Requirement. Unless required by their governing documents, associations are not obligated to buy earthquake insurance. Even so, the better course of action for condominium associations in high-risk areas is to buy earthquake insurance. This is especially true since individual members cannot insure the structure around their units, only the association can.
Fiduciary Duty. When members vote against earthquake insurance, they have no duty to act in the best interest of other members, only in their own best interests. Boards, on the other hand, have a fiduciary duty to make decisions that are in the best interests of the association as a whole. Since earthquakes can be devastating, that would argue in favor of overriding the membership's vote if the association is located in an area vulnerable to earthquake damage. Accordingly, boards should consider factors such as the location of fault lines, the type of soil upon which the structures are built (are they vulnerable to liquefaction?), the type of construction in the development (wood frame, steel & concrete, etc.) and premium costs, deductibles and pay-out levels.
Funding the Insurance. If the board decides to set aside a membership vote, it faces a practical problem--how to fund the insurance? The board can either increase annual dues or impose a special assessment. For most associations the cost of earthquake insurance is more than the 5% special assessment limitation imposed by the Davis-Stirling Act, which effectively eliminates this funding option. The other option is to increase annual membership dues up to 20% to cover the cost. However, the dues increase only applies to next year's budget. If the board wants to immediately purchase earthquake insurance, it can bridge the funding gap by borrowing money from reserves and repaying it within one year.
Business Judgment Rule. If the board chooses not to override the members' vote, its decision is governed by the Business Judgment Rule, which means directors are not subject to personal liability if their decisions are made in good faith, in the best interests of the association and with such care as an ordinarily prudent person would use.
Recommendation: Obviously, these are not easy decisions for boards to make. Whichever direction they go, to buy or not to buy, the decision should be well supported in the minutes and explained to the membership.
Board Authority to Purchase. Even though earthquake insurance is normally discretionary, boards can purchase and renew earthquake insurance on their own without membership approval, provided the premiums are within the association's budget limitations (20% increase for regular dues or 5% for special assessments). If the premiums require an increase above these limitations, boards need membership approval.
Discontinuing Insurance. There is no law requiring associations to purchase earthquake insurance. The only obligation to carry such insurance might be found in the association's governing documents. If no such obligation exists, boards have the authority to discontinue earthquake insurance. Before doing so, boards should seek membership input. In the event any changes are made in the association's insurance (cancellation, non-renewal, changes in deductibles, etc.), the board must immediately notify the membership. (Civ. Code § 5810.)
Commercial Policies. Earthquake insurance for associations is available through commercial carriers such as Farmers and State Farm. To help make the premiums affordable, associations must balance the amount of coverage with deductibles. The higher the deductible, the lower the premium.
Owner Insurance. In addition to any insurance purchased by the association, owners may purchase a residential policy through the California Earthquake Authority. Homeowners can calculate the cost of a CEA policy with their "Premium Calculator."
1. What it Covers. The California Earthquake Authority (CEA) offers basic coverage to owners of condominiums. Coverage can be purchased through a homeowner's own insurance agent and can be purchased regardless of any insurance carried by the association. With limitations, it pays for:
- damage to personal property
- interior damage
- emergency living expenses
- special assessments levied by condominium associations to pay for earthquake related repairs to residential structures
2. What is Not Covered. While California Earthquake Authority Insurance is important for all owners to carry, there are risks if the association does not itself carry earthquake insurance and instead relies entirely on the CEA’s loss assessment coverage.
- CEA loss assessment will only pay for residential structure damage. There is no coverage for pools, clubhouses, detached garages, patio coverings, walkways, driveways, fences, etc.
- It will not pay for bringing residential structures up to building code standards.
- It will not pay for special assessments to cover bad debt (caused by members who walk away from their units).
- Relying on owners to carry loss assessment coverage is risky. Many or most owners will not carry it, thereby providing limited resources for rebuilding after an earthquake.
- The maximum coverage for CEA Loss Assessment is $75,000 and the deductible is 15% of the coverage amount.
Because of these limitations, boards would be ill-advised to forgo earthquake insurance and rely solely on owners purchasing earthquake loss assessment coverage.
ASSISTANCE: Associations needing legal assistance can contact us. To stay current with issues affecting community associations, subscribe to the Davis-Stirling Newsletter.