Unlike fire and liability insurance, there is little you, the insured, can do to change the rating factors that generate earthquake premiums. But thankfully, there are a few things that can be done on your behalf to make sure you are not overcharged.

Premiums are driven in large part by how your insurance company calculates the probable maximum loss of your property. Several factors go into this calculation and believe it or not, even the smallest oversights or misconceptions can cost you big money in your premium.

Factors that make up the premium determination for any property are:
• Location
• Year Built
• Type of Construction
• Type of Parking
• Insurable Value
• Number of Stories

Location

Where the building is located will make a major difference for two different reasons:

First: what is the makeup of the soil underneath the building? Is the building built on top of bedrock or landfill? Is it on top of a fault line or many miles away from one? Commercial earthquake companies have spent millions on programs that have mapped out every square foot of California. The less firm the land underneath your building the higher the probable maximum loss and the more an insurer will charge to insure your property. Likewise, the closer you are to a fault line the more the insurer is going to charge as well. Two similar buildings one built on top of landfill that has a fault running right through it will pay far more than a property built on top of solid rock and the fault line is 10 miles away.

Second: What is the amount of exposure the insurance company has in proximity to your property? The more exposure that a company has on the books in your area the less it wants to insure one more building in your area. A company will charge more in the areas where they have less capacity. This is not due to conspiracy but rather the basic rule of supply and demand at work. This explains why rates go up after a major catastrophe. As the insurance companies pay out large claims they now have less capacity to write policies so supply shrinks and demand stays the same so the price goes up. Similarly, as the insurance companies rebuild their reserves they expand the amount they are willing to write and prices start to drop again.

This is where access to all of the markets, even obscure ones, will make a big difference to you. We have access to every earthquake market including a couple of very obscure programs that are able to write when others are declining. If your broker is not actively shopping your policy every renewal you may end up severely overpaying for no good reason, because all that needed to happen was for you to be rewritten from one company to another. The reason that things change every year is due to supply and demand. Your current company may have written too much business in your area and thus decides to keep their prices higher than another carrier that year due to decreased capacity.

Year Built
The year built will reflect what building codes the building was built to. If a building in California was built prior to 1976, it is assumed to be missing many seismic safety features that buildings built today have in order to comply with code.

If you have a pre-1976 building, obtaining proof that your building has been retrofitted to meet 1976 or newer building codes will make a big difference. We know which carriers will grant exceptions which companies will grant exceptions based on the proof. If your current agent hasn’t asked for the paper work and you have it, you are most likely being overcharged for your coverage.

Type of Construction
This refers to the type of materials that were used to build your buildings. Was it wood frame concrete tilt up, brick? Each carries different rates and risk factors. Make sure you really know the type of materials that were used to build your building. I have seen insureds say their buildings were made of brick, when in reality it was a wood frame building with a brick facade. Wood frame costs a fraction of the cost of brick. So long as you have gotten this right there is nothing you or your agent can do to really affect this factor.

Type of Parking

The type of parking also affects your rates. For purposes of earthquake insurance parking means under building parking.

Parking falls into three categories:

1. Subterranean/subterranean style
This is your typical parking garage that has concrete retaining walls holding up the upper floors. This is what you will normally find on most post 1976 multi-story office/apartment and condo complexes.

2. Soft Story Tuck Under
This is typically a two or three story building that is built over parking. Most are carports that line one or two sides of a building and the space above the carports are held up by a few two by fours. This type of construction ceased in 1976 due to the very high likelihood of severe damage during an earthquake. This type of construction is represented by the notorious Northridge Meadows complex that was a total loss and several lives were lost because the construction completely failed during the earthquake. This is the least desirable of all types of construction and it is very difficult to find coverage but it is still possible. Much of this exposure can be avoided by doing building retrofits. If your building has been retrofitted then that information can drastically reduce your earthquake insurance costs.

3. Living Space Over a Garage
This is your typical town home complex. Each unit has its own two car garage. This is different from soft Story tuck under, because there is normally sheer walling along the sides of the building and the parking is reinforced with this extra strength.

Number of Stories

The more stories there are to a building the more risky a building is. A sinlge story 30,000 square foot building is less risky than a four story 30,000 square foot building. There is nothing you can do about this rating factor.

Value of the Building

Getting the value right is critical to your getting the most value for your insurance dollars. This affects the amount of coverage you have the deductible and the premium.

