The Great San Francisco Earthquake & Fires of 1906

Insurance Industry Struggles with Claims

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The 1906 San Francisco earthquake and fires rank as the worst catastrophe in American history in terms of property damage and losses, according to Best’s Review, a leading publication for the insurance industry. Estimates of losses resulting from the 1906 quake amount to more than $28 billion (2005 equivalent), surpassing both Hurricane Katrina and the terrorist attacks on the World Trade Center and the Pentagon.

Interestingly, it was not the structural damage sustained so much as the fact that the earthquake effectively destroyed the city’s water supply system which proved catastrophic. The fires that ravaged the largely wood-built city in the wake of the quake wiped out most of the city, accounting for as much as 80% of the damage according to some estimates.

Total San Francisco fire premiums in 1905 were $2,985,540, of which American insurers wrote $1,645,710 and foreign companies wrote $1,340,830. One of the problems insurers faced was distinguishing between damage caused by the quake and damage caused by the fires. Further complicating the picture was the use of explosives to raze buildings in order to contain the fires, with some insurance companies simply refusing to cover the loss of structures destroyed in this manner. Many insurance companies did not have clear policies or procedures for how to assess the kind of damage they faced in San Francisco. To further complicate matters, their efforts at carrying out inspections were seriously hampered by the dangerous conditions.

Losses Stun Insurance Industry Leaders

Temporary headquarters were set up by insurance companies in Oakland, where a steady stream of people made the trip to present their claims. Adding to the confusion, not only the policy holders, but most of the local insurance companies as well, had lost all of their records in the fires. As the London Financial Times noted on July 6, 1906, “San Francisco's $200,000,000 ‘ash heap’ involves complications which will be felt on all financial markets for many months to come [and] the payment of losses sustained… represents a financial undertaking of far-reaching magnitude.”

In the aftermath, many insurers raised their rates, some by as much as 10-25%, while others announced they would reduce or strictly restrict policies for businesses in larger cities in the future. Others managed to come through the ordeal, with Continental winning the distinction of being the first to finish payment for losses due to the disaster; the company’s net losses were reported at $1.8 billion.