What Does Earthquake Insurance Cover?

QUESTION: Our condominium association does not have earthquake insurance. Since the Northridge quake, the board of directors has received many calls from our unit owners asking why we don’t have coverage. Some people are demanding that the association obtain coverage. We need answers to several questions. What does an earthquake insurance policy cover?

ANSWER: The earthquake insurance policy covers the structure of the building or buildings, common areas including equipment and contents owned by the association. The association’s policy would not cover the interior portion of the individual units or the furniture and personal belongings inside the units.

Is Board Liable When Units Aren’t Insured?

Q: Some owners feel that the board members have an obligation to obtain earthquake insurance for the association. Must the board do so? Is the board liable if they don’t vote to obtain the coverage?

A: Some associations have wording in their legal documents that requires that the association have earthquake insurance. However, most declarations of covenants, conditions and restrictions (CC&Rs;) leave this decision to the association’s board of directors.

The board members should consider their personal liability for this important decision. I know of many associations that have had major controversies about whether or not earthquake insurance was advisable. Some boards of directors feel that the responsibility for this decision should be shared by all of the owners, so they survey all of the owners or call a special meeting to let every owner vote on the matter.

Insurance broker Bob Little of Robert W. Little Agency Inc., offers the following advice:

“Most Directors and Officers ‘errors and omissions’ policies contain an exclusion for any ‘act, error or omission’ that a board member might make in procuring the right forms and kinds of insurance.”

In other words, if the board is sued for negligence because they didn’t obtain the insurance, the directors and officers liability policy might not have to defend the suit or pay any court costs. The board might be personally liable.

Little advises the board of directors to limit their liability by conducting a vote of all of the owners. He states, “We encourage the board to prepare a mailing for each unit owner explaining the insurance coverage and the effect, if any, the addition of the earthquake coverage will have on the monthly assessment that each owner pays. The mailing should include a written ballot. If the majority of the owners do not want the coverage, place the written ballots in a safe place so that the board will have evidence to support their decision.”

Can Individuals Buy Insurance Coverage?

Q: If the association does not obtain earthquake coverage, can an individual owner purchase an earthquake insurance policy that would cover structural damage?

A: I don’t believe that you can purchase coverage for something that you do not own. Since the structure of the building is owned by the association, each individual owns just a percentage of the structure, and an individual would probably not be able to purchase a policy.

Is Deductible on Loss or Replacement Cost?

Q: The association received bids from various insurance companies and they all had deductibles of 10%. Does that mean that the association would have to pay $5,000 of a $50,000 loss?

A: No, the deductible does not apply to the amount of the loss. The deductible would be 10% of the total replacement cost of the structure or the total policy limits. If the building is a $10,000,000 structure, the loss would have to be greater than $1,000,000 in order to file a claim. For example, if the association filed a claim for $1,200,000 worth of damages, the association would have to pay $1,000,000 and the insurance company would pay $200,000.

How Does Association Pay for Deductible?

Q: How would the association be able to pay the deductible?

A: The association would have to use reserve funds or, if reserve funds were inadequate, the owners would have to pay a special assessment. Let’s say the condominium association has 100 units. Each owner would have to pay a special assessment of $10,000.

There is protection that an individual owner can obtain that will help to pay a special assessment in these circumstances. The individual owner can obtain earthquake coverage for their personal property and the unit’s contents. In addition, some insurance carriers offer “earthquake loss assessment coverage,” which will protect the unit owner when the association must levy a special assessment to cover the cost of the repairs.

The individual owner may be able to obtain “earthquake loss of use coverage” to cover the cost of temporary relocation if the unit is uninhabitable. Some policies will cover hotel costs and other expenses if the owner has to leave the unit until repairs can be completed.

Does Owner With No Damage Have to Pay?

Q: Will I have to help pay for repairs even if my unit is not damaged in the earthquake?

A: Yes, you own a share or a percentage of the entire property and you must share in the cost of the repairs so that everyone’s investment is protected.

What If Owner Can’t Afford Assessment?

Q: What if an owner is unable to pay a large special assessment?

A: If an owner is delinquent in paying a regular monthly assessment, a special assessement or an emergency assessment, the association can file a lien and take the property through foreclosure.

Can Insurance Firms Cover All the Claims?

Q: Will the insurance companies be able to pay all of the claims that will result from another disaster?

A: Each disaster that occurred recently, such as Hurricanes Iniki in Hawaii and Andrew in Florida and the fires in California, has had a devastating affect on the insurance industry. Several companies have gone out of business. Be sure to check the A.M. Best Key Rating Guide to Property-Casualty Carriers to find the bidding companies’ ratings and their financial integrity.

You can call the California Department of Insurance at (800) 927-4357 to see if the companies have a good record for claims processing. I have heard complaints from some people who had losses during the Whittier quake. They were very disappointed that claims took several months to be processed.

What to Ask When Obtaining Insurance?

Q: What are some of the questions we should ask when obtaining earthquake insurance bids?

A: I urge board members and owners to contact several insurance experts when considering insurance matters. Ask about the cost of the clean up and disposal of debris and other related expenses. Be sure to fully disclose any information that you have about the property. For example, if you know that asbestos is present, that will cause additional expenses. Find out if coverage includes asbestos cleaning and disposal.

In general, coverage for full replacement cost is preferable because you will not have a deduction for depreciation at the time of the loss. Ask about co-insurance and get a full explanation of any co-insurance clauses in the policy.

Make sure that the association obtains an accurate appraisal for the full replacement value of the property, not including the land. A market value appraisal is not appropriate for insurance purposes. An excellent way to minimize the board’s liability is to rely on the advice of professionals who specialize in community association insurance. In addition to your insurance agent, you may want to obtain the services of an independent insurance consultant and appraiser.