J & N REALTY, INC.

Earthquake Insurance at Condominium Complexes  

Purchasing an earthquake policy for a building is a bad bet.  Financially with all odds in play, it just does not make sense.  There are a few facts about earthquake that most people do not take into consideration when making a decision. 

• Earthquakes insurance comes with a deductible, which is not a fixed amount but a percentage of your total policy amount.  For example, if your building were insured for a maximum of five million dollars your deductible would be a percentage of that amount. 
• Annual cost of the policy goes up exponentially as you lower a deductible.  Deductibles usually vary from 10% to 25% of the policy amount.  In addition, the cost can more than double between 20% and 10% deductible. 

Now let us take a look how a typical earthquake policy may work out.  Let us review an example of 20-unit condominium building that was insured for $4,000,000 with a 20% deductible.  This amount only covers building’s common areas.  You are still responsible for all the repairs inside your unit and your personal property. 

For this association the deductible is $800,000 or $40,000 per unit.  What does this mean in real life? 

• If earthquake damage is less than $800,000, your earthquake insurance will not pay.  Owners are 100% on the hook to cover all expenses. 
• If the damage is over $800,000, the insurance will only whatever is above the deducible still leaving owners responsible for a very large part of the expense. 
• How many owners do you think can come up with $40,000 out of pocket to cover for expenses? 
• How many owners do you think carry their own policy covering earthquake loss assessment coverage? 
• How many owners do you think will simply walk away from their units because they are either upside down on their mortgage or don’t have enough equity to justify an investment of $40,000 
• How many condominium units do you think can be bought at that point for very cheap because owners walked out left and right? 
• What happens to those owners that are able to pay $40,000 either by having a policy or having savings?  They cannot do anything before to begin construction you need to cover the entire amount. 

You really need to consider all facts before making a decision.  Earthquake insurance policies are very expensive and for associations that could be struggling to keep things afloat this maybe a good option to find some savings. 

P.S. The math above is equally applicable to larger buildings.  While you may have a lot more owners to split the deducible, your coverage amount usually is much higher per unit.  Larger communities tend to have more amenities and more common areas meaning the rebuilding cost is higher.  The building with ten times the units may cost a lot more than ten times to rebuild.