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.

Note: There is an email link embedded within this post, please visit this post to email it.