By David Swedelson, SwedelsonGottlieb Partner
Japan’s massive earthquake has caused many of us to be concerned about earthquakes in California. A March 20, 2011 L.A. Times article reports that the Japan quake has created a surge of interest in earthquake insurance in California.
The article reports that only about 12% of Californians with homeowner’s insurance policies have quake coverage. The article did not report on condominium associations, but Tim Cline, a respected California insurance expert and broker, advises that while there is no statistical data published as to the percentage of California community associations that do carry this coverage, he estimates it at 25%. Tim does indicate that the percentage is closer to 50% of condominium associations, and that makes sense as they have more to protect and deal with than other types of community associations.
As Tim Cline points out, “The board (of a community association) has the obligation to repair the common area, regardless of whether or not they maintain coverage for the peril of earthquake.” By purchasing earthquake insurance, they help “fund” the obligation that already exists. Without a master earthquake policy, large special assessments will result to cover the repair costs.
Interestingly, the article reports that the percentage of people who buy quake insurance in other states – including those with active faults – is far lower. Should you buy quake coverage? According to the article, there’s no clear answer. The problem is that there is the perception that earthquake coverage is costly and limited.
As the article suggests, experts say that it takes careful analysis to decide whether the expense is worth the potential benefits. This applies to individual homes as well as homeowner associations.
The L.A. Times article correctly points out that it’s important to look at what the coverage costs, covers and excludes.
Earthquake coverage is not inexpensive. But Tim Cline advises that the earthquake coverage rates for homeowner associations are at the lowest they have been for several years.
The article points out that the price can vary depending on a number of factors, such as the age of the buildings, how and of what materials they were constructed, and where they were built: “homes that sit on sandy alluvial soil that’s less stable than clay or rock” will cost more to insure.
Tim Cline advises that for larger condominium associations, carriers will commission a study showing how much damage the association may likely sustain in an earthquake. Tim states that “obviously, the more damage that the study says is likely to occur, the higher the cost for coverage.”
But Tim Cline also points out that he does not know of an earthquake modeling program which will predict, with any amount of accuracy, how much damage a condominium association would likely incur. Risk Management Solutions (RMS), EQECAT, AIR – all do earthquake risk modeling – but they only provide the probable maximum loss (PML). (Emphasis on “probable.”) It doesn’t mean they are predicting, with any great certainty, the worst possible loss – which, on any given day, may be exactly what a particular client will experience.
Tim states that he is “very wary of Boards who get a PML study and believe (incorrectly) that they can take that information to the bank.” There’s a great quote by Dr. Gordon Woo of RMS. He says, “The use of absolutes such as ‘largest possible loss’ and ‘worst combination of circumstances’ . . . reflects an understandable quest for clarity in the midst of ambiguity, and objectivity in the midst of subjectivity. However, such clarity and objectivity are often illusory.”
The cost of an earthquake insurance policy can depend on the nature of the building’s construction and other factors. Quoting the L.A. Times article: “Consider the costs for a policy overseen by the California Earthquake Authority. A $500,000 policy for a one-story home in Beverly Hills would cost $648 if the home had been recently constructed of wood. But the same policy would cost more than three times as much – $1,962 – if the home was constructed of masonry or brick.”
There’s an online calculator on the California Earthquake Authority site that can be used to help estimate the cost of a policy, depending on various factors.
The Times article does point out an important difference between fire and other coverage and earthquake insurance as compared with a deductible for an earthquake policy. “A fire or home insurance policy usually sets the deductible at a dollar amount. But the deductible on a quake policy is usually by percentage – typically 10% or 15% of the structure’s replacement cost. So, if you buy a $500,000 policy, it would not begin paying until your covered losses exceeded $50,000 for a 10% deductible policy or $75,000 on a 15% deductible.”
The Times article suggests that the purpose of most earthquake coverage is to get a roof over your head and that it is not aimed at getting an insured’s home back to the same shape it was in before the disaster. I don’t know if I can agree with that as it relates to a condominium association, where owners expect that after the deductible is met, they will receive enough money (less the amount of the deductible) to repair what has been damaged, and that usually results in getting the buildings into better shape than they were in before the quake.
While the Times article points out that the contents of a covered home are covered to the limits of the policy, but again (subject to numerous exclusions – such as china and crystal and many other items that are likely to break), Cline points out that the contents of a condominium unit are not covered by their association’s policy and that each owner should investigate their own interior quake insurance coverage.
With this information, maybe it is time for California community associations to revisit the issue of earthquake insurance before we suffer our next big one.