28 June 2011
EARTHQUAKE INSURANCE, A NO-BRAINER FOR ME.
I'll be darned if I can understand what the big controversy is
over our building earthquake insurance. This is not an emotional issue, this is
a dollars and common sense issue and a distant cousin to how risk averse you
are. It's like life insurance; you don’t need it if you have a lot of money in
the bank and don’t need to depend on it for the financial security of your family.
With earthquake insurance, it's almost just a simple. If you're a
homeowner and standing in the earthquake wreckage of the 535/555 building, you
need to ask yourself the simple question; Do I need financial help to go on with
my life or am I content to just walk away from my destroyed condo without any
financial help from the insurance company? The rule of thumb used by financial
planners is you should put at risk no more than 10% of your liquid assets. Let's
say your condo is worth $600,000. If you have $6 million in the bank, you can
survive the loss of $600,000 and go on with your life. No need in this case to
waste money on earthquake insurance. However, if you're like me and have a
little less than $6 million in the bank, having earthquake insurance to protect
my investment in my home is an important part of my financial security.
The subject of earthquake insurance recently got a little muddled with the release
of a report from the Homeowners Financial Committee. The report stressed the
risks in buying earthquake insurance but failed to present the advantages of
having it. The HFC charter is to look at ways to save our HOA money, which is
good. Our yearly premium for earthquake insurance will be almost $26,000. A big
and tempting number that the HFC wants to cut. However, it's not the earthquake
insurance premiums that have been driving the increase in our HOA budget. The
premiums have basically remained constant while our coverage has actually been
increased in recent years. Yet it remains the third biggest item in our budget,
but does that mean that it is unnecessary?
There are pros and cons associated with buying earthquakeinsurance. But to me,
the cons are all in the noise level when compared to thefinancial devastation that
would happen to me, and perhaps some of our other homeowners, if I lost my home
and did not receive any insurance funding to help me reacquire a roof over my head.
The one thing I can be absolutely positive about is that if my condominium is destroyed by an
earthquake and we don't have building earthquake insurance, I won't receive a nickel and
I will have a 100% loss. I can also guarantee that our building will not be repaired or rebuilt
and that I will be moving into an apartment somewhere inland.
I would rather take my chances that I will
receive an insurance payout of up to $242K (tier 2) as opposed to being
absolutely certain that I will receive nothing. Having this coverage costs me
$36 a month. To me, this qualifies as a clear “no-brainer”. If I then add in my
homeowner’s condominium insurance (CEA), I get another $223,000
worth of coverage for a total of $464,000in protection against
earthquake damage/loss. The total cost for this protection is $107
a month. Seems like a good deal to me.
So what are the arguments against buying earthquake insurance?
Maybe we don't need to be all that concerned about an earthquake occurring in
Redondo Beach and our building falling down. Is this a real threat? Well let's
see. We are in an earthquake zone that includes; the Redondo Canyon, the Palos
Verdes Fault, the Newport-Inglewood Fault, and the Compton Thrust. And we
shouldn't leave out the ever-popular San Andreas Fault. The last local rumble in
the area was a couple weeks ago in Hermosa Beach, a 3.7. The last big one of
course, was the Northridge quake. It was a 6.7 and cost $40 billion in property
damage. The US Geological Survey thinks we should be worried. There is a 99.7%
probability that we will have another 6.7 earthquake in California sometime
within the next 30 years. There is a 67% probability that we will have a 6.7 in
Los Angeles within the next 17 years. Okay, now I'm worried.
But, what if our new earthquake insurance company ( QBE )
defaults and doesn't pay us because if they are overburdened with bills and they
run out of money? Or maybe, some of our homeowners decide to walk away and/or
are unable to pay their deductible leaving the rest of us to make up their
shortfall. How will we be able to meet our deductible?
I don't worry about QBE defaulting. Not going to happen. QBE is
one of the top 25 insurance companies in the world. They are Australia's largest
international insurance and reinsurance group and have been in business for 120
years. They operate in 49 countries, have 13,000 employees worldwide and are
rated “Excellent” by A.M. Best, the company whose job it is to investigate and
rate the financial viability of insurance companies. QBE is licensed by the
State of California Department of Insurance. In addition, they are insured
themselves, and should they have trouble making payments, their insurance
company would step in and make whatever payments they owe. That's about as good
as you can get. Is it guaranteed or risk-free? No, but then nothing in life is
risk-free, just ask Weiner who thought his e-mails were private.
It is the nature of earthquake insurance companies that they do
not provide any funds until all the deductible costs are paid up front. Our
deductible is $3.6 million (on a $14.5 million policy) which means I would have
to come up with $60,000 as my share of the deductible as a tier 2 owner. What
if I don't have $60,000 lying around to throw into the pot? What do I do? Since
I do have Homeowner’s Earthquake Insurance (CEA) and have loss deductible
coverage, my insurance company will pay the $60,000. Additionally, if our area
is declared a disaster area, FEMA grants would be available. They only average
$15,000 but can go up to $31,000 and would not have to be repaid. SBA loans
would also be available. They go to a maximum of $200,000 with an interest rate
of 4% if your condominium is your primary residence.
What if one or more of our homeowners decide to walk away and not
pay their deductible what happens? Nothing good for them. If they have a
mortgage, then the mortgage company would take over the property and be
responsible for making their deductible payment. The homeowner, of course,
would still be responsible for making his/her mortgage payments to the mortgage
company. If the homeowner defaults then their credit rating goes in the toilet
and they are in a world of hurt. If there is no mortgage, then the HOA would
assume ownership of the property and once the building is rebuilt, the
condominium would be sold with the HOA receiving the income.
If 5% (3) of our homeowners walk away, the HOA would be on the
hook for an additional $180,000 deductibles. For me, that would mean I would
have to put up an additional $3500. Since I'm covered by my insurance company,
the additional $3500 would also be provided by them. If you didn't have this
coverage and were hobbling together your deductible by a combination of FEMA
grants and SBA loans, and additional $3500 would be a very small percentage of
what you already owe. I can't see this as a deal breaker since it can be folded
into whatever funding arrangements you are making.
One more thing about earthquake insurance should be pointed out,
it does not cover everything. In my case, if my condo is worth $600,000 and I'm
only getting $464,000 in coverage, I know I'm probably going to have to add
additional monies to restore it to its current magnificence. The question I need
asked myself is; would I prefer to start from $464,000 or from $0? I think I
prefer the larger number.
I am unimpressed with the fact that there are only a few HOA's
along the Esplanade that have earthquake insurance coverage. I know that 50% of
the HOA's in California have earthquake insurance. I like to think that our
Board is a little bit more progressive and a little bit smarter than the average
Esplanade HOA Board.
In the end, the choice of whether we have building earthquake
insurance or not comes down to what is best for the majority of our homeowners.
This is what our Board must decide. One of the most basic tenants of our
democracy is that we get to elect our representatives, and we have done that.
We have a Board of 5 dedicated and responsible homeowners. Now let them do their job.