Your deductible is affected because if the premium is overstated your deductible has just been artificially inflated. The reason for this is that earthquake deductibles are based on a percentage of your total insurable value.
Your coverage is affected potentially two different ways:

1. If it is overinsured you have just purchased coverage you won’t use. Furthermore, the deductible that you are have to pay on will also be artificially inflated so you will be paying more out of pocket before the earthquake coverage begins paying.

2. If you have underinsured the building you may have just triggered an actual cash value clause in your earthquake coverage, and you may not have enough coverage to rebuild your complex. Actual cash value means that the insurance company will pay you based on the depreciated value of the complex instead of on the basis of what it actually costs to rebuild the building.

The premium is based on the amount of coverage that you have purchased. So, the more coverage that you purchase the more costly the coverage will be, but this is not an arithmetic growth. The cost per thousand of coverage goes up significantly when values go over a particular threshold depending on the other factors that are involved with the building.

Allow me to walk you through an example so you to may easily understand what we are talking about.

A complex of 5 units has a real replacement cost of $1,000,000. It is insured for 1,200,000 by the broker.

Now watch what happens;
If the policy has a 15% deductible you have just increased your deductible from $150,000 to $180,000. The premium has just gone up from let’s say $6,000 to $7,500. Now here is the worst part. If it actually only cost a million dollars to rebuild your complex they will now pay the million dollars minus $180,000 so that the amount the insurance company will actually pay you will drop from $850,000 to $820,000.

In most cases a properly done Marshall and Swift replacement cost worksheet that reflects all of the features of your building will avoid most of these issues. That is why we prepare a replacement cost worksheet for every one of our clients and prospects so that we know you are always properly insured.

Now let’s look at a condo association where the broker doesn’t bother to read the CC&Rs or reads them incorrectly. This can create all by itself and over valuing of the complex by as much as 40%. So now, using the previous example you have just created a situation where instead of a $1,000,000 in coverage you now have $1,400,000 in coverage. The deductible has gone from $150,000 to $210,000. The premium will now be inflated from $6,000 to almost $9,000. Even worse yet, the $400,000 of additional coverage is completely worthless because you don’t even have the right to insure the interiors as an association. You have just been overcharged.

On the flip side, the association could end up failing to insure the interiors even though they had a responsibility to do so do. Do you want to be the one that informs the owners there will be a second special assessment of $40 per foot to cover the fact that the board didn’t purchase the correct coverage?

As experts in earthquake insurance and association insurance, we are experts at getting building values right the first time. We have read thousands of association CC&Rs and we understand them from an insurance prospective. With over 173 associations currently insured with our agency we know and understand your needs. As you can see there are several different ways that a broker can end up accidentally costing you big money, either through wrong coverage or not understanding your real needs.

Don’t trust your most valuable possessions to a broker that doesn’t specialize in this type of insurance. Don’t wait until it is too late. We are happy to provide you with a free risk review and analysis so that you can see if the coverage that you have is optimal for your needs. All it takes is one call and five to 10 minutes of your time. Give us a call (310) 945-3000.

Elliot Katzovitz Insurance Agency, Inc.

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News: 2010 Press Release
For Release: April 5, 2010

Nearly 90 percent of homeowners and renters do not have earthquake insurance

After the magnitude 7.2 earthquake in Mexico’s Baja California Peninsula destroyed homes and buildings yesterday, millions of Californians are wondering if they are adequately prepared for disaster. Insurance Commissioner Steve Poizner urged all consumers to equip themselves and their homes for earthquakes and to evaluate their individual needs for earthquake insurance.

“Sunday’s earthquake reminded millions of Californians that our state is home to many devastating natural disasters,” said Commissioner Poizner. “Because earthquakes can strike at any time without warning, it is vital for homeowners to prepare now for the possibility of a catastrophic loss. I urge every consumer to evaluate their individual need for earthquake insurance, and to regularly inventory their belongings to make sure their existing homeowners coverage is adequate.”

A 2008 National Association of Insurance Commissioners survey revealed that the majority of American consumers do not have the coverage necessary to protect themselves from specific types of losses that are not reimbursed under standard policies. Based on a data call by the Department of Insurance, almost 90% of homeowners and renters do not have earthquake insurance.

Get important information about preparing for a disaster from the California Department of Insurance website at www.insurance.ca.gov. Or, call our toll-free consumer hotline at 1-800-927-HELP.

