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June 8, 2007
Earthquake Insurance For Condos - Drop It Or Keep It?
The question keeps coming up - “ ... why would we (condominium board members or owner members) want to keep earthquake insurance when it costs so much and promises so little?
This is part of it: the insurance “pendulum” swings back and forth, meaning it goes from being affordable and desirable to expensive with decreased coverages, and back again. Associations commonly drop earthquake insurance when it gets really expensive, underestimating the ultimate benefits of having it if an earthquake seriously damages association buildings. The ultimate benefit is not often (necessarily) 100% coverage. That is not feasible to get these days. The ultimate benefit is having at least enough coverage so that the members are not devastated by such an event ... at least enough coverage that owners are encouraged to stay and rebuild, even if a loan is needed to bear the uninsured portion of the damage costs.
This is another part of it: if your HOA steps out of the market intending to come back in when the prices go down, you might be sorely disappointed. Carriers limit their risks by limiting inventory as to geographic areas, building types, etc., and even if the cost goes down, you are not guaranteed of getting back into the market in as favorable position as you once were because the carrier you used before may no longer have any room to add you back in.
Let’s be honest. Condominium living is marketed as "affordable". However, there are hidden expenses such as special assessments imposed for various purposes. Regular assessments commonly increase each year. Costs rise each year. Utilities, water costs, maintenance and costs are commonly subject to unanticipated increases. Utility shortages, materials shortages, and insurance-namely reinsurance - shortages are often directly related to serious crises like Hurricane Katrina and others, tornadoes, floods and "acts of God" (or mother nature), and shortages lead to higher costs. And then ... of course ... there are the rising compliance costs.
The California Earthquake Authority (CEA) says, and probably rightfully so, that there is no area of "low risk" in the state. There are only areas of "higher" risk and "lower" risk. Living in California is a choice. Living in California is expensive. Living in California is living in "earthquake country". Earthquake insurance can be very expensive. Where is that surprise in that?
Much of the real estate in California has appreciated providing very beneficial return in the form of increased appreciation for property owners. But the amazing thing is that those owners who are benefitting from these [inflated] property values aren't willing to pay alot more for whatever insurance protections are available. That is the real surprise.
Yes, the association earthquake policy premiums spiked this past year. Rumor is they are going to come down next year - why? The providers in the reinsurance market that got burned by the reach of Hurricane Katrina pulled out this past year or increased costs considerably to reduce their own risk. Rumor is that some of the providers that left the market are coming back next year. It is likely that the pendulum will swing back the other way, in favor of decreased premiums and/or increased coverage.
There are already two articles on the guru website relating to whether or not to buy earthquake insurance (visit www.californiacondoguru.com). One suggests that if your HOA is considering dropping its master coverage, there are steps that should be taken to assure due diligence in making a decision, and that the decision to keep or drop earthquake insurance should not be taken lightly. Another full blown article is going up soon, the emphasis on the fiduciary aspects of decisions relating to earthquake insurance, and whether the Board can be sued if the earthquake insurance is dropped.
Here is an angle you have probably not considered: In a perfect world all owners in the HOA would carry individual earthquake insurance through the CEA and all would share the cost of a reasonable level of master coverage for the buildings, whatever the cost was. This is the best protection for EQ that association members can get. Associations that are receiving EQ bids are having to accept high deductibles; however, consider this: owners can procure a private EQ policy through the CEA of up to $50,000 loss assessment coverage (coverage that would qualify to pay for the special assessments imposed by the HOA for earthquake building damage). If every owner had this coverage, even though their policy would have a $7500 deductible, every assessment dollar requirement over that $7500, up to $50,000 in coverage, more or less, would be covered. This means that HOAs could raise the deductible on the first layer of coverage (which can be up to 25% of the coverage amount), and pay less in premiums, if the owners in the development would in large percentage carry individual coverage providing loss assessment coverage. In other words, there are ways to balance the costs and spread the sharing of the risks, and possibly even lower the overall cost for each owner individually.
In short, and in plain English, instead of gathering information that helps members understand the adverse ramifications of dropping the EQ coverage and helping them get educated as to how to protect themselves to the extent possible, albeit expensive, and instead of encouraging owners to vote to keep the insurance, Boards are more often discouraging paying the high price and thereby eliminating the best chance for owners with equity in their property to protect the property from a serious earthquake event, by dropping the earthquake coverage.
And worse yet, the effect of this dichotomy is that Boards are letting owners with little or no equity "off the hook". Dropping insurance coverage puts everyone at risk, even those who have considerable equity. Why shouldn't every member of the community contribute a fair share for insurance to protect property values in the community. If they do not contribute to premiums and carry individual insurance, the special assessments to rebuild will be much higher, and those without equity will walk away - how do we know this? One word - Northridge.
And last but not least ... keep in mind what Boards are normally duty-bound to do .... the answer is protect property values. Dropping earthquake insurance coverage does not seem consistent with that stated purpose.
Watch for an upcoming article explaining all this in more detail on the website http:www.californiacondoguru. It’s complicated, but an unfortunate reality.
Posted by Beth Grimm at June 8, 2007 8:40 PM