QUESTION: After 29 years of renting, I finally saved enough for a down payment on a small condo. I really like a building in the San Fernando Valley with restaurants and other commercial businesses nearby, but it is not retrofitted and the association doesn’t have earthquake insurance. The lenders tell me they don’t require earthquake insurance to make a loan.
But my parents are warning me that without insurance there won’t be enough money to fix both common areas and individual units and I’ll lose my investment. If I’m financing most of my purchase and the lender doesn’t require it, why get it?
ANSWER: Even if earthquake insurance is not required, a borrower living in Los Angeles should still perform a careful cost-benefit analysis before making a final decision. After all, the 1994 Northridge earthquake caused an estimated $20 billion in property damage, prompting close to 700,000 applications by homeowners and businesses for disaster aid.
While it may seem that living in earthquake country would mean there is a requirement that homeowners associations buy earthquake insurance, that is not the case — just as it is not required that homeowners buy insurance for their own property.
One reason is that historically, earthquake insurance has been very expensive, and often comes with exclusions and limited coverage. But it has recently become more affordable through the California Earthquake Authority, a privately funded public agency established two years after the Northridge temblor.
But even though there are no explicit requirements, responsible association management should have a game plan for managing and recovering from an eventual costly disaster such as an earthquake.
Some boards forgo earthquake insurance because they want to keep the monthly dues low or anticipate a special assessment should there be significant damages after an earthquake. Obviously, this would be a strategy more attractive, say, to a larger complex of single-family homes with a handful of common-area structures, than a small complex with all the units in one building that could be rendered uninhabitable after a disaster.
Some boards also may be relying on the Federal Emergency Management Agency to take care of earthquake damage. But state and federal government residential disaster-assistance programs, if available, adhere to strict eligibility criteria. FEMA offers temporary housing and cash assistance for a variety of needs but does not make an owner whole. And any aid to fix or rebuild homes is given in the form of loans that must be repaid.
The California Earthquake Authority — www.earthquakeauthority.com — is the largest provider of residential earthquake insurance in the United States and as of 2015, it wrote 76% of all residential earthquake policies sold in California with more than 950,000 policies in force. The authority is willing to insure homes even if the homeowners association does not have one itself.
However, there are some caveats. The insurance is provided through a carrier that must be a CEA participating insurer. Also, based on the definition of residential property insurance under California Insurance Code section 10087, mixed-use properties are not eligible for CEA policies. Be sure you understand whether your policy covers your personal belongings, your structure or both.
The CEA website features a handy insurance premium cost calculator that can help you get some sense of what your policy might cost.
Titleholders also should strongly consider buying earthquake loss-assessment policies as part of their own coverage. The insurance covers HOA special assessments due to earthquake damage but are often limited to $100,000.
Even if an association has its own coverage, it may need to assess in order to rebuild. Without adequate coverage, it almost certainly will have to impose emergency assessments and/or specially assess each titleholder.