When it comes time to insure and/or renew an HOA earthquake policy, agents, managers and boards alike can easily become overwhelmed and confused. This is especially true when trying to figure out which deductible option to choose and what that choice will mean to the association should a quake happen. The question on everyone’s mind: How much would the HOA and the owners be on the hook for following an earthquake claim? The difficulty is in understanding exactly how earthquake deductibles work. The reason it’s not so easy is that earthquake insurance policies are often structured in a slightly more complex way than your typical home or auto policy we are all used to seeing.
Let’s take a look at how earthquake deductibles are structured.
First, let’s examine how your auto insurance deductible works and how this compares to earthquake insurance. Say you have a typical auto policy and you have an accident, totaling your car. The insurance company will figure out the market value of the car at the time of loss, subtract the amount of your deductible $500 or $1,000 and send you a check for the difference and they take possession of the car.
In contrast, most earthquake deductibles are expressed as percentages of the “total insurable value” rather than a straight dollar amount. This sounds simple enough. If you have a building that has a replacement cost of $1,000,000 and you choose a 10% deductible, you are responsible for first $100,000 of the damage. Therefore, if you have a claim that is $900,000 the insurance company will subtract the $100,000 and write a check to your contractors for $800,000. As you would expect, your unit owners would have to come up with the remaining $100,000 for rebuilding and repairs.
The “total insurable value” of the building is typically agreed upon at the time coverage is purchased. Therefore, proper valuation of your property is absolutely essential assuring that you will have enough money for rebuilding should the HOA experience a catastrophic loss from a quake. The building value must be set high enough to cover the future rebuilding costs. However, if your building is overvalued then you will be hit with a higher deductible liability because as a percentage of the inflated amount the owners will be stuck with a higher out of pocket dollar amount. Here’s what I mean. If you had a building that will cost $1,000,000 to rebuild but you have it insured for $1,500,000, your 10% deductible would drive your liability from $100,000 to $150,000. Therefore, you want the value as exact as possible.
Now, if instead of one building you had 10 buildings and each building was worth $100,000 the earthquake deductible can be structured two different ways:
1) Per building deductible so each building when it exceeds $10,000 in damage will be able to collect insurance money.
2) Blanket deductible which applies to all of the buildings. So you will be responsible for the first $100,000 of damage to all 10 buildings combined. If all of the buildings are severely damaged there is no difference between the two types of deductibles, but if only one building is damaged then there is a major difference between the deductible types.
As a broker that specializes in earthquake insurance we work to help you understand everything you need to know to make an informed decision on your earthquake insurance. Because we are experts in earthquake insurance we can structure your coverage in little known ways to be able to provide you with the best value for your insurance dollars. Give us a call at (310) 945-3000 and see what we can do for you.
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