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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