Homeowner Associations
Associations are not obligated to buy earthquake insurance unless required by their governing documents. 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. On the other hand, boards 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 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 by 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.
Board Authority to Purchase. Even though earthquake insurance is normally discretionary, boards can purchase and renew it 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 can discontinue earthquake insurance. Before doing so, boards should seek membership input. If 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.
Homeowners
In addition to any insurance purchased by the association, owners can buy a residential policy through the California Earthquake Authority. Homeowners can calculate the cost of a CEA policy with their "Premium Calculator."
What it Covers. The California Earthquake Authority (CEA) offers basic coverage to owners of condominiums. Coverage can be purchased through a homeowner's insurance agent and can be bought 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
What is Not Covered. While California Earthquake Authority Insurance is important for all owners to carry, there are risks if the association does not carry earthquake insurance and instead relies entirely on the CEA’s loss assessment coverage.
- CEA loss assessment will only pay for damage to residential structures. It does not cover 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 community association issues, subscribe to the Davis-Stirling Newsletter.