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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