Testimony on Assembly Bill 211
Assemblyman Lambert.
by Prof. John G. Anderson

Version of February 22, 1995

An act relating to property insurance; requiring a policy of property insurance for a business establishment to include coverage for loss or damage caused by an earthquake; providing exceptions to this requirement; and providing other matters properly relating thereto.

Testimony by:
Dr. John G. Anderson
Professor of Geophysics
Acting Director, University of Nevada Seismological Laboratory
University of Nevada
Reno, Nevada 89557

Phone: (775) 784-4265
FAX: (775) 784-1766
email: jga@seismo.unr.edu

Date: Monday, March 6, 1995
Nevada Assembly Committee on Commerce
3:30 PM, Room 332.

Mr. Chairman, members of the Assembly Committee on Commerce, and fellow citizens.

To begin, I would like to thank Assemblywoman Lambert for inviting me to testify at todays hearing.

My name is John Anderson. I am a Professor of Geophysics at the University of Nevada, Reno campus. I am also, for this year, Acting Director for the Seismological Laboratory of the University of Nevada. In addition, I serve on the State of Nevada Earthquake Safety Council, which is a panel of citizens who volunteer to advise the Nevada Division of Emergency Management about earthquake hazards. The Nevada Earthquake Safety Council has elected me as their Chairman. However, my testimony today does not represent the official viewpoint of either the University of Nevada or the Nevada Earthquake Safety Council.

My understanding is that A. B. 211 initiated with some business owners desire to obtain insurance coverage to protect themselves from losses caused by earthquakes, and their discovery that such coverage is not readily available. The proposed bill would require insurance companies to offer "coverage for a loss resulting from interruption in the activities of the business establishment caused by an earthquake." My further understanding is that typical business interruption insurance covers interruptions due to direct damages to the premises on which the business operates.

I would like to begin by pointing out that Nevada does have an earthquake hazard, and thus it is reasonable for individuals or business owners to seek to protect themselves. Figure 1 shows a map of the State of Nevada, together with epicenters of known earthquakes. Most of the earthquakes on this map are small. Over time the locations of large earthquakes tend to mimic the locations of small events. Thus this figure indicates that nearly the entire state of Nevada has the potential to experience a large earthquake.

Figure 1. Earthquakes in the Nevada region recorded from 1852-1988.
University of Nevada, Reno Seismological Laboratory

Figure 2. Active faults in Nevada; red lines are historical earthquake surface breaks.

Let me be specific about the daily chances of an earthquake causing at least minor damage in the Reno-Carson City urban corridor. Historical, potentially damaging earthquakes occurred in 1860, 1869, 1887, twice in 1914, and in 1948. Earthquakes in 1966 near Truckee and 1994 south of Gardnerville were near misses. An earthquake in 1852 might have been strong enough to cause damage, but very little is known about it. Not counting 1852, the six events since 1860 suggests an average of one every 22 years (Note 2). A well-established rule in seismology is that as the size of earthquakes goes down, the number goes up rapidly. It is not clear if this relatively high rate of events capable of some damage is quite consistent with an interval of several hundred years between extreme earthquakes; it might suggest that seriously damaging earthquakes occur more frequently. We know much less about the rates of potentially damaging earthquakes near Las Vegas, or near the other population centers of Nevada for that matter, since the appropriate geological and seismological observations have not been made yet (Note 3).

I would like to turn my attention to the economic effects. On this, I am less of an expert, so I will limit myself to some elementary points. From the viewpoint of an individual considering his risks, there are direct effects and indirect effects. Direct effects are direct damages to his property. Indirect effects include disruptions to the community's infrastructure or reputation. For either type, the effects can range from trivial to severe. The trivial cases are fortunately more common: when the earthquake occurs in a relatively unoccupied part of the Nevada desert, and causes little harm.

There is a greater variety of earthquakes that could cause indirect effects. I will identify three types of these indirect effects caused by earthquakes in other regions, and which have interrupted business activities.

Transportation. One effect is disruption of transportation. For instance, the economy of the Truckee Meadows depends heavily on the present transportation system: Interstate 80 is a main artery for shipping and for tourism. In Northridge and in Kobe, earthquakes destroyed main highways. Interstate 80 crosses major faults between Reno and Sacramento, and also between Reno and Winnemucca. Faulting or shaking caused by an earthquake in the Sierras could destroy bridges or cause landslides that could stop traffic on the interstate for several days or even weeks. Alternate routes may not exist around some major bridges over the Truckee River, for instance in the Truckee River Canyon in California.

The Reno airport could also be affected by a strong earthquake. It is constructed on very soft material - former marsh land - that is considered to have some potential for liquefaction - which means that the soils under the runways lose strength and flow like a liquid. The consequence could be loss of ability to use a runway. During the Loma Prieta earthquake in 1989, the Oakland airport lost a significant part of its main runway, although it was able to continue to operate.

