often remains overlooked until disaster strikes: are we truly protected against the economic consequences of an earthquake?
For many individuals and companies, the answer may seem straightforward: “yes, I have insurance.” Nevertheless, experience shows that holding an insurance policy does not necessarily mean being adequately protected.
The most common mistake: assuming that any insurance policy covers everything
From the perspective of those of us involved in handling insurance claims, it is common to discover, after an event has occurred, that certain losses were not covered or that the sums insured were insufficient to cover the actual losses sustained.
Accordingly, the relevant question is not merely whether there is a policy in force, but whether the coverages purchased adequately respond to the risks that are intended to be transferred.
This consideration is particularly important because insurance contracts are often perceived as lengthy and complex documents, the detailed review of which is frequently postponed by the insured until a claim occurs. For precisely this reason, it is worth identifying certain key aspects that both individuals and companies should periodically review as part of their insurance programs.
What should individuals review?
For individuals, the insurance policies that would typically be relevant in the event of an earthquake are homeowners’ insurance, mortgage-related insurance, and, in certain cases, auto insurance.
Beyond the specific features of each policy, there are five basic questions that every policyholder should ask their insurer or insurance broker:
- Does the policy expressly cover damage caused by earthquakes and other related natural phenomena?
- Does the sum insured reflect the current cost of rebuilding or replacing the insured property?
- What deductibles and limits would apply in the event of a claim of this nature?
- Are there any relevant exclusions that could restrict coverage?
- What is the deadline and procedure for reporting the claim to the insurer?
In the case of homeowners’ insurance, it is particularly important to verify whether coverage extends to property contained within the premises, such as furniture, electronic equipment, household appliances, and other personal property. It is not uncommon to find situations in which the structure of the property is insured while its contents are not covered.
It is also advisable to review whether the policy provides for additional coverages, such as temporary accommodation expenses or debris removal costs, which may be essential while repair or rebuilding work is being carried out.
On the other hand, individuals with a mortgage should verify whether the insurance required by the financial institution is sufficient to cover the actual cost of rebuilding the home and should understand the specific terms and limitations of such coverage.
For financed vehicles, it is also advisable to verify whether the indemnity for a total loss will be applied primarily toward repayment of the outstanding balance of the auto loan and what will occur if the indemnity amount is lower than the amount owed. This situation may give rise to significant financial contingencies for the owner.
What should companies review?
For companies, the implications of an earthquake often extend well beyond physical damage to their facilities. A severe event may disrupt business operations, resulting in loss of income (business interruption), give rise to third-party claims, and even jeopardize the financial viability of the business.
Accordingly, it is advisable to review, at a minimum, three key coverages: property all risks insurance, third-party liability insurance, and business interruption insurance.
1. Multirisk Insurance or Property All Risks: This coverage constitutes the company’s primary asset protection tool. Some key questions include:
- Does the sum insured reflect the current cost of rebuilding or replacing the assets?
- Does the policy expressly cover damage caused by earthquakes and related natural phenomena?
- Is there a risk of underinsurance, and what would be its implications for the indemnity?
- Are all critical business assets covered, such as buildings, machinery, equipment, and inventory?
- What deductible would apply, and what portion of the losses would the company have to bear with its own funds?
2. Civil Liability Insurance: An earthquake may also give rise to liabilities toward third parties, particularly where the collapse or deterioration of facilities causes bodily injury or property damage. In this regard, it is advisable to assess:
- Does the policy cover third-party liability arising from seismic events?
- Are there any exclusions or limitations relating to natural disasters or catastrophic events?
- Are the indemnity limits consistent with the business’s actual exposure?
- Are bodily injury, property damage, and consequential losses claimed by third parties covered?
- Are legal defense costs covered, and how do they affect the policy limits?
3. Business Interruption Insurance: Many companies may be able to recover from the material damage caused by an earthquake, but not necessarily from a prolonged disruption of their operations. Accordingly, it is advisable to ask:
- Does the sum insured adequately reflect the company’s current revenues and expenses?
- Would the maximum indemnity period be sufficient to fully restore operations?
- What conditions must be met to trigger coverage?
- Are extraordinary expenses incurred to expedite business recovery covered?
- Does the coverage respond to business interruption caused by damage sustained by suppliers, strategic customers, or critical third-party infrastructure?
A preventive review is worth more than a dispute later
A significant portion of disputes between policyholders and insurers does not necessarily arise from the absence of coverage, but rather because the policyholder’s expectations do not align with the terms actually agreed upon.
The occurrence of an earthquake is not the time to discover the limitations of an insurance policy. Asking your insurance broker or insurer these questions today may help identify coverage gaps and strengthen the financial recovery capacity of both individuals and companies.
The question is not whether another earthquake will occur, but whether we are prepared to deal with its consequences. Having insurance is a good starting point. Verifying that the coverages purchased effectively respond to the risks we face can make the difference between a swift recovery and a long-term financial crisis.
Because having an insurance policy does not always mean being adequately insured. And perhaps now is a good time to make sure.
Finally, if you or your company do not have any of the coverages described above, this may be an opportune time to consider obtaining them. The Peruvian insurance market offers various alternatives to protect assets, business continuity, and financial stability against one of the most significant natural risks facing our country.