Property & Casualty

Earthquake: Lessons Learned from our Webinar

Recently, Newfront’s Jonathan Naranjo moderated a webinar of earthquake industry experts including, Daniel Wallis, President and CEO of Motus, Nathan McGuire, Managing Partner at Adams Stirling, and Dr. Lucy Jones, Seismologist and Founder of Dr. Lucy Jones Center for Science and Society. The following is a high-level recap of their conversation.

No one can deny that earthquakes present a significant threat to our property and pocketbooks. The Northridge quake, of 1994, resulted in the loss of 49,000 housing units and caused economic damages in excess of $44 billion. Construction codes and legislation have resulted in creating stronger buildings however there are still many considerations that must be accounted for in an earthquake prone environment. Ultimately the goal is to create safer conditions and improve our economic response, so we have the ability and resiliency to come back.

There are certain types of buildings that are more susceptible to loss due to their construction materials. Of particular interest are the soft first story type of buildings, built prior to 1980, where there are carports, garages or glass on the ground level. Most of these have been the focus of mandatory retrofitting by certain cities as they are fairly easy to retrofit. Non-ductile concrete commercial buildings, from the 1950’s and 1960’s, which are particularly hard to retrofit, present a greater chance of a loss of life due to the weight of the concrete falling during an earthquake. Another consideration are pre-1994 steel frame of which many high rises are built on as there are weaknesses in the welds and they are difficult to retrofit.

All buildings constructed post 1994 must have a 90% of probability of not collapsing in our worst earthquake. Christchurch, New Zealand had similar building codes in place and none of the modern buildings collapsed however 1,800 had to be torn down because they were a complete financial loss. New Zealand was able to quickly resume business operations as there was a huge influx of money due to the fact that 95% of the buildings were insured. The lesson learned is when you delay recovery it leads to greater loss.

Focusing in on condominiums, all owners in a building, regardless of the size, are equally liable for the common area, after an earthquake event, even if their unit is not affected. Legally it is important to look at governing documents including Covenants, Conditions and Restrictions (CCR’s), rules, and internal documents as they are not all are the same. Insurance requirements and rebuild requirements are not boilerplate and can vary greatly from community to community. Owners have to question what happens in the event of an earthquake. Does the association have reserves or can money be borrowed from a bank?

If an association does not have insurance, it could result in massive special assessments or borrowing which ultimately the condominium owner will be responsible for. Lenders will be concerned if there is a greater than 10% delinquency rate that are 60 days or more past due. Additionally, as a rule of thumb, they will be disinclined to allow the association to borrow money if the owner/tenant occupancy is less than 50%. It is recommended that associations educate themselves on the financial impact and obtain as much loss assessment coverage as possible. Underinsurance equates to a large special assessments.

Master earthquake policies tend to leave associations 75% exposed; compound that with the fact that rates have more than doubled, especially in Northern California, many communities are starting to cancel their earthquake policies. As of now, there is no indication that rates are going to decrease due to the catastrophic claims, including wildfires, reinsurance companies have been experiencing. In turn, this is causing carriers to leave the market. California used to have about 15 carriers that offered coverage to HOA’s, now it is down to five. When a carrier exits the market, and as a result of less competition, it creates rate. Another factor that has contributed the rate increase are changes to the modeling which indicates a higher likelihood of claim severity. The marketed has shifted where typically 1-2% of insurance premiums are with surplus lines carriers, now we are seeing 10% of the market with excess.

A better solution for condominium owners is an opt in program offered by Motus where each unit owner can decide on their own if they want to participate. The program allows owners to access commercial rates and get commercial coverage on their own, with special assessment coverage at a higher coverage amount that what is currently offered on the market through other carriers. Newfront is pleased to partner with Motus and can help craft a policy solution that is right for your real estate needs.

The information provided here is of a general nature only and is not intended to provide advice. For more detail about how this information may be treated, see our General Terms of Use.