December 2, 2007
If Your CC&Rs Require EQ Insurance - What Should You Do?
I get asked to amend CC&Rs to require the purchase of earthquake insurance, and requests to amend to eliminate the requirement. I give similar remarks in either case. It is not good to have a duty imposed, without the ability to carry it out.
If a board wants to eliminate the requirement because it can't raise the money without an owner vote for a special assessment (under California requirements), I can understand that. I generally suggest though the importance of at least retaining the discretionary authority to purchase it, and explaining to members that the purpose of the amendment is to eliminate a legal quandary. I generally suggest that a Board explain why it is proposing what it is. Why? You can be sure that there will be members vehemently opposed to any measure that suggests the Board will not ever again consider purchasing earthquake insurance.
I would think any Board would still continue to at least review and offer to the members information each year, in order to bring the owners' interests into the fold in determining whether to purchase it, based on current conditions, including cost and availability factors, as well as available funds for purchase. And Owners being presented with a ballot to eliminate the requirement of purchase, need to know if the Board is still going to continue to address the question each year of whether and how much, if any, coverage to get, so they do not dispose of the ballot in disgust, assuming that is the end of the inquiry.
I get that the requirement to purchase earthquake insurance could hurt the association and board - it could lead to a lawsuit against the board members if they do not buy the insurance, or if they buy it and usurp funds from some other category of need to do it. But I do not care for the casual dismissal, when it is based solely on cost factors. Without a doubt, EQ insurance should be looked at each year, as it is such an important consideration.
And as to the purchase of it, even when the documents do not require it, I believe that Boards can get owner “buy-in” in many cases if the pros, cons, and options with regard to coverage are explored and are presented completely. I am certainly not in favor of keeping the language that creates the problem of having a duty to fulfill without the funds to do it, but I am always concerned if I believe that the idea of getting or keeping earthquake insurance has been dismissed too lightly.
In any situation where the Board wants to consider adding the requirement to purchase the EQ coverage each year so that future boards cannot drop it, I have to caution the Board that it not necessarily a good idea to write in a requirement that may place the Board in the position of having a duty without the funds to carry it out. When California sets limits on expenditures boards can make by limiting assessment increases - it leads to conflicts with documents that require boards to charge more in assessments (without a vote of the members) than is allowed to do legally. If the Board cannot get membership approval to raise the funds, it is thrown into a bad situation that could lead to a lawsuit, for failure to fulfill its duty. That would hurt all owners.
So, when considering proposing an amendment to the documents, either to remove the requirement to purchase earthquake insurance, or to add it, keep in mind that the inquiries are all the same, i.e., if a board wants to be prudent, i.e., there is a need each time the question comes up to consider what is available, what the costs are, what monies might be available, what the affect on the property values might be or what the difficulty in rebuilding might be if there is no level of coverage at all, what the financial hit might be if owners are not able to protect their investment individually, and whether it is fair for the oldtimers with equity let the newtimers with none decide that the risk is not worth it. And ... etc. etc. etc. - see the other articles on my website and blogs here for a lot more.
Posted by Beth Grimm at 6:56 PM
September 13, 2007
In the Event of An EQ -Are You Willing To Walk Away From Your Home? Lose Your Investment?
I will say it again: In the Event of An EQ -Are You Willing To Walk Away From Your Home - Lose Your Investment? How about this: Are you willing to force others out of their homes? If you are on the board, do you want to set your association up for failure in the event of a big earthquake? Do you want to let those with little invested in their homes dictate the level of protection of property for everyone in the development? Would you adopt the “Chicken Little " philosophy (“the sky is falling in so why bother planting the seeds”)?
Think about it. Certainly, if there is a devastating earthquake and your association is downed, that would be a very bad thing, but that does not mean the world is coming to an end. What is left are owners that need a solution. Certainly, there would be serious repercussions. The question is: is there going to be a chance that your members will be able to support rebuilding? And: What are you going to do to try and make sure it is within the realm of possibility that your association can rebuild?
If you are not willing to look at the possibilities, you can always throw your hands up and say - “if there is a big earthquake we are all cooked! So why try?” This is the “Chicken Little” philosophy.
