Insurance and a Volcanic Crisis—A Tale of One (Big) Eruption, Two Insurers, and Innumerable Insureds

Abstract

Although probabilistic insurance loss models, particularly for ash fall, are currently being developed volcanic risk has been widely ignored by insurers and policy holders alike. Volcanic eruption cover is often grouped in insurance and reinsurance policies with earthquake and tsunami cover. Many volcanic eruptions include several perils occurring in different spaces around the volcano, with widely varying intensities and consequences, sometimes all at once, sometimes sequentially, and sometimes repeatedly. Given the possibly large differences in hazard characteristics, event durations and potential losses the policy alignment with earthquake and tsunami covers can be unfortunate. Does ‘volcanic activity’ have the same meaning as ‘volcanic eruption’? Do the terms ‘ash fall’ and ‘pyroclastic fall’ have identical meanings to an insurer—or to a volcanologist? Some policies cover all volcanic perils while others include only named volcanic perils such as pyroclastic flows, ash falls, and/or lava flows. Often the intent of the coverage is not clear—were some volcanic perils missing from a list excluded by accident or design? Does a policy that covers damage occasioned by a fall of volcanic ash also cover the cost of clean-up, removal, transport and appropriate storage of the ash—even if the fall of 5–10 mm of ash causes almost no property damage? Clear communication between the insurance sector and policy holders (and the media) is dependent upon informed understanding of the nature of volcanic perils and volcanic eruptions, insurance wordings, and the potential losses to property and business interruption covers. This chapter explores these issues using examples of policy wordings, evidence from past eruptions, insurance case law, and potential losses in future eruptions.