TO BUY OR NOT TO BUY … THAT IS THE QUESTION
I have spoken to many managers and boards of directors in the State of California about the earthquake insurance crisis. For the past year or so, homeowner association boards are being hit with earthquake insurance quotes that far exceed past premium costs and budgetary allotments. The notices come quickly, the premiums are due quickly, and the boards do not have time to stop and ponder the decision. This leaves them in quite a quandary. They have to make decisions for the members that are very difficult to make. Sometimes, they borrow from reserves to make the earthquake insurance premiums. Some Boards choose to impose an emergency assessment on the members, based on advice of their attorney. Either might occur if the governing documents for the association require the association to carry earthquake coverage, and the budget doesn’t provide for the cost.
Some boards do not have the clear-cut guidance of documents that require the purchase of earthquake insurance. In fact, most governing documents in the state give the board discretion to purchase earthquake or flood insurance, but do not require it. In many board members’ minds, this leaves them in a more difficult position, because they have the use their own discretion.
Since the Northridge earthquake, insurance premiums for property insurance (loss assessment coverage to be more specific) and earthquake insurance, in common interest developments have, I believe, become commensurate with insurance premiums on single-family homes and all have increased substantially. What I observed in the past was that homeowners in common interest developments got “a deal” and did not normally have to pay what owners of single family houses of the same market value had to pay, but after Northridge, when the insurance companies realized what kind of damage could occur in homeowner associations, and what additional costs could arise, decisions were made somewhere by the powers-that-be that homeowners in common interest developments with homes of value equivalent of single-family homes should be paying premiums for insurance equivalent with the cost for single-family home coverage. That’s just my observation. There is much more to the “whys”, but that is not for this article on simple analyses of the issues. My observations are based on the rising costs I have seen not only for my clients, but for a condominium that I own. My condominium association purchases earthquake insurance each year and I am thankful for that. Why? Because I firmly believe that if there is a serious earthquake that affects my property, and damages are widespread, that I will be happy to have whatever protection is available on my condominium. I also carry a policy for condo owners through the CEA (California Earthquake Authority).
So, why do I call this the Mickey Mouse version of the “to buy or not to buy” articles? Because I had an epiphany recently – I see an analogy that the average person may be able to understand – that identifies the steps to the decision of whether or not to support the purchase of earthquake insurance. The analogy is simple, but it should make you think in a different way (than making the decision on the cost alone).
I was in Disney World recently with my daughter, son-in-law and two grandchildren. (We had a ball by the way.) Upon return, and getting back into the swing, I was immediately barraged with questions from clients and non-clients about whether to buy earthquake insurance. I now see the decision-making process to be eerily similar to riding the Kali-Rapids in Disney World. I have written a concurrent article that gets more technical about what boards of directors should do and consider before saying no to the purchase of earthquake insurance. It is a matter of fiduciary duty to be somewhat pragmatic in making that decision, to consider what the governing documents say, and to incorporate steps into the process that tap into the desires of the members when the board is considering continuing or discontinuing earthquake insurance. You can see that “sister” article by clicking here.
This is the simple version. When you stand in line at the Kali-Rapids, you can watch the people coming down the rapids and see that the various rafts hit the rapids in different ways, and people get wet. The people who get wet are not in the same positions in each raft, and some stay nearly all dry and others come out soaked. Consequently, it is difficult to predict how wet you are going to get, but you know there is a probability that you will not escape “scot free” when you ride the river. The excitement mounts as you get closer and closer to getting on the ride. Right near entering the ride, there is a Mickey Mouse character offering ponchos for sale at $7 a pop. You hadn’t thought about the possibility of getting some protection before, but now, at the moment of truth, you are offered a carrot and you have to make a quick decision. Do you purchase protection, or take your chances? 7 bucks seems like a lot of money for one ride down the Rapids. However, to someone like me, staying at least partially dry seems like a good idea, worth the 7 bucks. What crosses my mind as that I might end up in a position on the ride where I end up getting totally soaked, and I would prefer to avoid that. Given that we have another six hours in Disney World and then plan to sit and eat dinner at the Rainforest Café, and I have no extra clothes, getting soaked is not too appealing to me. So I fork over the seven dollars and take a poncho and hope I will not get soaked. I do realize that by putting myself in that situation, there is a real good chance I will get wet. How wet is yet to be determined. But the risk is worth the ride. My children on the other hand, and their children, are either bigger risk takers, or are less willing to spend the money. Of course, it is a bigger investment for four than for one. And they have brought back up clothes for the children. They forego the ponchos.