Commissioner Poizner provided the following disaster preparedness tips for California homeowners and renters:

* Take an inventory of your valuables and belongings. Take photographs or a video of each room. This documentation will provide your insurance company with proof of your belongings and help to process claims more quickly in the event of disaster.
* Keep sales receipts and/or canceled checks. Also note the model and serial numbers of the items in your home inventory.
* As you acquire more valuables – jewelry, family heirlooms, antiques, art -consider purchasing an additional “floater” or “rider” to your policy to cover these special items. These types of items typically are not covered by a basic homeowners or renter’s insurance policy.
* Remember to include in your home inventory those items you rarely use (e.g., holiday decorations, sports equipment, tools, etc.).
* Store copies of all your insurance policies in a safe location away from your home that is easily accessible in case of disaster. You may want to store your policies and inventory in a waterproof, fireproof box or in a safe, remote location such as a bank safe deposit box. Consider leaving a copy of your inventory with relatives, friends or your insurance provider and store digital pictures in your e-mail or on a website for easy retrieval.
* Know what is and is not covered by your insurance policy. You might need additional protection depending on where you live. Make sure your policies are up to date. Contact your insurance provider annually to review and update your insurance policy.
* Keep a readily available list of 24-hour contact information for each of your insurance providers.
* Find out if your possessions are insured for the actual cash value or the replacement cost. Actual cash value is the amount it would take to repair or replace damage to your home or possessions after depreciation while replacement cost is the amount it would take to repair or replace your home or possessions without deducting for depreciation. Speak with your insurance provider to determine whether purchasing replacement coverage is worth the cost.
* Speak with your insurance provider to find out if your policy covers additional living expenses for a temporary residence if you are unable to live in your home due to damage from a disaster.
* Appraise your home periodically to make sure your insurance policy reflects home improvements or renovations. Contact your insurance provider to update your policy accordingly.

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For many earthquake insurance consumers in California, having to make a choice between a “non-admitted” and an “admitted” insurance company can be quite confusing. This is due to the fact that most agents are salesman first; doing next to nothing to help you sort out fact from fiction so that you can pick the right policy.  On the contrary, I believe in sharing my insurance know-how, giving you the information you need to make a smart insurance decision. I hope to fill in the blanks and help you to understand why in many circumstances the differences between “non-admitted” and “admitted” are not as great as you might think.

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First, let’s define what we mean by the term non-admitted.

Carriers are “admitted” by the California Department of Insurance which means they must participate in the California Insurance Guarantee Fund, its financials are reviewed by the state, and its rates and policy forms must be approved by the insurance commissioner.

Next, let’s examine the key concerns and factors related to “admitted” and “non-admitted”:

CIGA

CIGA is the California Insurance Guarantee Association.

“Admitted” carriers take part in CIGA.

This guarantee fund for the state of California pays claims for insolvent admitted insurers. So, should your insurance company go broke, CIGA will step in to continue to make good on the obligations of the insurer.  Unfortunately, this fund has very serious limitations.  The maximum amount the fund will pay for any one claim is $500,000.   If the insurable value of your property is over $1,000,000 (most condo complexes and commercial buildings are) you are left holding the bag for the shortfall. Would you be able to write a check for $500,000+ in addition to the deductible amount in order to rebuild and fix your property? If you aren’t then the state’s guarantees are not of much value.

A “non-admitted” company does not offer this protection.

Rate Approval

An “admitted” carrier must have its rates approved by the Department of Insurance.  This poses a problem when it comes to earthquake insurance because of the reinsurance issue.

Let’s pause for a moment to first explain reinsurance.

Reinsurance is the means by which an insurance company protects itself against the risk of losses. You purchase your policy from an insurance company, who in turn buys insurance from a reinsurer to make sure they will be able to pay their claims. Earthquake carriers are typically heavily reinsured due to the size of potential losses.

The trouble you run into with earthquake insurance and rate approval is the fact that reinsurance premiums that carriers pay can change rapidly. An example of this was that soon after hurricane Katrina hit there was a 300% spike in reinsurance premiums.  An elected insurance commissioner is never going to approve the rate increase the insurer needs, making it impossible for the carriers to continue to do business.  A quality insurance company when faced with this situation, being forced to write on an admitted basis, will stop writing business and begin to cancel its current business. This is what Allstate did with all of its earthquake endorsements on its condo association policies after Hurricane Katrina.

A “non-admitted” company is free to charge whatever premium it feels is necessary and appropriate, to match its economic realty.

