HOA Law Blog
As part of an association’s preparation for an earthquake, inevitably there is the “issue” of earthquake insurance. In 1994, at the time of the Northridge quake, less than half of all associations had earthquake insurance. I do not believe the statistics have changed much since 1994.
Earthquake insurance is not required or mandated by any associations’ governing documents or California Law. After the 1994 earthquake, it was not available and/or was too expensive. Many associations say they are relying on their homeowners to obtain their own earthquake insurance. However, homeowners cannot buy insurance to cover the damage to the common area. While they can obtain earthquake loss assessment coverage and other earthquake coverage that will cover their personal property, the reality is that community associations need to seriously consider whether earthquake insurance makes sense for their association.
We were not strong advocates of earthquake insurance prior to the 1994 Northridge Earthquake. At that time, earthquake insurance policies carried a deductible of ten percent (10%), and that is not ten percent (10%) of the amount of the damage but ten percent (10%) of the replacement cost of the building(s). So, for example, if an association had an estimated cost of replacement and policy limits of 2 million dollars, the association would have to have more than $200,000 of damage before it could receive one dollar from its carrier.
What we learned from the Northridge earthquake is that all of the polices had coverage for betterments and improvements which includes all of the interior elements that are attached to the buildings such as paint, wallpaper, mirrors, cabinets, carpet and other flooring, etc. It was the cost of removing or replacing those elements that typically drove the cost of repair beyond the deductible in those buildings that were only moderately damaged.
Having watched those associations that were not insured deal with SBA loans and the like, it has become our recommendation that associations seriously consider earthquake insurance and do a cost-benefit analysis. Sometimes, the cost of the insurance and the amount of the deductible (we saw them go as high as twenty five percent (25%)) and the limits imposed by the carrier just do not make economic sense. One factor that should not go into your decision is whether the homeowners can afford it. If they can’t afford earthquake insurance, what is going to happen when there is an earthquake and they can’t afford to pay for the cost of repair?!
We recently received an article from the Timothy Cline Insurance Agency that specializes in providing insurance coverage for California Community Associations. In his article on earthquake insurance, Tim Cline states that buying earthquake insurance for community associations “may be one of the most important (and complex) purchases the association will ever make. And if there is a catastrophic earthquake, decisions made about it will be scrutinized for months (if not years) after.” Having represented hundreds of associations following the 1994 Northridge Earthquake, we can confirm that this is absolutely true.
The article (and additional information found on the company’s website) set out several important things that associations need to know about earthquake insurance coverage.
First, Cline recommends that associations make certain that the percentage deductible is applied separately to each building or structure. This way, the deductible will only apply to the replacement cost of those buildings or structures that actually sustained damage – rather than the replacement cost of the entire project”.
This is important. After the Northridge Earthquake, we found out that those associations that had multiple buildings suffered varying degrees of damage depending on where the particular building was located. Some buildings that were facing north to south suffered different damage then those buildings that were facing east to west, for example.
Cline recommends that Associations investigate the carrier. He states that “[m]uch of the earthquake coverage is written by Excess and Surplus lines insurers” who are not California admitted carriers “in order to write hard-to-place risks like earthquake.”
Cline recommends that associations ask their insurance agents/brokers to see the association’s “statement of values” which is a building by building schedule. It is important to review the schedule to see how coverage is apportioned amongst the buildings and perhaps more importantly, how the deductible might apply if there is damage from an earthquake.
As part of an association’s earthquake preparedness, associations need to communicate to the members whether or not the association has earthquake coverage, and provide information to the homeowners about the types of coverage they should look into. Cline’s website addresses individual homeowner coverage including earthquake loss assessment coverage (many homeowners after the 1994 earthquake were surprised to learn that the standard loss assessment coverage did not cover them for a special assessment levied by the association to meet the deductible or make repairs at the association for earthquake damage), earthquake coverage on personal property, loss of use coverage and earthquake loss of use coverage.
An association can improve its preparedness by reviewing insurance coverage, and inviting the association’s insurance agent or broker to attend a board meeting or perhaps even a meeting of the members to make a brief presentation regarding the association’s coverage and what coverage is available to the individual homeowners. As Cline states in his article, “[d]ovetailing the [association’s] Master Earthquake policy with the individual unit owner’s earthquake coverage is critical. A presentation by your agent/broker will encourage the unit owner to have a dialogue wit his/her own insurance agent/broker about purchasing individual earthquake coverage. Since earthquakes will damage the interiors (as well as exteriors) of the units, it’s an important discussion to have.
There is no better time than the present to consider earthquake insurance; it is too late to think about it after there has been a significant earthquake!