The January 17, 1994 Northridge, California, earthquake provided a "wake-up call" to lenders and property owners. Fortunately, due to the early morning holiday occurrence time, this earthquake caused relatively modest casualties, but the widespread damage and destruction to property resulted in more than $20 Billion in losses. Many property owners suddenly realized that building codes are minimum standards specifically designed to prevent loss of life or injury during moderate to strong earthquakes, but damage to buildings is expected. As a result, many lenders now require, as a part of the loan application process for commercial property, an estimate of what losses may be incurred at the subject property due to possible future earthquakes. These loss estimates are typically called Probable Maximum Loss ("PML") evaluations.

PML is a measure of expected damage, expressed as a ratio of repair cost to replacement cost of a building. This represents a number often used to determine whether mitigation is required to reduce the risk of unacceptable loss. Earthquake insurance is a typical mitigation alternative used when expected losses exceed specified threshold values. Unfortunately, insurance only serves to transfer the costs of future earthquake losses rather than to reduce these costs. Furthermore, the cost of earthquake insurance, if available, is often prohibitive. The lender may encourage or even require that direct mitigation of earthquake vulnerabilities be accomplished in order to secure financing for a property. A comprehensive Seismic Hazard Assessment ("SHA") provides a first order description of a building's vulnerability to earthquake damage.

SHA can be performed at several levels of analysis. Site-specific PML assessments are performed for individual properties or building sites and are common for individual property transactions. Broad-scale, portfolio-based, earthquake PML studies are performed for several properties or building sites, and are typical for insurance industry risk managers. Similar analyses are made for an investor's portfolio of real property that is located in Earthquake Country. Comprehensive SHA reports include a description of the earthquake and geologic environment of the site as well as the building and the principal structural components that are susceptible to earthquake damage. Presentation of mitigation strategies allows the lender to evaluate possible mitigation alternatives, with attendant financing, to ensure the successful security of a loan. More detailed engineering analyses then may be used to design specific seismic upgrades for vulnerable structures to improve their earthquake resistance.

Earthquake hazards to be evaluated include primary effects such as shaking and fault rupture, as well as secondary effects such as ground failures like liquefaction and landslide. Shaking hazards pose the greatest threat to buildings because the area affected by strong shaking is widespread during large earthquakes. Fault displacement is locally destructive within the fault rupture zone. Secondary ground failure hazards may also be destructive, and some regions have widespread zones susceptible to hazards like liquefaction. Experience shows that the site liquefaction potential often sharply increases damage potential in the PML estimate. This is confirmed by recent destructive earthquakes where the greatest damage occurred in areas of ground failure. For example, within the Marina district of San Francisco, even though located at substantial distance from the primary fault rupture and earthquake source region, poor ground conditions resulted in substantial structural losses due to liquefaction-related ground failures.

Structural vulnerability to earthquake damage depends upon many factors. These factors include type of construction, age, condition or quality of construction and materials, and structural details regarding the ability of the structure to hold together and resist strong horizontal vibrational forces. Buildings must be designed to stand up under their own weight, and therefore, resist the vertical forces induced by gravity. Earthquakes induce strong horizontal forces due to the ground vibrations. Consequently, in earthquake country, buildings must include a competent lateral load resisting system. The measure of the horizontal shaking forces that may affect buildings during earthquakes is represented as the Peak Horizontal Ground Acceleration ("PGA"), given as a fraction of the earth's vertical gravity force. For new buildings constructed in Uniform Building Code ("UBC") Seismic Zone 4, the design lateral loads are set at 40% of gravity.

Earthquakes pose severe threats to our developed environment. Major earthquakes are often destructive, but need not be catastrophic. With thorough earthquake risk analysis and implementation of cost-effective mitigations, severe earthquake hazards and potential losses to existing structures, inventory, and business operations can be minimized.

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