With the recent rolling and rumbling in Southern California, the topic of earthquake insurance has heated up. What is covered? What happens if there is an earthquake? Why is the beach now in Barstow? While we can’t help with understanding the finer points of a shifting earth, we can share some info on how earthquake insurance works.

Keep in mind that insurance in general is a transfer of risk from one party to another. A property owner is exposed to the cost to repair property, and they can reduce that exposure by giving it to someone else. We buy insurance and transfer exposure to the insurance company. Let’s imagine a condominium association with 10 buildings, 100 units, that would cost $20 million to rebuild if it were totally destroyed.

If an earthquake causes damage to the HOA, each owner will pay their share of the cost to make repairs. Without earthquake insurance, the maximum assessment to each owner is $200,000 ($20 million ÷ 100 units). A member can buy insurance for this earthquake loss assessment, but the maximum limit available is $100,000 and the cost can be prohibitive.

This HOA can chose to buy insurance to reduce the maximum earthquake loss assessment each member is exposed to. Insurance carriers write a limit of insurance and apply deductibles to the replacement cost of each building. For example, assume our HOA purchased an earthquake insurance policy with a 10% deductible, per building.

Each building will cost $2 million to rebuild ($20 million ÷ 10). With a 10% deductible, the deductible in the event of an earthquake is $200,000 per building ($2 million x 10%). If one building is damaged, each member is exposed to an assessment of $2,000 ($200,000 ÷ 100). If two buildings are damaged, the exposure is $4,000 per member. And, if all buildings are damaged, the maximum exposure is $20,000.

The Association has reduced each member’s exposure to assessment from $200,000 to $20,000, and each member can easily purchase insurance to cover this assessment.

Limits and deductibles can be varied to meet the financial needs of a community. Higher deductibles and lower limits bring cost down to something feasible. By and large, the cost of insurance in today’s market works out to about $25 per unit, per month when the HOA makes the purchase. Because of scale economies, smaller communities will pay a little more than larger properties, per door. But the reality is, earthquake insurance is affordable when you consider how much the risk of loss is being reduced, per member.

Our guest author this month is Michael Berg, MBA, CIRMS, CMCA! Michael is the CEO and President of Berg Insurance Agency and can be reached at Michael@berginsurance.com.

Have an insurance question? Ask Terri (terri@berginsurance.com) and your question may be the subject of next month’s edition of Coverage Corner! If your question is picked, you will win a gift