Damage to the area's reputation. One spectacular failure anyplace in the region could discourage a significant number of potential tourists from coming to the state, even if most structures are not affected. For instance, after the Loma Prieta earthquake, which was a significant distance from San Francisco and caused no damage to the majority of structures, tourism to San Francisco decreased substantially and only returned to pre-earthquake levels after several years. Thus, business activity and state revenue could decrease in a major way just at a time when the revenue is needed the most to help with recovery efforts.

Lifelines. Utilities including electric power, water, phone, gas, and sewer are often interrupted by a strong earthquake, and take days to weeks to reestablish depending on the severity. Reno is also vulnerable because virtually all of our petroleum supplies arrive by pipeline from the San Francisco Bay area, and are shipped on a "just in time" basis. A strong earthquake in the Bay area or in Reno could disrupt this supply.

Direct effects could occur in a spectrum of effects ranging from minor to the worst case. Serious earthquakes, but weaker than this "worst case", could happen much more frequently, as I mentioned earlier. I will describe only the worst case. We suggest that happens once every 1000 years or so near Reno, for instance, in the form of an earthquake on the Genoa fault, which is on the east side of the Carson range (Note 4). In this earthquake, we could expect damage from Stead to Gardnerville. Well built structures throughout the region would have all the contents of shelves on the floor, but for most of the region, structural damage would mainly be architectural damage like cracked plaster, loose ceiling tiles, broken windows or perhaps broken chimneys. Poorly built structures such as unreinforced brick buildings could collapse throughout the region. In the areas of strongest shaking, ground motions would probably be comparable to the strongest motions in Kobe or Northridge, that is three times greater than those specified in the present building code for ordinary structures. Some preliminary information that I have seen about the Kobe earthquake suggests that the building code design specifications in Reno are about the same as those used for some of the buildings that failed in Kobe. Consequently, in this worst case earthquake, there could be failures of some modern buildings. In other words, merely because the structure has been designed to meet the present building code does not provide complete protection from structural damage in the worst earthquakes the region could experience.
Individuals, home owners, and businesses have the alternative to build structures that exceed the requirements of the building code, although this is more expensive. Likewise, the legislature has the ability to require structures to be designed to a higher level than the recommendations that are given in the Uniform Building Code. In buying a car, many people are willing to accept the added cost of a Cadillac in return for better performance; this sort of more expensive alternative is also a possibility with earthquake resistant construction although it is hardly ever considered.

Finally, I should like to tell you a little of what I know about earthquake insurance. On this also, I am not an expert. I do know that there is a national debate going on right now about earthquake insurance. Some people in Congress are unhappy with providing major emergency relief efforts that run up the deficit by bailing out areas that have not taken prudent mitigation measures (see attached article in Note 5: GOP: NO MORE AUTOMATIC DISASTER AID). Many people consider the national level the only level able to develop a sufficiently large insurance pool. My understanding is that this is not a high priority with the Republican leadership, and has lost some momentum compared to before the November elections. I would suggest that this is a national level trend that ought to be watched carefully in your deliberations about earthquake insurance.

Note 1. One could compare with a popular game in our casinos: the chance of any one individual winning a million dollar prize in Megabucks is quite small, but so many people are trying that there are relatively frequent winners. In this analogy, the many players would correspond to the numerous faults, and the winner would correspond to the fault that has a magnitude 7 earthquake.

Note 2. For comparison, if I were to play $100.00 every single day in Megabucks, my daily chances of winning a million dollar jackpot would be smaller than the daily chances of an earthquake causing at least minor damage in the Reno-Carson City urban corridor.

Note 3. I see little prospect of the appropriate studies being completed in the near future. Lack of financial support is a major problem. The U. S. Geological Survey supports operation of the seismic network in western Nevada, but has no funds to allow the network to expand to provide adequate coverage of the Las Vegas area or the northeastern part of the state. The UNR Seismological Laboratory likewise does not have sufficient equipment and operating funds to allow this expansion.

The other needed group of studies is the neotectonic geology of the faults near population centers. Only one of about 20 faults near the Reno-Carson City urban corridor has been the focus of any thorough studies that might be considered approaching modern standards. None of the faults near Las Vegas have been studied adequately, although there is good reason to believe they are active. Likewise, none of the faults near Elko or other smaller Nevada population centers have been studied. Again, the problem is manpower. The best hope is to obtain Federal help by means of research grants and contracts, especially from the U. S. Geological Survey. However, that program is being scrutinized at present for cuts by the U. S. Congress in the interest of balancing the Federal budget, and its future is uncertain.

This is extremely unfortunate. Considering the rapid growth in these regions, it would be far better to know the earthquake risk up front, and have the confidence that design standards are appropriate. The worst situation is to discover, after the development is complete, that designs were inadequate. That discovery can happen two ways. Sometimes, geologists study the faults and prove the case. More often, it happens in a devastating earthquake.

Note 4. We do not know how often earthquakes that are nearly as severe occur on other faults in the region.

Note 5.

