CA: Common interest of a common disaster risk

Homeowner Associations (HOAs) are sometimes called common interest developments because ownership of the association is held in common. The attribution is further complicated within condominium communities inside HOAs. Add to the equation the consideration of purchasing earthquake insurance for a condominium community when homeowners are forced to consider not one, but FIVE (5) different levels of coverage.

* (1) This level of coverage may only be purchased by the HOA, hence a vote of the membership. All other areas of coverage are individual homeowner purchases.
  • Condominium owners within HOA communities in California have unique challenges finding and obtaining earthquake insurance (EQI) for the common areas and buildings
  • The California Earthquake Authority (CEA) has a specific role to ensure the availability of property insurance in the state, including disaster threats like earthquakes
  • Even after more than 20 years of marketing, EQI is now covering less than 20% of the homeowner households in California


Number of recorded, actual seismic events in California every 24 hours

Current Data
(more recent reports below)

Sooner or later, most California homeowners will come face-to-face with a decision about purchasing earthquake insurance (EQI). But the decision for about 50% of the state’s homeowners (those in common interest developments, aka homeowner associations or HOAs) is not clear cut. It is even complicated beyond belief, particularly for condominium owners in HOA communities. We will explain.

Do you need earthquake insurance? The NBC4 I-Team is looking into what is covered under earthquake insurance — and what isn’t — after two large earthquakes rattle Southern California and residents’ nerves. Lolita Lopez reports for the NBC4 News. (6-5-19)
Earthquake insurance rates are expected to spike for some residents in California. John Rundle, a distinguished professor of physics, earth and planetary science at University of California – Davis, and Glenn Pomeroy, CEO of the California Earthquake Authority, join CBSN to discuss. (7-10-19)

About 17 percent of California’s some 7 million residential owner-occupied homes are covered by earthquake insurance despite the fact that the state is reported to have about two-thirds of the USA risk for earthquakes.

Aside from the physical danger, earthquakes can also take a huge financial toll. Why are so few people willing to protect themselves from that? John Ramos reports. (10-17-19)

For one Bay Area homeowner the EQI purchasing experience was not at all expected…

Earthquakes are part of life in California – a series of small quakes rattled the state over the past few months – and yet, only 17 percent of us have earthquake insurance. (4-16-18)

“The CEA owes its existence to a single earthquake over 20 years ago and a 1980s-era state law: Without the 1994 Northridge earthquake and the 1985 law requiring sellers of home insurance in California to offer earthquake insurance, there would be no CEA.” ~ DANIEL MARSHALL

The California Earthquake Authority (CEA) claims to have $17B in claim-paying capacity, but a catastrophic quake in the state could require $100B in loss, so who will make up the difference? No one knows when the next Big One will happen, nor the amount of destruction to happen at that time.

But we do know CEA has 1 million policies in force (2019)
and that represents but a fraction of the total statewide homes, owner occupied or not.But can it be that the CEA does not seek a serious uptake in EQI policies under their jurisdiction because such would increase exposure for claims, the risk factor?

$200K x 65 $200K rebuilding cost per home in 65 HOAs
$17B / $200K per house = 85,000 units repaired under the worst case scenario (so this calculation gives a snapshot of how far $17B might stretch). = 65 communities like Trilogy Glen Ivy (TGI), the Inland Empire HOA community of 1317 homes (if the TGI community is typical of HOA locations in California, then the $17B of CEA claim-paying capacity will cover something like 65 communities like TGI).

By comparison, and in reality, the $17B of CEA claim-paying capacity would not cover 10% of all of the HOA communities in Riverside County alone with…

902 HOAs in Riverside County, much less any significant percentage of the HOAs statewide…

48,150 (2018) HOAs in California with 13.7M residents in those communities

Annually, the CEA is required to file a status report with the State of California. Here is the latest on file from August 2019.

The CEA owes its existence to a single earthquake over 20 years ago and a 1980s‐era state law: Without the 1994 Northridge earthquake and the 1985 law requiring sellers of home insurance in California to offer earthquake insurance, there would be no CEA. And without appreciating its primary legal columns of support, the CEA cannot be fully understood. ▶ SOURCE
After more than 20 years of operation CEA is no longer just a bright idea—it is a mature insurance provider with a broad portfolio of ideas: market‐leading insurance products, unique loss‐mitigation programs, and innovative financing techniques. CEA is the largest and by far most active California player in addressing and mitigating both structural and financial residential earthquake risks, and its CEA experience is instructive. ▶ SOURCE

But the state’s data outlook fails to answer key questions like…

QUESTION: After 29 years of renting, I finally saved enough for a down payment on a small condo. I really like a building in Riverside with restaurants and other commercial businesses nearby, but it is not retrofitted and the association doesn’t have earthquake insurance. The lenders tell me they don’t require earthquake insurance to make a loan.

