Why insurers may not pay for earthquake claims

By Staff Writer
By Angelique Ruzicka, editor, Justmoney

After scrutinising and querying policies from 16 major building insurance providers, including the likes of Telesure, Santam, Hollard and the big four banks, Justmoney found that four out of 16 insurers may not uphold earthquake building insurance claims if it is found that they are directly linked to mining related activity or acid mine drainage (see table below).  

Home owners suffering from damage to their homes as a result of the 5.5 magnitude earthquake that hit Orkney in the North West province in South Africa and the quake that followed are set to submit insurance claims following the disaster. But they may be disappointed by claims being rejected thanks to a clause that many insurers lay out in their building insurance policy documents. 
The four include three of the four major banks Standard Bank, Absa and Nedbank and one underwriter, MUA. Nedbank provides cover for mining related damage but not if earthquakes result from acid mine drainage (AMD).

AMD is polluted water from mining areas. The water may contain high levels of salts, sulphate, iron, aluminium, toxic heavy metals and radioactive elements.
Standard Bank’s policy, makes things more difficult for clients as it states that ‘You must prove that the damage was not caused by mining operations; and you must pay the first R2 500 or 1% of the loss or damage (whichever is higher) if it was caused by mining operations.’
But major insurers are not the only ones that may reject claims. Specialist insurer MUA Insurance Acceptances offers standard earthquake cover but if its mining related it won’t uphold the claim.

Christelle Fourie, managing director of MUA told Justmoney’s sister website Moneybags that: “Most insurance policies will cover you for an earthquake, but you get two causes of earthquake. One is seismic event related and the other is mining activity related. There are quite a few policies, especially on the commercial side that would exclude any mining activity-related events.” Fourie added that consumers should check their policies and ask for advice from their broker if they have one.
Meanwhile, if you have an old building policy (i.e. if you applied for building cover a few years ago) sectional title specialist brokerage Addsure pointed out that you may not have cover from damage resulting from tremors. 
"Whilst some older policies issued by some insurers do not necessarily cover tremors resulting from mining activity, Addsure ensures that policies arranged for its clients do cover earthquake cover resulting from such activity," said Mike Addison, director of Addsure. There have been warnings about the impact of AMD in South Africa. 
Homeowners may be underinsured
This week Mandy Barrett of risk consultants and insurance brokerage, Aon South Africa, pointed out that many South Africans are under-insured against major losses, such as an earthquake.  
“Financial times are tough and many households have reduced their sums insured in a bid to try and cope with skyrocketing living costs.  What most forget to factor into their decision is the fact that you will most likely have to replace all your household content and possibly even the entire structure of your home in the event of a catastrophic event,” warned Barrett.
If a client is under-insured, they may find themselves in a situation where they are only paid partially for a loss at claims stage.  “Insurers call it the ‘average formula’ which means that if your property is under-insured by 50% for example, they may only pay you 50% of your claim.  This easily happens where a home was bought a number of years ago.  Many insure the structure of their home for the value that they purchased the property for or the current market value of the house, but as building costs escalate the actual replacement cost – not the market value – could have appreciated to well beyond your insurance cover,” adds Barrett. 
Most insurance policies insure on the replacement value of the structure and its contents.  “The replacement value covers a ‘new-for-old’ approach, which is why it is essential that the sum insured is adequate to cover the cost of rebuilding the same building at today’s prices that includes associated costs such as municipal and professional fees in addition to debris removal,” adds Barrett.
Poor workmanship and construction
Pieter Visser of Aon Benfield pointed out that the basic building quality within settlements that are close to deep mines, is a concern.  “The majority of large seismic events, excluding Ceres in 1969, occurred within close proximity of deep mines, which leads one to conclude that these locations are more prone to frequent, relatively small, earthquakes of a magnitude of 5.5 and lower,” said Visser.  
“Typically we do not expect structural damage above ground from magnitude events smaller than five, while mines may suffer losses from seismic events that are smaller than a magnitude five,” he adds.
But is it truly mining related?
Whether insurers will be able to prove that the Orkney earthquake is down to mining related activity is still unclear. Michelle Grobbelaar seismology manager at the Council for Geoscience said: “The earthquake occurred in a mining region and thus we call it a mining related earthquake. However we cannot prove that it was caused by the mining activities because we don't have enough historical seismicity before the mining started. But at the same time we do acknowledge that mining activities can cause stresses to build up and induce earthquakes but this would be difficult to prove. 
Visser explained that an earthquake is often not induced by a single blast operation within a mining operation, but by the mine changing the stresses within a plate on a continual basis. There is often not reliable information on stresses underground, especially not on stable continental plates.  It therefore makes it very hard to pinpoint the cause of a seismic event, which makes it difficult to prove liability, especially from a mining perspective.
Experts claim that South Africa can expect more tremors like the one experienced in Orkney.  “The South African insurance industry does not have a great deal of experience in dealing with earthquake damage, due to the low frequency of earthquake losses.  The events in Orkney may lead to many insurers reviewing the cost of damage which may hint at possible premium increases, an increase in excess payments for earthquake damage or even exclusion of cover in areas that are prone to earthquake damage,” said Barrett.
The services of a professional broker could well prove to be invaluable in evaluating your exposure to earthquake risks.  “A professional broker will be able to facilitate the making of a well-managed insurance programme that accounts for your unique needs and risk profile, while matching your available budget.  

"Your broker will also be able to confirm whether you are covered for an earthquake and whether any exclusions exist on your policy.  A broker can ensure that you are in good hands in the event of a catastrophe and that there are no surprises waiting for you when you claim,” concluded Barrett.

Major insurers and their insurance policies regarding mining related earthquakes:


Do you cover damages to buildings from mining related earthquakes?

Explanatory notes



Covers earthquakes with no exceptions to mining related tremors.

Standard Bank


Covers earthquakes. Standard excess is R750 but if mining related you pay an excess of R2,500.



Covers earthquakes, if not mining related.


Partial cover

Covers earthquakes and mining damage. Except if it is relating to acid mine drainage, it is not covered.



Covers earthquake damage.



OUTsurance covers earthquake damage as standard on all our policies.   The insurer doesn’t exclude mining activity.  If a mine is found legally liable, then it will recover claims costs from the mine through a legal process. 




Earthquake is a covered peril under comprehensive cover. Policy exclusions include pre-existing damage, damage not related to the incident, and loss due to lack of maintenance or wear and tear. Acid mine drainage does not form part of Discovery Insure’s policy exclusions.




Full cover for earthquake damage, regardless of mining related.

Auto & General, Dial Direct, Budget, 1st for Women (part of Telesure Group)


Cover earthquake damage with no exclusions.



The specialist insurer offers standard earthquake cover - but not mine related.



Earthquake cover, with low maintenance or poor construction exclusions.

Addsure (brokerage)

Yes and no

Earthquakes are covered but some older policies issued by insurance companies, exclude damage from tremors. Addsure arranges cover for clients with full earthquake cover.



Cover is not limited to the cause of the earthquake. Mining related or natural earthquakes are covered.




There are no exclusions for the policy, whether mining related or from natural occurrences. But if there was structural damage, or erosion to the structure before the earthquake, then the policy would be adjusted to include that, and the pay-out would be less.


Table correct as at 26 August, 2014.


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