Since 1900, according to the California Earthquake Authority (CEA), earthquakes have stricken 39 states and have caused damage in all 50 states, with 5,000 quakes felt each year. On April 18, 1906, the infamous earthquake and fire that devastated San Francisco was deemed one of the worst natural disasters in the United States. “It produced insured losses of $235 million at the time, equivalent to $5.1 billion in 2006 dollars,” according to CEA. If a quake of great magnitude were to hit under today’s economic and demographic conditions, a study by AIR Worldwide estimates the loss would be at $108 billion.
The likelihood of an earthquake and resulting damage is something that many California homeowners have pondered, particularly when the homeowner resides in a condominium association. Many condominium owners have a significant investment in their unit, and the concern and question they may have is, “How can I protect and insure my unit against an earthquake loss?” To help answer this question we need to get a basic understanding of how the earthquake markets operate.
Probable maximum loss
The condominium earthquake insurance market is comprised of insurance carriers that specialize in catastrophic risk exposures (e.g., hurricanes, tornadoes and earthquakes). These insurance companies use sophisticated modeling software programs that determine the PML (probable maximum loss) of a given homeowners’ association. The insurance industry learned a painful lesson from the ’94 Northridge earthquake: Insurance carriers were not adequately pricing and funding the appropriate premium for the true earthquake exposure. Consequently, many of the traditional carriers made the important decision to no longer offer new commercial earthquake coverage to homeowners’ associations.
the earthquake insurance market, like many other industries, is cyclical and we are currently in the throes of one of the “hardest” cycles in recent memory. In other words, premiums are very high and the availability of coverage is low. What affects insurance premiums? Perhaps the biggest driver of rates is the cost of reinsurance. Insurance carriers leverage and spread the earthquake insurance they write by purchasing insurance from the reinsurance market. These reinsurance carriers have taken in substantial losses, approximately $30 billion in 2006. Another element that affects premiums is supply and demand; insurance carriers are being required to increase their reserves, which further limits their availability or capacity to offer earthquake coverage, so there is less supply to go with the increased demand.
Cost prohibitive – what can unit owners do?
What can a unit owner do to obtain earthquake protection if the cost to the HOA is prohibitive? (Keep in mind that the association is the only entity that can purchase earthquake insurance for the buildings – the CC&Rs should be reviewed to verify.)
* Individual unit owners can insure their personal property for up to $25,000 in interior unit building coverage as well as $50,000 earthquake loss assessment coverage, which insures the unit owner for a special assessment levied by the association for building repairs due to earthquake damage.
* Individual unit owners can obtain personal earthquake insurance through the CEA (California Earthquake Authority), established as a response to the near-total halt of insurance sales from the private sector due to the Northridge earthquake. The CEA is not a stand-alone policy – individual unit owners must currently have or purchase a condominium unit owner’s policy also known as an HO6, and the insurance carrier must participate in the CEA program in order to offer the CEA coverage, including earthquake loss assessment. Most major carriers participate in the CEA program.
Decision to protect
By being informed and educated, condominium unit owners can better decide if they want to mitigate and insure their personal property against an earthquake loss, whether or not the association maintains earthquake coverage. The likelihood of earthquake damage in California is a real concern to homeowners’ association unit owners; however, armed with information and options, their investment in their home can be somewhat protected.