I am in favor of the former, which is, looking at all options, and presenting all options to the members of the Association. I believe that Boards should look past the rising premiums and the lowered coverage aspects - painful as it might be - get above the anger with the insurance companies for doing this, and the disdain for the messengers (agents and brokers) who are scrambling to find you coverage, and get on with a plan to succeed if there is a big earthquake and if it hits your community hard.
Looking forward, and backward for that matter, if there is/was an EQ centered in your community, and it devastates your association, and others within a reasonably small radius, the Chicken Little "world is falling in" theorizing will/will have buried you. There will be heck to pay, lawsuits and pointing fingers all over the place. Few will think back that the $500, $1000 or $2000 that each owner would have had to pay for a year of some very basic protection was too heavy a price to pay.
And think about this too: even if the governing documents do not require the purchase of earthquake insurance, they do require that the board take measures to protect and preserve the property values. What can be more graphic a misstep than allowing the EQ to lapse, suffering EQ damage, and finding the property values are in the dumps?
This is why Boards need to take great pains to make sure that owners understand the ramifications of letting all EQ insurance go. There are various layers of coverage that can be considered to save money, and as layers are added, the price goes down. Individual owners can get protection through the CEA for up to $50,000 in loss assessment coverage for any special assessment they might have to pay in the event of an EQ event. If you as a Board tell owners they can get the coverage, and you take it a step further and calculate the amount of protection owners could get by multiplying the number of owners in your association by $50,000, you can realistically look at a reasonable deductible that may be higher than anything you have considered acceptable in the past. If 100 owners got the CEA coverage in your association, that is $5,000,000 worth of coverage (by my math) and encouraging this practice could allow raising the deductible, which could save some dollars.
It's a tough decision, purchasing earthquake insurance, or any insurance for that matter, as it seems like money gone into the wind, if there is no "event". But if we buck up and pay now, we may not have to pay 100 times over later on. Betting against yourself may seem a waste, but to me, the fact that such insurance still can be bought is a blessing in disguise. Some of the wind and flood damaged areas of the country no longer offer any of this kind of "sleep-at-night" protection at all.
Beth A. Grimm is an attorney who serves homeowner associations and homeowners alike. She is a frequent contributor to the Echo Journal and other similar publications in the State of California and on a national level. She is provides several publications written in plain English to help people who information about California law as it relates to homeowner associations. She posts a wealth of information on her web site at www.californiacondoguru.com.
Posted by Beth Grimm at 9:59 AM
September 12, 2007
Earthquake Insurance - The Owner's Perspective
I have written extensively pointing out to Boards and Management that dropping earthquake insurance must not be done lightly, even though premiums are sky high and coverage is decreasing. While I find that HOAs are commonly split fairly evenly on the issue, those with considerable equity [understandably] on the side of keeping it, and those that have little equity on the side of letting it go - foregoing the expense, I do not believe that there would be such an even split if the "have nots" and the "haves" fully understood the options in layered coverage, and the ramifications of "going bare", especially in earthquake fault-prone areas.
I own a condo, near a fault, on fill, and my association is considering dropping the earthquake insurance. I am going to encourage FULL DISCLOSURE to the members if/when the option is put to the members for a survey or vote. And personally, I am going to encourage keeping it. I am on the side of the "haves" having owned the condo for about 8 years. It is hard for me to understand that owners who have hundreds of thousands of dollars in equity in property in California can turn down the opportunity for some protection for themselves and fellow owners that could mean the difference between a $10,000 to $50,000 special assessment (for serious repair, and depending on the cost to rebuild) to $150 ,000 to $500,000 (more than 10 Xs the cost) to rebuild. These figures may not be exactly tied to your property, but I believe that they accurately represent the difference between EQ coverage - even if not full coverage - to no EQ coverage. Owners even with minimal equity have more incentive to stay on if the ability to recover involves a reasonable monthly payment to repay a small business administration loan as opposed to a double mortgage.
What does FULL DISCLOSURE involve?
I will use the outline of a similar paper that was presented to me by a reader for my paper I plan to submit to my Board, and will prepare the format for use by readers, and post it on my website within the next few weeks. I will add some twists and also and give the reader due credit for the format (if he wants it). It was incredibly well written, and answered several important questions. I plan to write a full article on behalf of the owners that are concerned and want to keep the insurance, within which I will put my slant but the format informational paper itself need not be indicative of any bias, just the facts ... [M'am].