But my parents are warning me that without insurance there won’t be enough money to fix both common areas and individual units and I’ll lose my investment. If I’m financing most of my purchase and the lender doesn’t require it, why get it?

We live in the condo section of an Inland Empire HOA community where EQI is not included in member dues. That practice (automatic EQI) exists in a minority of HOA condo communities. For what reason? Mostly because the CEA does not directly market EQI policies for common interest developments to associations. They require this market to obtain EQI from the secondary agencies like Lloyds of London, from brokers not enrolled under the state Department of Insurance. onQuora

ANSWER: Even if earthquake insurance is not required, a borrower living in California should still perform a careful cost-benefit analysis before making a final decision. After all, the 1994 Northridge earthquake caused an estimated $20 billion in property damage, prompting close to 700,000 applications by homeowners and businesses for disaster aid. What would $100 billion in damage cause? At least five times the Northridge quake loss.

While it may seem that living in earthquake country would mean there is a requirement that homeowners associations buy earthquake insurance, that is not the case — just as it is not required that homeowners buy insurance for their own property.

There is no evidence that CEA even targets HOAs for EQI purchase* despite the fact that more than 50% of state communities are so designed.

* Currently, condominium owners in HOA communities may purchase EQI CEA-authored policies ONLY for internal buildings, personal property, loss of use, and loss assessment, but nothing of the external structure although all quakes begin with external phenomena

Proof of this conclusion is found in the current CEA policy to maintain two tiers of business lines for the earthquake insurance market in California.

  1. The 25 Participating Earthquake Insurance Providers (enrolled agents). These agents may write policies for the internal condo dwellings, loss of use, and loss assessment protections, but nothing for the external dwellings and structures, including parks and roadways.
  2. Secondary market includes all other insurance carriers in California (some based overseas) who offer EQI but at not enrolled agents with the state Department of Insurance

It is this secondary market to which commercial entities, including homeowner associations, must rely to find and purchase EQI.
CEA does not send reps to individual community meetings, but they rely on individual brokers to communicate and offer CEA products.

What’s more, CEA (internal building property losses, loss or use, loss assessment, etc) are the only lines CEA carries. HOA and corporate policies for common area coverage all go to secondary line carriers like Lloyds of London and those lines are not regulated by the Department of Insurance (DOI). Hence, HOA EQI policies cannot be adjudicated or mediated through the DOI.

The uncertainty about EQI purchase is complicated for any homeowner in a California HOA. One reason is that historically, earthquake insurance has been very expensive, and often comes with exclusions and limited coverage. But it has recently become more affordable through the CEA a privately funded public agency established two years after the 1994 Northridge temblor.

But even though there are no explicit requirements, responsible association management should have a game plan for managing and recovering from an eventual costly disaster such as an earthquake, but almost no HOA does. HOA disaster recovery plans are as scarce as a Southern California rain storm in the summer.

Some boards forgo earthquake insurance because they want to keep the monthly dues low or anticipate a special assessment should there be significant damages after an earthquake. Obviously, this would be a strategy more attractive, say, to a larger complex of single-family homes with a handful of common-area structures, than a complex that includes condominiums and significant other common areas.

Some associations also may be relying on the Federal Emergency Management Agency to take care of earthquake damage. But state and federal government residential disaster-assistance programs, if available, adhere to strict eligibility criteria. FEMA offers temporary housing and cash assistance for a variety of needs but does not make an owner whole. And any aid to fix or rebuild homes is given in the form of loans that must be repaid. FEMA places HOAs at the bottom of their priority list because HOAs are commercial enterprises that have member emergency assessment options.

As already reported, the CEA — — is the largest provider of residential earthquake insurance in the United States and as of 2018, CEA wrote about 80% of all residential earthquake policies sold in California with more than one million policies in force. The authority is willing to insure homes even if the homeowners association does not have one itself.

However, there are some caveats. The insurance is provided through a carrier that must be a CEA participating insurer. Also, based on the definition of residential property insurance under California Insurance Code section 10087, mixed-use properties are not eligible for CEA policies. Be sure you understand whether your policy covers your personal belongings, your structure or both.

The CEA website features a handy insurance premium cost calculator that can help you get some sense of what your policy might cost.

Titleholders also should strongly consider buying earthquake loss-assessment policies as part of their own coverage. The insurance covers HOA special assessments due to earthquake damage but are often limited to $100,000.

Even if an association has its own coverage, it may need to assess in order to rebuild. Without adequate coverage, it almost certainly will have to impose emergency assessments and/or specially assess each titleholder.

Owners must not rely on an association or lender to protect their investment. Without purchasing adequate insurance you are exchanging your hard work, down payment and monthly mortgage payments for a home that may be irreparably damaged by a natural disaster. After saving and investing for a lifetime, now is not the time to make a foolish decision.

Here is a list of the top insurance companies writing earthquake coverage provided by Insurance Journal’s research partner Demotech Inc.

READ ▶ (Circa 2015)