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.

About Jeff Ross

7 Responses to “Earthquake Insurance at HOA and Condo Complexes”

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  1. Bethany says:

    Great post here Jeff, I appreciate the breakdown of all the specifics.

  2. Amber says:

    Very enlightening Jeff, these days you have to research everything you do and not just sign up for services just because you are told you should. We all need to be better at speaking out and educating each other.

  3. Thad says:

    I read this just in time. My HOA is considering not renewing it’s earthquake but is a little squeamish about it. My question is how do HOA’s that don’t have earthquake insurance and experience earthquake damage typically deal with making repairs? Where does the money come from? Thank you.

  4. Your point actually makes the case to have EQ insurance.

    1. It is easier to come up with the $40k deductible than the $400k to rebuild the unit yourself.

    2. As you said you can further buy an individual EQ policy for the units interiors with loss assessment and reduce your exposure to as low as $4k on the deductible assessment in your scenario.

    3. You can physically walk away(hopefully) but financially you are still on the hook with the lender…do you think they are going to just forgive the loan…I don’t think so.
    So now you must decide to walk away, ruin your credit and financial ability to buy another, be chased for years by the lender, all the while without having anywhere to live…not a pretty picture.

    It is easy to say things while all is calm but when the EQ hits and your great advise was to have no EQ cover… please know that those buildings you advised to not have coverage probably will not have an alternate Earthquake Disaster Recovery Plan in place and will most likely cause all to suffer financial & emotional ruin.

    As to quote Ruskin: It is unwise to pay to much, but it’s worse to pay too little. When you pay too much, you lose a little money-that is all. When you pay to little (or in your case nothing) you sometimes lose everything.

    After 22 years in the HOA business for those buildings that do not have EQ insurance, more than 80% of those buildings will loose their entire investment, credit & home by not having EQ insurance. As professional risk advisors please stop making ignorant remarks to unsuspecting unit owners who may acquire a unit and based on your advise get wiped out when the quake hits…or at the least come to us to beef up your professional liability.

    Regards
    Thomas Bergin
    ISU Insurance Services

  5. maillot says:

    I think this is a real great article post.Really looking forward to read more.

  6. Jeff says:

    Interesting how little Thomas knows about condos and lenders. I’m the president of my HOA and I came to the exact same conclusions and Jeff Ross.

    He isn’t saying it is right or wrong, just the simple realities that will affect those without that tens of thousands so they will walk, PERIOD. And yes, just like the millions of people that did and still do walk away from their loans and other debt, they will in fact be able to do the same after their complex crumbles. On what planet would people be able to walk away in all other homes but not one ravaged by an earthquake, sorry no common sense, nothing personal. Whether its easier to shove a bowling ball up one’s butt or a softball is irrelevant. If the hole isn’t big enough for either, it ain’t gonna happen(sorry figured something graphic would wake you up by now)

    I have a friend in my office that had EQ insurance and lived in the Northridge quake and the Whittier Narrows and got nothing. This was when the policies were better than those today. It was the deductible that was too high. In my complex we would need to exceed $300k in damage to even start getting any coverage. This is a small 10 unit complex that would cost about $600-$800 to build from the ground up with foundations. EQ insurance does not cover the driveway or foundations or anything but the actual building therefore of the lets say $1.0M to rebuild the insurance would not cover the first $300k and not the last $300k. Not sure where one would even think a unit is $400k per unit to build. Maybe in Malibu for luxury 2,000 sq ft units, geez.

    Also our policy as well as many others are with foreign offshore companies. Not to be all about conspiracies, but if US based banks can topple the world economy and not a single person goes to jail. What makes you think a foreign company will even pay in the event of a big EQ.

    Since our deductible is so high we are not insured for any big EQ, or huge one 20 miles away. It really is only coverage for the super massive one that will rock the entire LA area. When this happens it would be years before anything would be done. Possibly a 8.0+ in Pasadena would cause $300k in damage here, and then guess what?! WE ARE STILL NOT COVERED. The math is so simple. But yeah, if we all have the money in the bank, we all can pay our mortgage and rent somewhere else for a few years while it’s being rebuilt, nobody walks because they all have lots of equity(like almost paid off), then yes eq insurance makes some sense. It’s when you factor reality into the equation is all Jeff Ross was saying.

    I think some people think the word insurance means the same as auto insurance. You have a deductible and they come to your rescue for everything else. It would be the equivalent of someone getting auto insurance for only head on collisions at 55mph for each car with a 10k deductible on a $18k car, it not including hospital fees, and that insurance is 2x the price as the insurance that covers the other 99.9% of probable things. And I’m being nice with this comparison.

  7. Sebastian says:

    Thanks everyone for a very good discussion of possible and actual scenarios.

    I was wondering what would happen in a large condo community (think: 150 townhouses, but owned as condominiums, i.e. with all land and exterior walls owned by the community), which has been built on a slope, and where an earthquake triggers a mudslide.

    Let’s assume the mudslide damages 10 of the townhouse condo units to such an extent that their foundations are now structurally unsound. It will take $5M to rebuild the affected units from the ground up. Let’s also assume the HOA has no earthquake insurance, or if it does, that the deductible is $10M, so the HOA’s earthquake insurance is irrelevant in this case.

    Questions:

    1.) Since this is a condominium (not withstanding that it looks like a townhouse), doesn’t that mean that the entire community needs share the costs for the repairs? Such as, each condo owner is assessed $5M / 150 = $34k (loss assessment), or maybe proportionally according to their ownership percentage? Let’s ignore the costs of the interior damage (furniture) for this question and just focus on who is responsible for paying the expenses that are necessary to restore the dwelling to a structurally safe and sound condition.

    2.) Earthquake loss assessment insurance was elsewhere characterized as a good deal, i.e. for $100 / year you would get up to $50k in coverage for loss assessments that the HOA may ask you to pay. Would such a loss assessment coverage cover the $34k hypothetical claim that the HOA has against a condo owner?

    3.) What are the chances that the HOA has a majority vote and then says “sorry, we decided to not rebuild those ten damaged units, and we won’t compensate the affected owners for their loss – they should have bought their own independent earthquake insurance”?

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