Earthquake Insurance at HOA and Condo Complexes

I am often asked why certain Condo association do not carry earthquake insurance. In some cases I am approached by owners or boards where association is considering canceling a policy.

Unfortunately after much analysis and working with multiple associations I have concluded that purchasing an earthquake policy for a building is a bad bet. Yes, financially with all odds in play it just doesn’t make sense. Before you jump all over me please hear out this few facts about earthquake  that most people don’t take into consideration when making a decision.

  • Earthquakes insurance comes with a deductible which is not a fixed amount but a percentage of your total policy amount. For example if your building was insured for a maximum of five million dollars your deductible would be a percentage of that amount.
  • Annual cost of the policy goes up exponentially as you lower a deductible. Deductibles usually vary from 10% to 25% of the policy amount. And the cost can more than double between 20% and 10% deductible.

Now lets take a look how  a typical earthquake policy may work out. Lets review an example of 20 unit condo building which was insured for $4,000,000 with a 20% deductible. This amount only covers building’s common areas. Your are still responsible for all the repairs inside your unit and your personal property.

For this association the deductible is $800,000 or $40,000 per unit. What does this mean in real life?

  • If earthquake damage is less than $800,000 your earthquake insurance will not pay. Owners are 100% on the hook to cover all expenses.
  • If the damage is over $800,000 the insurance will only whatever is above the deducible still leaving owners responsible for a very large part of the expense.
  • How many owners do you think can come up with $40,000 out of pocket to cover for expenses?
  • How many owners do you think carry their own policy covering earthquake loss assessment coverage?
  • How many owners do you think will simply walk away from their units because they are either upside down on their mortgage or don’t have enough equity to justify an investment of $40,000
  • How many condo units do you think can be bought at that point for very cheap because owners walked out left and right?
  • What happens to those owners that are able to pay $40,000 either by having a policy or having savings? They can’t do anything before to begin construction you need to cover the entire amount.

You really need to consider all facts before making a decision. Earthquake insurance policies are very expensive and for associations that could be struggling to keep things afloat this maybe a good option to find some savings.

Please don’t kill the messenger. I am not attempting to make a case if you should or should’t have an earthquake policy, I am simply providing some facts that may make your decisions easier.

P.S. The math above is equally applicable to larger buildings. While you may have a lot more owners to split the deducible your coverage amount usually is much higher per unit. Larger communities tend to have more amenities and more common areas meaning the rebuilding cost is higher. The building with ten times the units may cost a lot more than ten times to rebuild.

A Dictator runs my community – what do I do

I am often approached by homeowners about a problem in their community. There speech often starts with “My condo building is run by a dictator. There is absolutely nothing we can do …..” Once our discussion goes a bit further one of two things become obvious. Sometimes an owner is wrong and just doesn’t want to do what their board decided, but often […] Read more »

California adopts a law prohibiting rental restrictions at HOAs

California legislature recently passed a bill regarding leasing restriction in common interest development. SB150 will go in effect January 1st, 2012. While it’s not clear what ‘prohibition’ really means one thing is for certain – it will affect association’s ability to impose caps on number of units that can be rented at any given time. […] Read more »

Insurance: what’s covered

One of the questions I get often from clients is about insurance. Most people believe that since they are moving into an HOA community which already has insurance they don’t need to buy their own. In order to understand that better we need to break HOA into at least two categories – Single Family Houses controlled by […] Read more »