Trouble Understanding Insurance?
Michael Berg, CMCA, CIRMS Berg Insurance Agency
Earthquake insurance can be a difficult concept to understand. Mainly that’s because most people don’t think about it every day, and there is math involved. And now that there are a number of earthquake insurance options for a board of directors and individual property owners to consider, many minds are trembling before the ground moves.
Let’s take a quick insurance 101 course. If you own a piece of property, there is a financial risk involved in caring for that property. Insurance is the transfer of that financial risk in exchange for a premium. If the risk cannot be transferred, a property owner should work to maintain or avoid the risk. If that isn’t possible, the risk must be accepted. If there is an opportunity to transfer the risk, and that opportunity is less expensive than accepting the risk, buy insurance and transfer the risk to some other entity.
Earthquake damage can be extensive and expensive. A single-family homeowner can buy an earthquake insurance policy through the California Earthquake Authority (CEA). If the home is damaged by an earthquake, the CEA will provide funds to repair the home, repair interior fixtures, replace personal property, and pay additional living expenses (e.g., rental of an apartment or other residence while the home is rebuilt). The CEA is a “scheduled” policy, meaning each coverage category has its own limit and deductible. Property insurers in California are required to provide their insureds with an offer from the CEA upon initial purchase, and once every other year as long as the policy is in force. The purchase is made through the agent or broker providing the homeowner’s insurance on the property.
10 January | February 2022
Now, the CEA isn’t the only game in town. There are other carriers in the market. Some homeowners insurance carriers don’t partner with the CEA, so those carriers must provide their own earthquake insurance option. Other carriers have earthquake specific policies. These policies are often “blanket” policies, meaning a single limit of insurance is provided for all categories combined. Sounds attractive, but be careful, because with a single limit comes a single deductible. Earthquake insurance policy deductibles are a percentage of the coverage limit. So, if you have a $500,000 insurance limit, and a 10% deductible, you must sustain $50,000 of earthquake damage before the insurance will be triggered.
Owning and insuring property in a single-family home is fairly straightforward, but what if the property is in a condominium project? As a member of the community, the owner doesn’t actually own the structure of the building in which the unit is located. The owner actually owns a fractional interest in all common property. So, for protection against the cost associated with damage to the residential buildings, the owner needs to rely on a few options.
OPTION 1
The CEA The CEA (or similar carrier) makes available earthquake loss assessment insurance to owners in developments where the association purchases insurance for residential structures. This is insurance for the assessment the association delivers to the membership for the cost to repair community property. The maximum limit of insurance
Earthquake Let’s Shake That Out of You
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