Form Approval

An “admitted” carrier must have all their forms approved by the department of insurance before they can use them. It can take many months or years to get contracts approved by the Department of Insurance. Therefore an admitted earthquake insurance company is limited in what it can write and what coverage it is able to provide.  This lends itself to smaller risks once again.

A “non-admitted” company is free to write custom contracts as the insured and the carrier agree.

When writing large property risks an insurance company will many times need to customize the contract to the specific needs of an insured.  Think of insuring expensive high tech items such as a satellite, or other unique types of buildings and property. Whenever the need arises for custom clause to the contract , it must be written on “non-admitted” basis.

Financials Are Approved by the State

An” admitted” carrier meets the minimal financial standards set by the state. This is by no means a testament to their solvency or ability to pay claims.  This is why CIGA exists.  Numerous high-profile admitted insurance companies have gone bust. Examples of these are Kemper, Executive Life, Golden Eagle, HIH, Superior National to just name a few.

A” non-admitted” carrier’s financials have not been reviewed by the department of insurance.  That could mean that they are financially weak or maybe not.  It does mean that you or an agent that you trust needs to do their homework on the financial strength of the company that you are about to purchase insurance from.

The reason there are only two admitted carriers selling commercial earthquake insurance is because most companies want and need the flexibility of being able to set their own rates and writing their own policy forms.  Most are financially stable companies with significant assets behind them.  A good example of this is Lloyds of London. The syndicates at Lloyds are all non-admitted in CA. They are non-admitted because they want to charge what they want for premium and be able to craft the policies necessary.

In conclusion, the major question to ask when talking about earthquake insurance IS NOT are they admitted or non-admitted. The real question that needs to be answered is “Is this company financially capable of paying my claim?”  That is better determined by a proper review of the company’s AM best rating and financial report, than by whether or not they meet the minimum solvency requirements of the State of California.

If you’d like a free insurance risk review call us at (310) 945-3000 and we’ll be happy to help.

Elliot Katzovitz Insurance Agency. Inc.

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Board members need to understand that HOA earthquake insurance decisions made today will determine whether or not their association and unit owners can afford to rebuild in the event of an earthquake catastrophe tomorrow. In addition to insurance premium cost considerations, associations need to be mindful of the amount of money each individual unit owner would need to come up with if a quake were to strike. Discussing these costs, both present (insurance premiums) and possible future (deductibles and insurance gaps) cannot be answered in a general way because each insurance contract has different coverages, deductibles and exclusion language. The amount of earthquake peril risk an association or unit owner is exposed to is based upon several factors including: insurance carrier, coverage exclusions, liability limits, deductible clause, endorsements etc.

The biggest concern in regards to earthquake insurance coverage for HOAs is the amount of deductible. There are trade offs in regards to lower up front premiums with higher deductibles verses higher cost policies with lower deductibles. The question is whether or not your unit owners would be able to cover their share of a large deductible. If an earthquake happens then the unit owners will be required to pay their portion of the deductible (most often by special assessment) on the earthquake policy in order to repair and/or rebuild the complex.

Here’s what could happen:

Let’s say an HOA with 8 units has a $2,000,000 earthquake policy. Therefore, the association is going to be responsible for coming up with $200,000-$400,000 depending on what the deductible is. That leaves us with a potential special assessment of $25-50,000 per unit.

There are four possible scenarios that could play out in any combination:

1. Unit owners have a CEA loss assessment policy with a $50,000 limit in place. Thus, they simply pay the $7,500 against their deductible and the CEA will pay the rest of the special assessment.
[This coverage only cost approx. $300 per year and is recommended for anyone that does not have easy access to $50,000. Owners can purchase this coverage from any CEA affiliated homeowners insurer in conjunction with their unit owner policy.]

2. Owners pay the entire $50,000 assessment by either withdrawing savings out of the bank or by borrowing the money.

3. The association borrows the money on behalf of those owners that did not purchase loss assessment coverage, and then places a lien against those condo units on behalf the association until the loans are paid back or a unit is sold and their portion of the loan is paid off in escrow.

4. An owner doesn’t have the money and the association can’t borrow it. Therefore, the bank will foreclose on the unit and the bank will step in to pay the portion of the assessment that the unit owner failed to pay in order to have a marketable unit.

These instances are typical of what happened in 1994 following the Northridge earthquake.

