Flickr photo credit: aprilzosia

Even if your condominium or apartment complex is located outside California, you’re still facing an earthquake risk. That’s because all 50 states to date have been hit with earthquakes, and 39 states have suffered losses, according to the California Earthquake Authority. More than 5,000 earthquakes hit every year, and losses can be devastating. The San Francisco earthquake in 1906 caused $235 million in damages (an amount equal to $5.1 billion today).

So who insures the risk in the condo association world? Are condo associations responsible, or do unit owners bear the burden of insuring against earthquake damage?

In some cases, condo association insurance for earthquake damage is no longer available. Thanks to historic losses that proved unequivocally that insurers were under-pricing earthquake losses, many carriers opted to exclude homeowners associations from their list of buyers. That puts the onus of coverage onto the unit owners, who may not be aware of the association’s lack of coverage. If your condo association is one that is prohibited from purchasing coverage, let your home owners know. Inform them of the insurer’s lack of coverage availability, but also let them know what their options for their units and personal belongings are. Owners are able to purchases up to $50,000 in earthquake loss insurance and an additional $25,000 in personal property coverage.

Consider, though the risks of not having coverage. If your association is able to purchase it and you decline, your board could be sued for “failure to adequately insure” the premises. Also, the costs of not insuring could be exponentially higher than the costs of coverage. And if your association drops coverage one year, then attempts to buy it in another year, it could be difficult to find thanks to availability of policies.

Check with your broker or your insurer to see if your association can purchase earthquake insurance. Whatever the outcome, communicate your coverage or lack of coverage with your unit owners and residents.

In recent years, with the rising cost of insurance claims and the ambiguous language in some association CC&R’s, insurance coverage has changed dramatically.  Many condominium documents specifically detail what is to be covered – - for example:  roof repair and replacement only.  In this instance, the documents are explicitly pointing out that all other structure is not covered.

A Master Package Policy will generally include property coverage that can be categorized by:

 • Bare walls – coverage for the common elements, usually excludes property within the unit such as interior walls, permanently installed appliances, fixtures, finishings, floors and ceilings  

 • Single entity – coverage for the common elements, usually includes initially installed property in accordance with the association’s original plans and specifications 

 • All in – coverage for the common elements, plus initially installed property, plus improvements and betterments made at the expense of the unit owner

An Association should survey and identify owned property which is to be covered by the association master insurance package:

•  Buildings – residences, clubhouses, garages, carports; Building definition could include foundations, pipes, wires, conduits, utilities, heating, cooling, security systems, machinery and equipment, balconies, porches, decks, and patios 

 • Structures – arbors, awnings, cabanas, sport courts, fences, fountains, gatehouses, gazebos, recreation fixtures. 

 • Other property – could include antennas, indoor/outdoor furnishings, signs, landscaping, fine art.  

 • Non-covered property – could include bridges, roadways, walks, underground infrastructure. 
 

Common causes for the loss of covered property are categorized accordingly:

 • Special form – this is known as an “all risk” form and usually provides coverage for all perils, except those specifically excluded, such as flood, earthquake, war/military action, nuclear reaction  

 • Broad form – this includes loss as a result of fire, lightning, wind, smoke, hail, vandalism, sprinkler leakage, accidental discharge of water, collapse of building 

  • Basic form – most limited coverage of the three types of coverage
 

 In the event of a loss of covered property, the payment of the policyholder will be valued based on: 

• Guaranteed Replacement Cost – replacement cost with no limit and does not state a specific property limit

 • Replacement Cost – payment for the loss is based on the actual replacement and may be limited to stated value

 • Actual Cash Value – loss payments are based on the cost of new product, less depreciation and usage   
 

A deductible will apply to the property insured in the association’s policy.  The deductible could be on an occurrence basis, or could apply separately to each building or unit.  There may be different deductibles for the different covered property. 

One aspect of the deductible to consider is how the deductible will be handled with the unit owner.  Unless the association documents specify who is responsible, the association or the unit owner, then the association should adopt a policy which describes the circumstances under which a unit owner would be responsible for paying the deductible.

It is important that the association Board and its management company understand the scope of the association coverages.  Homeowners should be advised on what is covered.  Even where the association covers improvements, alterations, fixtures and appliances within units, it is advisable for the homeowner to continue to carry coverage on their own separate policy.

For a Master Policy item list that every HOA should review each year, click here

Reprinted with permission © Association Times