Paying for Earthquake Insurance – How Much Per Unit?

Earthquake insurance is not cheap – that’s for sure. And some associations have dropped it because of
the cost. I happen to not be an advocate for dropping earthquake insurance. I do not buy into the – well if there is a big one everyone will be in the same boat – philosophy because I saw what happened in the Northridge situation, which was by accounts pretty devastating. The homeowners associations that
carried earthquake insurance for the most part recovered, getting small business loans to cover the deductibles, and rebuilt. But there were many associations that had dropped the insurance, whose homes were never rebuilt. I have written on the topic extensively and there are articles on my website at about things to consider if an association board is considering dropping the earthquake insurance.

But that aside, for those association boards that are working to preserve the  earthquake insurance protections for their members, how are the costs allocated?

Here is the question sent to me that triggered this blog:

“My condo association is looking to do a special assessment for earthquake insurance – dividing the
premium up evenly amongst homeowners. My thinking is that this is not a special assessment, rather an operating cost and the earthquake insurance should be included in the monthly association fees and calculated based on square footage. Is my assumption correct or is the board accurate in doing a special assessment evenly amongst all homeowners?”

An association can pay for earthquake insurance either through a regular assessment collected for
operating costs, or a special assessment. If the insurance costs are wrapped  the annual budget, the amounts would be collected as regular or monthly assessments. Some associations charge a special assessment to cover insurance premiums as they arise. The costs are hardly a fixed amount each year.
Earthquake premiums may be the most variable as they depend on many conditions. However, if a board does not budget some amount to cover the costs for earthquake premiums, it may find that when the bill comes in, the cost exceeds 5% of the budgeted gross expenses for the fiscal year, in which case the board
would need to get owner approval (a majority of a quorum under Civil Code Section 1366) in order to collect the assessment. If the board budgets an anticipated amount based on the prior year’s cost, then it’s less likely the Board will have to seek owner approval to pay for the insurance.

As to how much each owner should pay, the governing documents, usually the CC&Rs, dictate how
assessments (dues as some call them) are allocated. Sometimes the owners pay equally, sometimes the assessments are based on square footage, and sometimes they are based on ownership interest as set forth when the development originated. Sometimes owners pay equally for operating expenses and on a square
footage or other basis for expenses that are impacted by square footage, such as reconstruction, and insurance which provides for rebuilding. It can be real simple, or get real complicated, but there is no formula in the law – it’s in the documents.

Hope this helps!

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