Why do all this? Because I get calls and emails on almost a daily basis from owners that are frustrated and seriously concerned that the Board is talking about or has already dropped earthquake coverage, based solely on the cost/coverage aspect. And I cannot attend all of the meetings I get asked to attend.
I also think it fair to say that having the Association insurance agent or broker attend a meeting to explain the options and encourage keeping the insurance is often met with challenges and (not so friendly) comments that the presentation is "self-serving." It may seem so, but the agents and brokers are the ones with the answers to the questions about how the insurance works, what is covered, what is not, what the cost is, and the owners need them there. Those are not questions I would want to answer.
In case you cannot wait for me to get around to writing this article, here is the information that the Board should be presenting to Owners when they are asked to answer a survey for EQ insurance or are being asked to approve a special assessment:
What is this poll/informational paper all about?
This section is for explaining why the HOA is addressing the members on the subject and can be used to give owners general background on past coverage, and what the documents require (or do not require).
What is the Association’s earthquake insurance costing us?
This section should be used to describe the costs for the past year or years, and to present the bids that have been received, or costs increases that have been presented by the Association's insurance vendors.
Who is insuring us?
This section is to describe the current carrier, the rating, and to provide any comparison information you may have on other carriers, for "better or for worse". It is the opportunity to provide information that your broker or agent has provided to you about the availability, or nonavailability of other carriers.
Does this policy cover my own unit and belongings too?
This is the opportunity to explain what EQ insurance covers and what it does not (and even throw in a plug for property/fire coverage and the need to owners to understand their personal belongings, fixtures, etc. are not covered by the master insurance policies. It's the opportunity to explain loss assessment coverage (and the difference between the regular loss assessment and the EQ loss assessment coverage).
What can you do to get the individual protection?
This is where you can explain the option for Owners to add to their coverage cushion by purchasing a CEA policy. This is the key to helping boards and homeowners understand that even without full protection under the master policy, a homewner can close the gaps by purchasing up to $50,000 in loss assessment coverage, and extra building coverage, relocation insurance, personal belongings insurance, etc.
Won’t our reserve fund cover the deductibles?
This is the opportunity to explain why the reserves is not likely to cover EQ damage, without depleting them. If an association is 100% funded, it helps; however, that may mean that there is enough in the bank to replace the asphalt and fencing that are due to be repaired, but not the roofs and siding that are not scheduled for replacement for 15 years.
What is the historical perspective?
This is the opportunity to give a detailed chart or matrix showing coverage for the past years, the percent change in premium and coverage and deductible.
How do the policy limits and deductibles work?
More information can be provided here about scenarios and damages possibilities, etc.
What if the damage exceeds both the deductibles and total loss limit?
This is the opportunity to explain about the possible special assessments, and how much less they are likely to be for shortfalls in the case of serious damage, with coverage, and serious damage, without coverage. It is the opportunity to explain that the "haves" can help the other "haves", themselves, AND the "have nots" by forcing purchase of the coverage. This is because the more resources that the Association has in the event of a big earthquake, the less likely that the owners who stay and pay will have to cover the losses for those who "walk" away for lack of substantial equity (because fewer are apt to "walk").
Since this blog is getting long, I will simply lay out the remaining questions that could be answered in such an informational paper. Believe me, these are things inquiring minds want to know.
What if my building is not damaged – do I have to pay anything?
Can we learn anything from the Northridge Earthquake?
How much was paid out in insurance claims for the Northridge earthquake?
What other steps has the Board taken to address the possibility of earthquakes?
Can the Board be sued for failure to purchase EQ insurance?
Won’t FEMA come in and rescue us for free?
Why not drop coverage now, and pick it up again in the future if it gets cheaper?
What about retrofitting instead of insuring?
What about putting the earthquake premiums into our own emergency fund?
What about fire?
And a wrap up.
This sort of communication can be very helpful to everyone - and I believe, with a better understanding of the facts and options, more people will hang on to the insurance. The pendulum will likely eventually swing the other way with the EQ coverage. Historically, it has.
Posted by Beth Grimm at 10:36 PM
August 7, 2007
May a Condo Association Mandate Individual Homeowners Coverage?
