Cost of Earthquake Insurance for HOAs in California
Earthquake risk keeps growing in California, making earthquake insurance a viable option for HOAs and condominium owners. Learn about the costs of insurance premiums, deductibles, and the types of homeowner earthquake policies available
In 2008, the United States Geological Survey (USGS) predicted a 63% chance that a 6.7 or larger earthquake will hit the Bay Area within 30 years (6.7 is considered a major quake). This risk continually increases each year that a major earthquake does not occur, exposing Bay Area community associations to a greater chance of earthquake-related catastrophe.
Earthquake Coverage for Homeowners Associations
Providing earthquake for your HOA may be something your board of directors is considering in light of these risks. One of the biggest concerns for homeowners associations, especially of condominiums, is the cost of the premiums and size of the deductible for an earthquake policy. The premium is determined by the replacement value of the collective units within a community association, and the deductible is the amount of money that an HOA must spend out-of-pocket on repairs or replacements before the insurance policy will pay.
In order to examine the cost of earthquake insurance, let’s use a Sample HOA of 200 homes worth $300,000 each, a total of $60,000,000. The Sample HOA replacement value, for purposes of simplification, assumes there are no common area buildings.
Premiums are determined by the replacement value of all units in the development. The earthquake coverage premium based on the Sample HOA’s replacement value would start at (and likely be even more than) $100,000 per year. Dividing $100,000 by 200 homes comes to about $500 per household per year, or roughly $42 per month. This is the amount an owner’s monthly assessment would increase if the Sample HOA voted to add earthquake coverage. By contrast, property/fire insurance premiums per year for a development are typically, at least to a certain extent, already included in many HOA’s annual assessments.
A large problem with earthquake insurance premiums is that in order to keep the cost low (like described above), a homeowners association typically obtains a stop-loss limit. Stop-loss limits are limitations to the total amount an insurer will pay for repairs, replacements, etc. For example, a stop-loss limit of $25 million on the Sample HOA means the insurer will only pay $25 million, and not the full $60 million regardless of how much damage occurs. This is explained below in more detail.
An earthquake insurance policy pays only if damage exceeds the deductible, and the deductible is based on the replacement cost of the damaged structure. Earthquake insurance is written on a scheduled basis, not blanketed like a master policy or fire coverage. This means that coverage for each individual building is capped at the amount stated on the insurer’s property schedule.
One damaged building from the Sample HOA has a replacement cost of $300,000, meaning it would always have a deductible of $60,000 (20% of $300,000) regardless of how much damage that building sustained. Say, for instance, that after an earthquake strikes the only damage sustained was broken plumbing pipes in the unit’s floor. This minor repair would only cost about $2,000, but since this is less than the $60,000 deductible, the HOA’s earthquake policy would not cover the cost.
|20% Deductible = Special Assessment (amount due) Total||20% Deductible = Special Assessment (amount due) Divided by 200 Owners|
For the Sample HOA of 200 homes, if every building was damaged in an earthquake, the deductible would equal $12 million. That’s a potential special assessment of $60,000 per owner if all buildings were lost. There would be an even higher special assessment due if the HOA purchased a $25 million stop-loss limit. The total (deductible plus the shortfall) would then equate to a special assessment of $175,000 per household.
|Total Replacement Value of Development||20% Deductible = Special Assessment (amount due) Total||20% Deductible = Special Assessment (amount due) Divided by 200 Owners|
|$60 million||$12 million||$60,000|
|Total Replacement Value of Development – (Loss Limit + Deductible) = Shortfall||Add Special Assessment of ALL Buildings Damaged (amount due) Divided by 200 owners|
|$23 million shortfall||$115,000|
*Total due per owner if ALL buildings damaged and $25 million loss limit in place: $115,000 plus $60,000 = $175,000
The deductible is assessed to the whole community, with each owner paying a portion. The cost of these deductible amounts would need to be covered by a homeowner’s individual earthquake policy unless an owner had another source of funds.
Individual Condominium Owner Earthquake Insurance
The Condominium Unit Owner Policy, or HO-6 policy, is an individual owner’s private (not affiliated with the HOA) property or fire damage policy. Some condominium owners may believe that their regular insurance policy will cover losses resulting from an earthquake. However, in almost every case damage resulting from earthquakes is specifically excluded from basic coverage. Yet a basic individual insurance policy is necessary for obtaining earthquake coverage. In other words, before an individual can obtain earthquake coverage he or she must have an HO-6 policy. He or she will not be able to receive earthquake coverage without it.
Learn all the right questions to ask when buying homeowner’s insurance for the first time
The California Earthquake Authority (CEA) offers four types of earthquake coverage for condominium owners:
Earthquake Building Property—Provides coverage to repair or replace interior structural components of a condominium such as cupboards and cabinets, carpeting, and built-in appliances. Has a $3,750 deductible.
Earthquake Personal Property—Provides coverage to repair or replace personal belongings such as furniture, electronics, etc. Has a $750 deductible.
Earthquake Loss of Use—Provides coverage if an owner is unable to access his or her home due to its structural conditions or civil authority. Does not have a deductible.
Earthquake Loss Assessment—Provides coverage for an owner’s share of the association assessment imposed to repair damage caused by an earthquake. Loss Assessment can also cover the owner’s share of the insurance deductible required of the association.
A homeowner is not required to purchase all four types of earthquake insurances. As long as an owner has purchased an HO-6 from a participating carrier, he or she can purchase, for example, just the Earthquake Loss Assessment coverage if he or she desires.
The CEA website provides additional information about their earthquake insurance policies.
Financial Impact on HOA Members
Whether a HOA purchases earthquake insurance or not, the members will be financially impacted. If the board of directors decides to invest in insurance, the premium will end up raising the members’ regular assessments. If the insurance premium raises the assessment more than 20%, the board will have to get a vote from the members (Civil Code Section 5605).
If the board of directors decides against insurance and an earthquake does strike its association, the HOA will most likely be allowed to assess individual homeowner funds to cover the cost of rebuilding and repairing damages. Without individual earthquake coverage, the membership will pay a hefty fee in special assessments to return the development to its pre-disaster conditions.
Contact your HOA’s insurance provider to learn more about specialized policy options for your particular area and risk factors. Or check out our Professional Directory to find an insurance provider for your community association.
Adapted from article by Barbara Ellen, President of Rancho Dorado Homeowners Association. Fact check provided by Tim Cline of Timothy Cline Insurance. John Allanson of Allanson Insurance also contributed to this article.