Natural Disasters and Community Associations

Published on: September 2, 2001

The topic of earthquake and flood insurance was the subject of much debate at the 39th CAI National Conference held in Baltimore, Maryland, in October. The community association industry continues to wrestle with how best to deal with these issues. In California, earthquake insurance is very difficult to get, the deductibles have been increased dramatically and Freddie Mac (Federal Home Mortgage Corporation) has threatened to discontinue buying mortgages on condominium units in certain geographical areas of California which are, in their opinion, most prone to problems with earthquakes, unless certain stringent criteria is met. A group of Californians headed to Capitol Hill in Washington, D.C., during the conference to meet with their senators and congressmen about the earthquake crisis in California. In addition, legislation has been passed in California which would prohibit insurers from not offering earthquake insurance in selective portions of the state. Some commentators in California have even suggested a self-insurance pool to deal with the crisis.

No matter what the solution, one thing seems clear. There must be a mechanism in place to assure that insurance coverage is available at affordable costs for community associations. The fact that many community associations in California have chosen not to purchase earthquake insurance, either because of its unavailability or because of its cost, is extremely dangerous in the event of a loss. In essence, the loss would be uninsured.

In other parts of the country, community associations are struggling with the new flood insurance requirements which took effect on October 1, 1994. In essence, the new program requires associations which purchase insurance under the National Flood Insurance Program to purchase insurance at eighty percent of the replacement cost of the entire building or suffer a substantial co-insurance penalty. Until October 1, 1994, the maximum amount which one could even purchase under the National Flood Insurance Program was $250,000.

Although it is desirable to have flood insurance coverage if you are in a special flood zone, the problem which has arisen is that premiums have skyrocketed. Because of the increase in premiums, the number of community associations across the country which are purchasing the insurance under the federal program has actually decreased by 4,000 associations. This is obviously the direct opposite effect which Congress desired.

A major problem with the program is that the rates under the program do not take into consideration actual risk. For example, although the first couple of floors of a mid-rise or high-rise building may be at risk in the event of a flood, the risk dramatically decreases on higher floors. However, the rates do not appear to give any benefit to high-rise buildings versus other types of structures.

Another flaw with the program is that it does not include commercial buildings and apartments. In fact, apartments, hotels and other commercial buildings are only allowed to purchase up to $500,000 of coverage under the program. The problem which arises is that the risk and thus the premiums under the program are shifted towards community associations versus being shared by all multi-family dwellings in flood zones. The worst case example which I have heard of to date relates to a high-rise condominium with parking on the first level. Pre-October 1, 1994, the flood insurance premium was $7,500. Post 1994, the premium escalated to over $250,000. The result, unfortunately, is that the association chose not to purchase the insurance under the federal program. Fortunately, the association was one of the few which were lucky enough to be able to find another market for the insurance and were actually able to purchase adequate insurance at a premium of $16,000.

In response to these issues, legislation has been submitted on a federal level to deal with natural disasters. However, the proposed legislation has some critics who feel that it will not be of use to community associations since it contemplates one to four family dwellings. In addition, CAI is attempting to work with U. S. Senator John Kerry to alleviate the problems faced by community associations. This seems fitting since the new regulations came out of an Act which was co-sponsored by Senator Kerry. In addition, Republican Senator Alfonse D’Amato of New York co-sponsored the Act and attempts will be made to discuss the ramifications which the program has had upon community associations.

It is assumed that other interest groups will also work towards a solutions to this problem. It is unknown at this point in time as to what effects these efforts will have, but it is clear that any program which discourages community associations from having needed coverage will be devastating and therefore it is clear that a solution must be formulated.