Give us a call at (310) 945-3000 and I will be happy to show you how to restructure your insurance program so that the association is maximizing the benefit unit owners can get from the CEA and using that to control the costs of the association and to get better value for the association.

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Let’s say your building or complex is substantially damaged from a 7.1 magnitude quake. Chances are every unit owner will face repair and replacement costs running into the six figures, for their share (pro rata) of the special assessment.

The question you need to ask is:

Will all owners in your association be able to write a check for $100,000? Will some owners, lacking the financial resources needed, or be forced to walk away from their properties?

IF THERE IS ANY DOUBT THAT EVEN A SMALL MINORITY OF OWNERS WILL BE UNABLE TO COME UP WITH THE MONEY TO PAY THE EMERGENCY ASSESSMENT, IT IS NECESSARY FOR THE ASSOCIATION TO PURCHASE COVERAGE TO PROTECT THESE OWNER’S INTERESTS.

HERE’S WHY:

The Association’s Board could very likely be sued by those owners that cannot pay the assessment, for failure to act in the Association’s best interest. D&O contracts typically exclude coverage for this type of lawsuit, so the board is going to need to pay for their own defense. If the Board loses, not only will they be out thousands in legal fees, but also quite possibly hundreds of thousands more for payments of the earthquake damage assessments for the plaintiffs as ordered by a judge. This risk in entirely unnecessary and can easily be by avoided by getting adequate Earthquake coverage in place for your Association.

Argument # 1: The Deductibles Are So High That the Policy Will Never Pay Anyway

There are those that will say that even if the association buys earthquake insurance these people will still not be able to pay their portion of a deductible so why bother purchasing the coverage at all. However, the numbers tell a different story.

Let’s look at the numbers for condo of average size and construction. For the sake of example we’ll use a property with units of 1,500 sq ft.

The first thing you need to consider is the cost to rebuild. Construction costs for a typical condo unit run between $90 and $150 per foot depending on the associations CC&Rs. (If the association is bare walls it will be about $90 and if it is full coverage of interiors it will be around the $150 rate.)

Since our example is 1,500 square feet, the cost of construction for the association would run somewhere between $135,000 and $225,000 per unit. If the association has a 15% deductible the owner will be responsible for between $20,250 and 33,750. The owner’s loss will be stopped at this point and the insurance the association purchased will kick in to pay the balance of the loss. Here is what is unique about condo associations. Unlike a single family residence a condo owner has the ability to purchase loss assessment coverage personally from the CEA to cover his potential assessment to cover the deductible. This coverage provides up to $50,000 in protection and will lower the exposure to just $7,500. Most anyone will be able to come up with $7,500 in order to protect his/her $500,000 asset.

Argument # 2: Odds Are Low That a Quake Would Strike & Damage MY Building

To those who say it will never happen, I say don’t be so sure. In a new comprehensive study, scientists have determined that the chance of having on or more magnitude 6.7 or larger earthquakes in California over the next 30 years is greater than 99%. In 1989 we experienced a 6.9 in Loma Prieta and in 1994 the Northridge Earthquake was a 6.7. The truth is earthquakes are unpredictable and can happen anywhere at any time Just ask the people in China that just experienced a 7.2 earthquake how much damage can be done in a matter of seconds. The aftershocks of that quake were larger than what was felt during the initial shock in the Northridge quake. We all hope never to experience such a devastating event, but there is always a possibility of it happening and it’s better to be prepared than to say I wish I would have. . .

Argument # 3: MY Building Survived Northridge with No Damage, So Why Worry Now

If your building was sitting atop the epicenter in Northridge and came through entirely unscathed I would probably agree. Now if your anywhere else in Los Angeles County your building did not get the full brunt of the power of the earthquake, and you have no idea how well your building will fare if you are at epicenter of 6.7 magnitude quake. Now close your eyes for second, even if you were the undamaged building in Northridge, if the Northridge earthquake was 5 times its magnitude (that was the strength of the quake in China) do you think your building would have fared just as well?

If ALL of your Association’s Owners are willing and able to write a check for $100,000 or more on top of their mortgage, or if ALL of the Association’s Owners are willing and able to walk away from their units, along with the adverse affect it will have both financially and physically, you do not need Earthquake Insurance. Short of all that your Association needs Earthquake Insurance. Even in cases where there is only a minority of owners that want or need the coverage, they have no ability to protect themselves on their own. Therefore, the Board has a fiduciary responsibility to protect those people and their interests.

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