Getting Shaken Up-The State of Earthquake Insurance in California

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The news in early 2010 has been abuzz with the reports of two major earthquakes. The first was a Richter magnitude 7.0 earthquake that occurred in Haiti on January 12 and the second, a magnitude 8.8 earthquake that occurred in Chile in the early morning hours of February 27.

The Chilean earthquake was 550 times more powerful than the Haiti earthquake, yet there was more property damage to buildings from the Haiti earthquake, not to mention so much more human loss. The Haitian earthquake was a shallower earthquake, 8.1 miles deep as opposed to about 21.7 miles for the Chilean earthquake. Haiti’s quake was only 13.7 miles from its Port Au Prince capital, compared to the Chile earthquake, which was 200 miles from its Santiago capital. Perhaps the biggest factor though in explaining the difference in resulting devastation is that Chile’s building codes are much stricter than Haiti’s. Chile has a long history of earthquakes including the world’s largest recorded earthquake of 9.5, which occurred in 1960, so Chile knows all about earthquakes and how to prepare for them.

Worldwide, there are nearly two earthquakes each day that are strong enough to cause property damage, death and injury. Fortunately, most of these earthquakes occur in unpopulated areas.

On April 18, 2008, these words from the U.S.G.S. newsroom rattled more than a few nerves closer to home:

California has more than a 99% chance of having a magnitude 6.7 or larger earthquake within the next 30 years, according to scientists using a new model to determine the probability of big quakes.

The likelihood of a major quake of magnitude 7.5 or greater in the next 30 years is 46%-and such a quake is most likely to occur in the southern half of the state.

That alone was enough to jolt many owners into checking for earthquake insurance rates.

But the companies that rate insurance companies, notably A.M. Best, Inc., have become much more stringent and conservative in their rating methods, following the 2008 financial meltdown. In order to avoid having their financial ratings downgraded, insurance companies offering catastrophe coverage are now under more pressure to either purchase more reinsurance to bolster protection for their existing portfolios, or restrict the amount of coverage they can offer. Some carriers have even withdrawn from the market.

The trend in earthquake coverage in California is toward ever increasing prices and less availability. For example, in 2008, the pure premium for a policy I placed for two six-unit apartment buildings was $5,050. In 2009, for the same coverage, the premium jumped to $7,460, a 47% increase. Prices in 2010 are higher, not lower. The volatility of commercial earthquake insurance quotes is such that quoted rates are only offered for five days.

There are several factors that affect earthquake insurance rates:

Insured Value-The price of insurance is directly proportional to the amount of coverage purchased.

Year Built-Due to stronger earthquake codes in more recent years, carriers charge less for newer buildings than buildings constructed prior to 1976.

Location-There are several major territorial earthquake zones that insurance companies use to determine their starting rates. Properties that are located close to a major fault are charged higher premiums than those areas located further from seismic zones. Geological characteristics are also taken into consideration, such as whether the location has a high water table is built on loose soil, or is built on bedrock.

Construction Type-While concrete and brick buildings are saints in a hurricane, they are much more expensive to insure against earthquake. Frame buildings generally cost less to insure and replace than their less flexible counterparts.

Height-The taller a building stands, the higher the rate will be. There is more stress created on taller structures.

Parking-If a building has tuck-under parking, it will be difficult or costly to obtain earthquake coverage. Tuck-under parking is reputed to have caused the Northridge Meadows apartments to collapse during the 1994 Northridge earthquake. Subterranean parking may also increase cost or restrict the ability to purchase coverage. If there is soft first floor parking, where there is a substantial open area in the perimeter walls, this is also viewed as an additional hazard by carriers.

Purchasing too little coverage can result in your policy becoming revalued from replacement cost to “actual cash value,” following a claim. This means that depreciation would be deducted away from your claim. But on the other side, overinsuring is not only expensive, but packs a second punch of significantly increasing the deductible that you pay. Unlike fire insurance which has set deductible amounts, an earthquake insurance policy uses a percentage of the policy amount as a deductible. Buy the lowest deductible you can.

If you have an older building and can provide proof of retrofitting to current building codes, you may be able to save money on premiums and more importantly, qualify for coverage in an ever tightening marketplace.

It is important to consider business income coverage if the carrier offers it. A building that has been condemned by the authorities following a major earthquake is not producing any income but still produces lots of expenses!

Building ordinance coverage is also very important. With ordinance coverage, you avoid arguments with the carrier if your building is only partially damaged but you become obligated to demolish the remaining structure. This coverage also assures that you will be adequately reimbursed for the cost of replacement upgrades that meet current codes.

If you are inclined toward purchasing earthquake coverage, now is the time to act. Waiting will not only cost you more — it may even prevent you from finding available coverage.

About the author
Eric Paulos is a Certified Insurance Counselor, apartment owner advocate, licensed California insurance agent, author and speaker. Eric Paulos Insurance Services caters exclusively to the apartment owner community, offering insurance and risk management services. Contact phone: 800-974-6787 Fax: 800-959-9603, Email: eric@apartmentins.com. Visit www.apartmentins.com for 24 hour a day, 7 day a week online quotes. Download free money-saving articles and reports. Apartment Management readers are also invited to log on for a free subscription to Eric Paulos Insurance Services’ monthly apartment insurance tips & bulletins.

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