HOA Earthquake Insurance Deductibles 101

Elliot Katzovitz — Mon, 03 Jan 2011 19:11:41 +0000

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.

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

What happens if an earthquake strikes my condo?

Elliot Katzovitz — Thu, 23 Jul 2009 01:30:57 +0000

One of the most common questions asked by homeowners association board members is what would happen if an earthquake of significant magnitude were to strike their condo complex.

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.

Earthquake Insurance .net » earthquake policy

HOA Earthquake Insurance Deductibles 101

CONDO QUOTE FORM

What happens if an earthquake strikes my condo?