Volcanoes, Mudslides, and Sinkholes: Are You Covered?

The violent eruption of Hawaii’s Kilauea Volcano, which began on May 3, 2018, destroyed 35 structures on the Big Island — including more than two dozen homes — within the first four days, with dangerous lava, rocks, and fumes spewing for weeks.1 Volcanic eruptions are unusual in heavily populated areas, but you may be surprised to know that seismologists track 169 potentially active volcanoes in Hawaii, Alaska, and the western United States.2

Naturally, one of the biggest concerns for homeowners near Kilauea is whether their homes are covered for damage from the volcano. Unfortunately, the answer may be complicated and depends on the individual policy. Damage from lava flows is typically caused by fires, and fire damage would be covered by a standard homeowners policy, up to policy limits. However, because the homes near Kilauea are in high-risk lava zones as defined by the U.S. Geological Survey, insurance policies in the area may exclude lava damage, and those that include it can be expensive. Some homeowners may have no coverage at all.3

To further complicate the tragedy, a magnitude 6.9 earthquake rocked the same area on the day after the volcano erupted, and even homeowners who have coverage for lava may not have earthquake coverage. So whether specific damaged is covered will depend on what force of nature caused it.4

Know Your Policy Perils

The Kilauea eruption illustrates the importance of understanding exactly what is and is not covered under your homeowners policy. Generally, there are two different types of homeowners insurance. A “named perils” policy provides coverage only for certain risks that are listed in the policy, whereas an “all-risks” policy (also called “open perils” or “special perils”) covers all causes of loss, up to policy limits, except those that are specifically excluded in the policy documents.5

The most common homeowners policy in the United States, known as Homeowners-3 (HO-3), is an all-risk policy that provides broad coverage for many hazards, including fire, lightning, tornadoes, wind storms, hail, explosions, smoke, vandalism, theft, falling objects, and water damage, among others. However, floods, sewer backups, and earth movement — such as earthquakes, landslides, and sinkholes — are typically excluded from HO-3 policies and would require separate coverage.6

Moving Earth

Earthquake policies are available from private insurers and, in California, through a state-run private-public partnership called the California Earthquake Authority (CEA). Most policies carry a deductible ranging from 5% to 15% of the structure’s replacement value. Although California has traditionally had the highest earthquake risk, some areas of the country that are far from major fault lines, particularly Oklahoma, are experiencing increased seismic activity due to oil drilling through hydraulic fracturing, commonly known as fracking.7

Earthquake policies and standard homeowners policies do not cover damage from landslides or mudslides — a generic term often used for a landslide involving saturated ground. These policies also do not cover damage from mudflows, essentially a river of mud that would generally be covered under a separate flood insurance policy. (For insurance purposes, the difference between a mudslide and a mudflow is that a mudslide is mostly solid earth or rock that moves downward, whereas a mudflow is mostly liquid.) You may be able to buy a Difference in Conditions policy, which typically provides all-in-one coverage for landslides, mudflows, earthquakes, and floods.8

Mudslides can be caused by heavy rains, especially after a wildfire has destroyed vegetation that helps stabilize the ground on a hillside. In January 2018, a mudslide that followed a devastating wildfire killed 21 people and destroyed at least 100 homes near Santa Barbara, California. Most insurers have agreed to cover the Santa Barbara County damage under the fire insurance coverage on homeowners policies, because courts in the past have ruled that insurers must accept risk for the “efficient proximate cause” of damage, meaning the most important cause. However, this is a gray area, and in late May 2018, the California state legislature was considering legislation to clarify mudslide insurance.9–10

Sinkholes are another form of earth movement that is typically excluded from standard homeowners policies. A sinkhole is a collapsed land feature that is formed when running water collects under the surface, dissolving soluble bedrock over time. Sinkholes can be caused by natural forces or by human activity such as groundwater pumping or construction work. A slow or sudden sinkhole collapse can range in size and severity from a few feet to many acres wide and more than 100 feet deep.11

Damage from sinkholes occurs most often in Florida, Texas, Alabama, Missouri, Kentucky, Tennessee, and Pennsylvania. In some high-risk states, coverage may be available at an additional cost, either as an endorsement to a property insurance policy or as a stand-alone policy. Florida and Tennessee insurers are required to offer optional sinkhole coverage.12

Know Your Risk

Maps produced by the U.S. Geological Survey may help you to assess the likelihood of damage from volcanic eruptions, earthquakes, landslides, sinkholes, and other geologic hazards in your area. You may want to read your insurance documents carefully to find out whether these or any other unusual perils are covered or excluded by your particular homeowners policy. Call your insurance professional if you have any questions about your coverage.