When you purchase a California condominium, the governing documents usually require the Association to purchase insurance to cover the buildings for fire and other common casualties and for liability for accidents in the complex. If they don't, be very concerned. (Besides the serious risk of loss, when buying or selling you may run into trouble finding a policy that will be satisfactory to the lender, as your individual insurance would not cover the unit next to yours, and if there is a fire destroying both of them, it will be difficult to rebuild only one).
The next inquiry is whether the documents require the Association to purchase earthquake insurance. It is hard to tell which is more common - that they do or don't. In either event, there are other articles on the subject right here on the blog so I suggest you search them out.
The question I have not yet addressed is whether the Association can mandate that owners purchase individual coverage. What would be the need of that, you ask. Many people believe the Association's insurance covers "everything." It does not.
Owners should have an individual policy called an HO-6 policy if they reside in the condo. If not, they should have a landlord's policy.If every owner had individual coverage, that would provide important protection for everyone. What are some examples of how this individual coverage would pay off:
If there is a fire and the buildings are severely damaged, there will be a deductible to pay which may result in a special assessement and the individual coverage should include loss assessment coverage for this situation - you can increase the basic loss assessment coverage without breaking the bank.
If there is an accident in your unit and someone is hurt, the Association's coverage will probably not cover it (unless it occurred because of some condition in the common area portion of the unit) - you need this protection!
If there is a fire in your condo only, the association may (assuming the governing documents allow it) charge the deductible to you as a special assessment. An HO-6 should cover this. And if the fire burns up your furniture, which is your responsibility, you will be happy you had the contents insurance that is provided in the HO-6 policy.
If there is a fire and you have to move out during the rebuild, you would be very relieved to have coverage for this expense.
If your refrigerator tubing breaks or your washer hoses fail and the result is a flood of yours and the lower or next door units, the people below you whose personal property is damaged have the right to seek compensation from you. Having protection in the form of an HO-6 policy would come in very handy - these situations can become very expensive. Even if your neighbor's personal property is not lost, the damage to your own unit could be devastating.
Each owner is at risk if all do not have the separate individual coverage for such incidents as this last one. In fact, with regard to earthquake, where the chance of a very large development-wide special assessment is high if there is earthquake damage, the whole of the development can benefit greatly if each individual has coverage. (Note that it is very important to understand that an HO-6 policy does not cover earthquake or earthquake special assessments - so again, read the other blogs on this subject.)
Associations can get into deep trouble if the owners do not help carry the load of risk by purchasing individual coverage on top of the master coverage purchased by the association, and there is a big fire, flooding of units because of faulty pipes, or an earthquake. This is because when an owner suffers a large loss of property because of a fire or flooding, they often try to squeeze the money from the Association, leading to legal disputes and costs. They try to make claims on the master policy when the claims are not justified.
I believe requiring individual earthquake insurance might be going to far, but requiring owners to have liability coverage for accidents in their units and loss assessment coverage for special assessments, and personal property coverage would be reasonable, if the members approved an amendment to the CC&Rs for the condo association carrying the requirement. However, "policing" the purchases could become cumbersome and having the obligation to do so could also create extra liability for the Association if it fails to keep after the owners to get the policies. So my suggestion is to require the purchase of a homeowner's policy (HO-6 or appropriate landlord policy) for owners that carries liability, loss assessment and personal property coverage (if a resident), and suggest that the owners should consult with a condominium-knowledgeable insurance agent or broker; however, also include in the verbiage that the requirement does not impose on the Board the obligation to collect copies of the policies or actively enforce the requirement. It is better in my opinion to write something to the effect that the Owners need to procure the policies to protect themselves and cannot look to the Association for losses covered by such policies.
I am sure there are attorneys that disagree with this assessment of the matter, so as always, consult your own attorney and rely on his or her advice. There may be something about your situation that suggests deeper inquiry about what is best.
If nothing else, take away the idea that everyone in the association needs to be better educated about what the master insurance policy covers, if there is one, and what it does not cover. Owners should be encouraged to consult with a knowledgeable agent and find out what they need to "close the gaps" between the association's coverage and the extent of their risk and exposure to loss. There is an annual disclosure required by statute (Civil Code Section 1365(e) that has specific verbiage indicating that the association's master policy does not cover everything. (You can look this up at www.ca.gov by navigating to the Legislature and the Laws.)
Posted by Beth Grimm at 9:52 PM