October 2013

A recent Swiss survey found that 8 in 10 fear damage from an earthquake, flood or other natural disaster within the next 20 years. There is no shortage of catastrophic events to substantiate this statistic – in California, wild fires, mudslides and tsunamis are of concern, but earthquakes are the biggie; this is earthquake country after all.

As purveyors of earthquake insurance to community associations and commercial properties in California, we are sensitive to the pragmatic approach of transferring risk and believe in its value. While our hearts break when we hear of the latest natural disaster that shakes our global community, we can’t help but think, once the dust settles, about the uphill battle that remains for the uninsured.

An article recently published by New Jersey-based newspaper Star-Ledger featured James and Mary Ann Guida, a retired couple from New Jersey, and their struggle as they attempt to rebuild after their home was destroyed by Sandy. They did not have flood insurance. James Guida states, “When we paid off the mortgage, no more flood insurance, because nothing ever happened.” It’s a common refrain among the uninsured – why pay for something that’s never been used? Choosing not to maintain insurance for a catastrophic loss is a great gamble, though – one the Guidas lost. It is in the name of the Guidas, past, present and future, that we wish to share with you our thoughts on the question, Does our Association really need an earthquake policy?

If we had a catastrophe and we were uninsured, could I afford to walk away from my investment?

Consider this: If you have equity in your home, you need earthquake coverage. Historically, homeowners associations that have suffered catastrophic damage and were without earthquake coverage have not been able to rebuild. FEMA’s loans to individual residents did not provide them with sufficient capital to rebuild, and the burdensome loan process involved endless red-tape that took a minimum of nine to ten months to complete. (Not to mention, existing mortgages do not disappear in the event of EQ damage – so any loan obtained by the association would compound the owners’ existing monthly payment obligations.)

Can’t each individual owner protect their own unit? Why should the HOA be involved?

Consider this: Shy of an association purchasing a Master Policy, there currently isn't a way for individual unit owners to obtain sufficient coverage to fully protect themselves against damage to the building by earthquake. You can certainly protect your contents via the California Earthquake Authority (CEA) who will also offer coverage for your loss of use and earthquake loss assessment exposures, but even if every unit owner purchased the maximum possible real property coverage (CEA caps this at $25,000), in terms of your individual unit as a structure, you are essentially at the mercy of your Association's decision to either maintain a master earthquake policy or have the financial wherewithal (reserves, special assessments) to rebuild at the time of a loss. If those avenues are unable to generate adequate funds, it's likely the Association – and therefore you – will be unable to rebuild.

What are the alternatives to purchasing a Master Earthquake Policy?

Consider this: Because of the complexities of “common interest ownership”, there are no viable alternatives, save for the association constantly maintaining a reserve account balance sufficient to cover the cost of rebuilding, which we realize is hardly realistic. As mentioned earlier, an owner will not be able to restore their unit unless the common area is restored. Buying individual coverage is still important, but the potential for rebuilding is unlikely. Neither private lenders nor the Small Business Administration (SBA) are likely to lend to an HOA that has failed to purchase earthquake coverage.

 

Is there a way the Board of Directors can limit their liability?

Consider this: While few CC&Rs specifically require earthquake insurance, this wouldn’t necessarily relieve the Board of Directors from potential liability if an angry unit owner (with an earthquake-damaged home) felt the decision to drop the coverage was unwarranted. What is especially alarming is the fact that the vast majority of Directors & Officers Liability policies exclude allegations involving “failure to maintain insurance.”

In other words, if a future uninsured earthquake loss resulted in a lawsuit against the Board, there would most likely be no coverage under the D&O policy – leaving the association responsible for covering the defense costs out-of-pocket. An article written for the Los Angeles Times addresses this issue nicely and is worthy of checking out [Read full article here] Vanitzian, Donie. “Does homeowners association have to carry earthquake insurance?” Los Angeles Times 19 July 2013.

A 20% deductible! What gives?

Consider this: Many associations, already frustrated by the high premium for earthquake insurance, are appalled by the high deductible to boot. A board may choose to raise funds for the deductible via a special assessment, liquidate reserves, or borrow the funds from the SBA – or a combination of all three. Gratefully, should the board choose to special assess, individual unit owners have the opportunity to purchase earthquake loss assessment through the CEA for their proportionate share of that 20% (or 10% or 15%) deductible. The brutal reality is, without insurance, your earthquake deductible is 100%.

Ultimately, as a resident of earthquake country, you are choosing between two wagers:

1) Gambling your equity on Mother Nature (that there will not be an earthquake, or 2) Protection from a well-rated insurance carrier in a highly-regulated industry.

Critical collateral is at stake in this decision – your entire real estate investment is on the line. If you are one of the 8 in 10 people who believes that a catastrophic earthquake is possible, then we encourage you to carefully consider these two alternatives when deciding whether earthquake insurance is worth the cost.

 

 

Your agent/ broker may be able to provide you with an earthquake risk analysis provided by an earthquake risk assessment firm like Risk Management Solutions (see link below). Aside from that, there is more general earthquake risk data available at:

The U. S. Geological Study (USGS) - http://www.usgs.gov/"www.usgs.gov

The California Dept. of Insurance - http://www.insurance.ca.gov/0400-news/0200-studies-reports/0300-earthquake-study/

Risk Management Solutions - http://www.rms.com/


AND/OR
Additional resources:
Earthquake preparedness in Los Angeles and San Francisco.  here


Los Angeles:  Proposal to list buildings vulnerable to earthquakes sparks debate  here


San Francisco:   San Francisco Passes Landmark Earthquake Retrofit Law  here


Tsunami:  Community Exposure to Tsunami Hazards in California  here


Wild Fires:  Cal Fire Incident Information here


Mudslides:  California Geological Survey on Mudslide Hazards  here


Check out the California Office of Emergency Services  here

 

By Timothy Cline, CIRMS

Timothy Cline Insurance Agency, Inc.

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