Question: I'm president of a 44-unit homeowner association in the Torrance area. Every year we purchase earthquake insurance, which carries a 20% deductible and a premium for each owner of about $350 a year on a $12-million policy for the association. Many owners don't want to pay the premium, preferring no earthquake insurance because the deductible is so high. I calculate that each homeowner would have to come up with about $54,500 as a deductible before insurance kicks in. In the event of a catastrophic earthquake, I'm not sure owners will be able to come up with such large deductibles. How can we handle this?
Answer: Homeowner whining about paying a deductible is misplaced; they appear to misconceive "insurance." It rarely restores the status quo: Even millions paid for treasures lost cannot restore beauty or sentimental value. Deductibles are part of insurance life.
As a board director, you're right to worry how — or if — titleholders could handle the deductible. Even a detailed case history will provide limited comparative guidance for your potential situation since every association's finances and management differ, as do architecture and quality of construction.
Each disaster or emergency situation stands to be substantially unique, further undercutting comparisons to other associations. A cluster of one-story bungalow courts in the desert can't be compared for vulnerability to a large four-story complex in a high-density urban location: Besides more potential casualties, structurally each property would respond differently to the same quake.
The one constant among all homeowner associations is that rebuilding success will depend on the financial stability of individual titleholders who, by law, are obligated to pay into association operating funds.
Specifics of both the association's insurance and to some extent the titleholders' individual insurance policy coverages play fundamental roles in the success of the common interest development's own rebuilding process.
Owners complaining about a $350-a-year payment probably will be unable to pay the $54,500. This will lead to survival of the fittest, inasmuch as the association will have to employ collection techniques against those who can't or won't pay.
One alternative may be long-term bank financing of repairs. Although securing such loans after a disaster could be difficult, a loan might transform an otherwise overwhelming special assessment for repairs into manageable repayments.
The better and immediate option is individual earthquake insurance, offered by major private insurers on behalf of the California Earthquake Authority. This additional coverage is an add-on to private insurers' individual condo/homeowners liability policies.
Insurance coverage may include personal property, internal fixtures, temporary housing after a quake and special assessments levied by the association. Premiums vary with coverage.
Most relevant to your concern should be the "earthquake loss assessment" coverage option that many CEA policies include. When the association specially assesses owners for earthquake damage, each titleholder's CEA loss assessment coverage is invoked.
The CEA recently announced that effective next Jan. 1, a statewide rate reduction of 10% for CEA-issued earthquake insurance policies had been approved by the Department of Insurance.
That expands deductible options from today's 10% or 15% to choices of 5%, 10%, 15%, 20% or 25%. The deductible is the amount that is deducted from the insured loss but it does not have to be paid by the policyholder before a covered claim is paid. CEA imposes no out-of-pocket deductible-payment obligation on policyholders before it pays.
Association boards should consider the very real risk of owners defaulting on special assessments meant to be applied to earthquake damage, but they also should remember their duty to act in the best interests of owners and the association by encouraging owners to be financially prepared.
Meanwhile, owners should be thankful that $350 a year buys up to $224,000 coverage per unit beyond the deductible.