We all get wet at varying levels. However, I am wet only lightly at my ankles and knees, and derriere of course (from sitting on the seat). My children are in various states of drench and their children are transferred to dry clothes right after the ride, because that was the backup plan. My daughter and son-in-law were wet enough to still be damp on the late evening ride back to the hotel on the bus. And there were a few “chilling” moments at the Rainforest Café where it was a lot cooler than in the park. But they are young, and resilient, and still had more fun having taken the risk than if they had not, and stayed dry.
I see the ride, and the purchase of the poncho similar to considering the purchase of earthquake insurance. I see the decision to ride similar to that of choosing to live in “earthquake country”. I see the option of carrying the dry clothes as having a backup plan that would give one immediate relief if there was a bad quake. I see taking precautions as similar to earthquake retrofit instruction in context out of considering what to do about the earthquake risk. I see getting a poncho as similar to purchasing EQ insurance protection. And I see going without a poncho as the biggest risk within the choice of taking the ride.
I do not want to be too simplistic but I am being realistic here about the human side of things, and a simple way of understanding what goes into a decision on earthquake insurance. Of course the cost and consequences of riding the Kali-Rapids at Disney World and purchasing a home in California on or near a fault are vastly different in the big scheme of things. But the decision making process is, as I said, eerily similar.
When it gets down the basics, insurance is all about whether you need some comfort level to sleep at night. Since common interest developments involve people of many natures, making the decision for a widely diverse community can be difficult. Some owners are risk-takers (the gamblers), some have a pragmatic approach (the engineers), and some have clear backup plan (more eggs in their basket so-to-speak). Some have little investment in the property (new buyer – no equity as yet), and some owners’ life savings and equity retirement are tied up in their property. These are all things that can affect what each Owner wants.
An all-too-common question that comes up when speaking to a group of people is: “Well, if there is a devastating earthquake, everyone, including the insurance companies will go broke, so why should we buy it?”
My answer is: “I suppose that is possible, but what I gleaned through my colleagues in the Northridge earthquake and by getting very involved in the insurance issues at that time, was that the associations that had earthquake coverage that were hit by the Northridge EQ hard survived, got small business administration loans for the most part, and rebuilt. Those associations that did not have earthquake insurance coverage were, for the most part, according to one of my colleagues that had many associations that were affected, red tagged, sold “as is”, as distressed property, and many are still in distress today.”
Experience speaks louder than my words, or anyone else’s. We have the experience of Northridge in our fairly recent past.
My other article talks about assessing risks, getting information, polling or taking a vote of the owners, and the possibility of the board being sued for failure to procure earthquake insurance. Many association insurance policies that provide directors and officers fiduciary duty coverage exclude the failure to purchase insurance as a covered event. It talks about the widely varied amounts of possible special assessments that may be imposed in a coverage vs. non-coverage situation.
Why are theses things important to consider? If you are an owner that is intending to sue the Board of Directors to recover damages to your property from an earthquake because the Board did not procure coverage, you may be sadly disappointed. First of all, you would be suing yourself. And, if the board is diligent in its decision-making process as outlined in my sister article, then suing the board either for spending the money to procure coverage or because it did not spend the money and get the protection is probably a lost cause. As for special assessments, maybe you do not realize that if your neighbor cannot withstand the assessment imposed to rebuild after an earthquake, you and your neighbors may have to contribute more to save the day, so the value of adopting a plan that would minimize the “rebuild” costs in any way would probably benefit everyone. Therefore I have to say that my personal position, if asked, is to get on board at the front end and support the insurance purchase as an alternative to relying on a lawsuit or your financial well-being as a means of surviving a big earthquake.
The decision on earthquake insurance often comes down to an emotional component. The truth of the matter is, however, that if there is a devastating earthquake in any given area, the owners that have earthquake coverage of any kind will be glad they have it. The owners who do not have any earthquake coverage will probably be very sorry they do not.
By Beth A. Grimm, Attorney. A member of the Bay Area-Central CAI Chapter and (former) Public Relations Chair of CAI’s California Legislative Action Committee (CLAC), ECHO East Bay Resource Panel Member (and former Chairperson), and author of FINDING THE KEY TO YOUR CASTLE and other helpful community association publications.
copyright 2007, Beth Grimm, all rights reserved.
THE MATERIALS BEING MADE AVAILABLE HAVE BEEN WRITTEN OVER THE YEARS AND DO NOT COVER STATUTES OR CASE LAW OR PRACTICAL ISSUES THAT AROSE AFTER THEY WERE WRITTEN.