BY STEVE REICH, PRESIDENT, STEVE REICH INSURANCE AGENCY, INC.
This is a difficult question because we simply can’t predict the future. However, we do live in Earthquake Country and historically and statistically we are getting closer to the next major event.
Many experts feel that if a Board has the duty to preserve, protect and enhance the value of the property, then Earthquake Insurance is a must. There are a number of things to consider before making this important decision.
1. If we have a catastrophic loss, can I afford to walk away from my investment?
For many families, their home is their biggest asset. If you have equity in your home, you need Earthquake coverage. History has shown that many associations without coverage weren’t able to rebuild.
2. Can’t we go to FEMA and get a low interest loan in order to rebuild?
Don’t count on it. Seldom will these loans provide the sufficient capital to rebuild and the loan process involves endless red-tape and can take up to a year or more to complete. For associations with multiple owners and lenders, the process becomes even more complicated. Getting a loan through a private lender or the Small Business Administration (SBA) could also prove difficult without Earthquake coverage. Lenders will seldom sign off for a loan on property that is already fully collateralized.
3. If the individual owner can buy coverage, why should the association be concerned?
Currently there is not a way for an individual owner to purchase coverage to protect the structure. Coverage is available for the interior fixtures, but that does little good if the structural shell can’t be replaced. Individual owner policies will not cover property that is the association’s responsibility. Only if the association carries a Master Earthquake Insurance Policy will the owners be able to address their personal exposure.
4. How many Associations carry Earthquake coverage?
There are no studies that I am aware of that answers that question. The Department of Insurance has insufficient data to determine the percentage of associations that carry Earthquake protection. In talking with numerous insurance agents and brokers that specialize in Condominium Associations, it would appear that between 50-60% of associations carry some limit of Earthquake Insurance.
5. Do lenders require Earthquake Insurance?
Most lenders do not require an association to carry Earthquake coverage. However, I have been told that some lenders take it into consideration and may even charge a higher interest rate on units not protected. The underwriting rules and requirements of the various lenders are constantly changing and very little information is available to the public.
6. Is there any way for us to know what our specific risk really is?
I’m not sure there is any way to know exactly what any one association’s risk really is. We do know that we live in Earthquake Country and there are most likely faults that we don’t even know exist. The insurance companies know what they are doing and certainly do their research. Most all companies use some type of “modeling” software that helps to determine the fault lines, soil conditions and seismic activity in any given area. With that information, they try to determine the Probable Maximum Loss (PML). The higher the PML, the higher the premium. Qualified and experienced agents and brokers should be able to provide you with that information.
7. Does the board have any liability and are we protected?
This is the million dollar question and perhaps best answered by your Association Attorney. While most CC&Rs don’t require Earthquake Insurance, it won’t necessarily relieve the board of potential liability. I think we can all agree that there is little doubt the board may be sued by an owner(s) who just lost their home with no coverage. Did the board make a reasonable and educated decision? Was the decision made for financial reasons alone? Did the board act in the best interest of the owners? We can speculate but simply don’t know what a judge or jury might say. What we do know is that there are some Directors &; Officer Liability policies that exclude coverage for insurance decisions and the “Failure to Maintain” the proper type and limits of coverage.
8. Is now a good time to purchase Earthquake coverage?
Absolutely. The cost of Earthquake coverage is the lowest it has been in a number of years. Many associations are paying 20-40% less than they were only 4 to 5 years ago. In addition, deductibles have decreased and coverage terms have improved.
9. Where can I find more information about Earthquake and the risks involved?
The easiest way is to go to Google and type in “Earthquake Info Sites.” Some of these are shown below:
*The U.S. Geological Study (USGS) – http://www.usgs.gov/”www.usgs.gov
*The California Department of Insurance – http://www.insurance.ca.gov/0400-news/0200-studies- reports/0300-earthquake- study/
*Risk Management Solutions – http://www.rms.com/
2017 – The Steve Reich Insurance Agency, Inc.
ALL RIGHTS RESERVED
About the author:
Steve Reich attended Arizona State University and graduated with an Insurance major in 1975. He started his agency in December of 1975 and has specialized in Community Associations for the last 35 years. He has been selected as a Presidents Council Member, the highest agency award, five times, Division Agent of the year 26 times, and voted the best insurance agency in the Conejo Valley by the readers of the Daily News.
This letter contains only a general description of coverage and is not a statement of contract. For a more detailed description of the policy conditions and exclusions, please consult the policy itself.