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October 4, 2005
EARTHQUAKE INSURANCE - TO BUY OR NOT TO BUY - THAT IS THE QUESTION!
Many community associations have been inquiring whether they should buy earthquake insurance, considering that the costs have become exorbitant. After networking with attorneys all over the state of California that had to deal with the problems involving reconstruction, collection of special assessments, and disputes with insurance companies in the aftermath of the Loma Prieta and Northridge quakes, it is my opinion that associations should purchase earthquake insurance if they can get it, even if the price is high. The reason: Associations that DID NOT have coverage experienced severely exacerbated problems. Translated into English - the Associations that did not have coverage had a much harder time recovering. Many still have not recovered - and it is years later. The homeowners who wish to rebuild and keep their homes are the biggest losers when there is no insurance and the special assessment to rebuild is out of reach of the average person.
I have been asked since to speak to many associations about the considerations behind the decision to buy or not to buy - and have shared the floor with insurance representatives that are able to find earthquake insurance, some even with a 10 percent deductible, a "per building" deductible (which is more desirable than a "per development" deductible) for a sum of money that is sufficiently affordable. By the way, my rule of thumb in 1996-2001 was that I considered an affordable master policy to be somewhere in the range of $400.00 - $600.00 per year per unit for homes priced in the neighborhood of $200,000.00. With rising insurance costs since then, I would consider protection in a consideralbly higher range per home to be affordable and worthwhile.
Many boards, when they face the increases coming through for earthquake insurance and the cuts in coverage, immediately react with negativity, and their objectivity is lost, because it just seems unfair. Maybe it is unfair - life is not always fair. But it is extremely important to consider the risks involved in saying "NO".
Those risks are:
·If there is an earthquake, the board members and association could be sued and the directors and officers liability carrier may deny coverage for "failure to adequately insure".
This "failure" is an excluded item on most directors and officers liability coverage policies. Even though there does not seem to be a binding precedent yet - many of the insurance companies are publicly claiming that they could assert this exclusion as a basis to deny a claim if an association or board was sued for failure to purchase earthquake insurance.
·If the association has no coverage, and there is an earthquake, only those owners with substantial equity in their property will be inclined to stay and weather the special assessments needed to reconstruct.
In many cases, we could easily be talking about the difference in a $7,000.00-$15,000.00 assessment in an association that has master earthquake coverage as opposed to a $100,000.00-$150,000.00 assessment in an association that does not (based on discussion about homes that average $250,000.00 to $450,000.00 in cost, perhaps a scarcity today).
·"Stand alone" coverage which is purportedly being offered for individual homeowners whose associations are uninsured is not a very practical solution, considering how difficult it would be to rebuild one single unit in a four, five or six unit building. (Besides, reportedly, the quotes given to owners are astronomical, and some policies sold purportedly as “stand-alone” products will only pay if there is underlying coverage.)
If your CC&Rs require that the board purchase earthquake insurance coverage, then it is my opinion that it must be purchased unless the CC&Rs are amended. If it is not, then there is a problem by virtue of ignoring the governing documents and they should be amended.
For any association that is having difficulty getting earthquake insurance or that is having difficulty justifying the cost and is considering just saying "NO", the following [minimal] steps should be taken in order to enable the board to claim the decision was a "prudent business decision" and protect the Association.
The board of directors should investigate as follows:
·Obtain risk analysis for type of development and geological location.
·Procure multiple bids from insurance companies for earthquake insurance, or from insurance broker who has access to several different companies.
·Survey homeowners to see where they stand on the issue (providing them with meaningful facts and information the board has gathered).
·Determine whether the costs involved would require homeowner approval (if they are in excess of legal limits for increases in regular assessments or imposing a special assessment).
·Make a prudent decision after gathering and considering the information as described above.
If the association wants to purchase earthquake insurance and the costs exceed legal limits for increases, then the association must go to the membership to get approval of a majority of a quorum of the homeowners for the special assessment or the increase in regular assessments to cover the insurance costs under Civil Code Section 1366 (the governing documents may require majority approval for the purchase – be sure to get legal advice on this). For those associations waiting for a state program to bail you out, you can stop waiting. The California Earthquake Authority, and any other state program selling residential insurance policies, will not provide coverage for associations because associations must purchase commercial insurance. Community associations are considered a business by the insurance world. Owners can purchase coverage there on an individual basis, but there are no master association policies available.
Some associations are considering using the money that would otherwise be used to purchase earthquake insurance for retrofitting. If your buildings could benefit greatly from retrofitting, this might be an option. However, the above considerations still apply. Perhaps if an association must pay exorbitant amounts for layers of insurance to get full protection, there might be a feasible way to combine the purchase of minimal coverage with additional monies being spent on retrofitting.
It is best to consult with your (knowledgeable, I hope) legal counsel and seriously discuss the legal ramifications, and consult with a knowledgeable insurance agent to discuss the options available, before turning your back on the question involving the purchase of earthquake insurance.
Posted by Beth Grimm at October 4, 2005 12:48 PM