GOP: NO MORE AUTOMATIC DISASTER AID

CALIFORNIA'S BAILOUTS WILL DEPEND ON CUTS ELSEWHERE

By THOMAS FARRAGHER Mercury News Washington Bureau

WASHINGTON -- California residents, accustomed to billions in federal aid to
rebuild after crippling earthquakes and devastating floods, got a stern warning
Friday that those bailouts would no longer be so automatic.

House Speaker Newt Gingrich said that from now on, Republican leaders in
Congress would insist that federal disaster aid to states be offset with cuts
elsewhere -- new political math that could imperil nearly $5 billion in
requested relief for California and future assistance to the state.

Generally, disaster funds are sent to states under special budget rules that do
not require Congress to earmark offsetting cuts. But Gingrich said House
Republican leaders had decided to change that practice and would no longer
exempt disaster aid, beginning with Clinton's latest aid request for
California.

''I am very committed to getting California the money, because I think it's a
legitimate request,'' Gingrich said of President Clinton's request this week
for $4.9 billion for lingering Northridge quake repairs and $500,000 for
repairs from last month's flooding.

''But every American family that faces an emergency has to either borrow the
money and pay it back -- as opposed to borrow it forever and leave your
grandchildren to pay for it -- or the family has to cut spending something. You
don't have this thing of waving a magic wand and saying, 'Well, this is an
emergency.' ''

In a letter sent to Clinton this week, Gingrich was joined by GOP Majority
Leader Dick Armey, R-Texas, and the heads of the House Budget and
Appropriations committees in asking the White House to outline cuts it wants to
make to pay for the requested aid.

''We will not act on the balance of the requests until you have identified
offsets and deductions to make up the balance of the funding,'' said the
signers, who together have the clout to control spending approved by the House.
''Whether these activities are emergencies or not, it will be our policy to pay
for them, rather than add to our already immense deficit problems.''

But finding other programs to cut is becoming increasingly difficult as
lawmakers look for ways to trim the budget deficit. What it means for
California taxpayers is this: If repairs for a certain disaster were to cost,
say, $10 billion and Congress could find only $7 billion in cuts to pay for
that, the state would be left with a $3 billion repair tab -- and taxpayers
could end up footing the bill.

Gov. Pete Wilson, who met with Gingrich this week, seemed taken off guard by
the new Republican budget calculus. He told reporters the GOP speaker never
mentioned the plan during a meeting this week.

''What I want in terms of treatment for Californians is that they be treated as
disaster victims have been in Hawaii, Florida, South Carolina, Iowa, Illinois,
Michigan -- all these places that have legitimately made claims when, through
no fault of their own, their people have been sorely afflicted,'' Wilson said.

He said if Congress decided to demand cuts elsewhere in the budget to provide
disaster aid to states, it could find less-deserving programs than helping
earthquake victims.

''People who are afflicted with natural disasters don't choose to be,'' the
Republican governor said. ''And if they suffer real and serious injury, then I
think it is the American way -- and has been -- to help out.

''But that doesn't exempt Congress from the necessity, as we are not exempted
at the state level, from having to find ways to pay for it.''

Gingrich said Friday that the president had yet to suggest cuts to pay for the
new aid request.

''And we're saying, 'Send us your wish list.' And if you can't find it in
fiscal '95, show us what we could cut out of fiscal '96,'' Gingrich said. ''But
don't tell us that we're not going to be fiscally responsible and actually
fight our way to a balanced budget, as hard as that is.''

When the administration was asked for comment, a representative of James Lee
Witt, director of the Federal Emergency Management Agency, said Witt was
concerned about his agency's ability to provide disaster relief under the new
rules.

''He hopes the situation can be resolved so that recovery from the various
disasters in this country can continue,'' the official said.

Clinton's request this week would bring to $16 billion the amount of federal
money supplied to help rebuild Southern California after the most costly
natural disaster in U.S. history. The Jan. 17, 1994, quake registered 6.7 on
the Richter scale. Funds that already have been approved would not be affected
by the new House policy.

In recent weeks, some leading Democratic lawmakers have asked that the federal
disaster relief program be dismantled, proposing a replacement system that
would make the states pay the repair bills.

Reps. David Obey, D-Wis., Charles Stenholm, D-Texas, and Richard Durbin,
D-Ill., have introduced legislation that would establish an insurance pool
among states based on a risk assessment. States' participation in that system
would be voluntary.

Obey said 160 House members voted last year to eliminate emergency
appropriations altogether. And, he said, that sentiment is growing stronger.
California's congressional delegation has condemned that plan.

''Much of the damage which has required federal disaster funds in recent years
has resulted directly from zoning decisions by state and local authorities to
permit the development of coastal areas and flood plains prone to flooding and
other natural disasters,'' said Obey, the ranking Democrat on the House
Appropriations Committee.

''The authorities who make those decisions do not equally weigh the risks and
benefits of such decisions because currently state and local governments can
pass the risks on to taxpayers in other jurisdictions.''

MERCURY CENTER ID: me55737c

Transmitted: 95-02-11 05:25:02 EST