Earthquake insurance not always a solid buy for HOAs

Dr. HOA,
I live in a townhome with a homeowners association. I recently purchased earthquake insurance for my home, but I was told I could only purchase earthquake insurance for the contents inside of my home, not the building itself.

How can I make sure the building is insured in case of an earthquake? If I am unable to purchase insurance, is there a law that requires the association to purchase earthquake insurance on my behalf? 
— Adam H.

Hello Adam,
As a condominium owner, having a thorough understanding of earthquake-insurance coverage and how it impacts your investment is extremely important.

Owners often assume that when they purchase earthquake insurance for their home that it includes the contents, as well as the building itself. It does not.

Individual condominium owners are unable to purchase earthquake insurance for association buildings because of the fact that their ownership is an undivided interest rather than fee simple ownership.

As such, owners are not legally able to purchase earthquake insurance for the structures. Only the association may purchase earthquake insurance for the association’s buildings.

Our firm manages several associations with earthquake insurance, and many without. There is no law requiring condominium associations to carry earthquake insurance.

Different associations reach different conclusions regarding whether earthquake insurance makes sense for their associations.

I encourage your association to contact a professional insurance broker specializing in homeowner associations to discuss the pros and cons of earthquake insurance, as it relates to your association.

I can, however, share with you why some associations we manage choose not to purchase earthquake insurance and why others feel it necessary.

Do not purchase
One of the most common reasons associations do not purchase earthquake insurance is that it’s expensive, both the monthly premiums and the deductible payment, should an earthquake cause structural damage to an association’s buildings.

Often times, the monthly insurance premiums would result in assessment increases in excess of the 20-percent legally permitted in any given fiscal year. This would require holding a special election of the members to approve the assessment increase, and approval would require affirmative votes by at least a majority of the membership.

Getting a majority of the members to vote in favor of a dues increase, especially during these difficult economic times, would be a difficult objective. How a homeowner votes will depend on his or her specific circumstances, including personal finances and whether he or she has equity in his or her home.

If the insurance deductible exceeds the amount of equity a homeowner has in his or her home, it may not make sense. Earthquake-insurance deductibles for associations are typically in the tens of thousands of dollars.

Would most homeowners be able to pay a $40,000 deductible, should an earthquake damage the structural integrity of their condominium? Would they want to if they owed $50,000 more than the condominium is worth? The answer is, probably not.

Do carry insurance
Our firm also manages several associations that consider earthquake insurance to be a necessity, not a luxury. The associations feel it is their responsibility to have earthquake insurance in place not if, but when the next significant earthquake occurs.

Many still vividly recall the 1994 Northridge earthquake and the loss of structures. Several associations throughout the valley were able to repair and rebuild because of their earthquake insurance, while many without insurance were faced with total and complete loss.

Depending on the size and force of the earthquake, significant structural damage could make it unrealistic in the absence of earthquake insurance to simply assess association members to repair the association’s buildings.

Supplemental insurance
In many other cases, a special assessment required to repair or rebuild the buildings would far exceed the insurance-deductible expense if the association had earthquake insurance.

For a relatively small monthly premium, insurance carriers also offer homeowners a supplemental “earthquake loss-assessment insurance,” which would cover a significant portion of the special-assessment-insurance deductible, should it ever be necessary.

This makes it far more realistic for owners to pay the large deductible and rebuild, should an earthquake damage the association structures.

Many living in condominium associations view the monthly earthquake-insurance premiums and associated deductible as fairly reasonable compared to the total financial loss they would suffer, should their association ever experience the devastation caused by a large earthquake.

Get educated
It is important for an association to educate its members on earthquake insurance and the fact that its individual earthquake homeowner’s policies only cover the contents inside their home, not the structure itself.

Additionally, it is important for an association and its members to understand the pros and cons of earthquake insurance as it relates to the community’s structures so that they are able to make an educated decision regarding whether earthquake insurance makes sense for its association.

Ask your board of directors if the topic of association earthquake insurance has been addressed. If not, ask that they consult with a homeowner association-insurance professional to determine whether association earthquake insurance is right for your community.