By: Johanna R. Deleissegues, Esq. (Originally Published in Fall 2006)

Earthquakes can cause more than property damage; they can also cause financial disasters.  After a damaging earthquake, the board will need to call an emergency meeting pursuant to Civil Code section 1363.05(h) and address membership needs and insurance issues, such as paying the insurance deductible for common area repairs. 

The purpose of this article is to discuss how an association can pay the insurance deductible when an earthquake hits.

  • Insurance.  Call the association’s insurance agent immediately.  The agent will need to inspect, evaluate the damage and inform the association of the amount of the deductible.  In all likelihood, 30-60 days will pass before insurance payments will arrive.  Use this time to decide how to pay the deductible. 
  • Check Reserves.  After an earthquake occurs, it is appropriate to use the contingency reserves or insurance deductible reserves for the earthquake insurance deductible.

>  According to Civil Code section 1365.5(c)(1), the board can use reserve funds to “repair, restor[e], replace[]… major components which the association is obligated to repair, restore, replace… and for which the reserve fund was established.”  For example, use the funds reserved for streets to repair the streets after an earthquake.  

>  If the earthquake insurance carrier requires full funding of the deductible, then the association’s reserves must include a line item for the deductible.

  • Quick Money.  Associations can apply for a loan or a line of credit to pay the insurance deductible. 

>  As collateral, the bank may appropriately take an assignment of any assessments connected with repaying the loan plus the association’s lien and assessment rights.

>  Look elsewhere if the bank seeks personal guarantees or trust deeds against individual members.  Personal guarantees from members are not appropriate to guarantee funds for common area repairs.

>  Consider establishing an open line of credit, prior to an emergency.  The pros and cons are:

         Pro: If an emergency does occur, then the funds are available at an interest rate established when there is decreased demand.  

        Con: The potential for abuse.  If the association does apply for a credit line, then seek fidelity insurance to protect it from abuse.

  • Emergency Assessment? 

> An earthquake is clearly an emergency that the Board could not reasonably foresee when it prepared the previous year’s pro forma operating budget. 

>  If a board passes an emergency assessment, it will also need to prepare a written resolution documenting the need for the expense and why the expense could not be foreseen when the budget was adopted.

>  Members must receive a copy of the resolution and emergency assessment notice.

  • Condemnation/Partition.  If there is massive destruction, it may be appropriate to consider the options of condemnation and partition.  Typically, CC&Rs address this and require timely notice to eligible holders.
  • Research Public Assistance.  Check for available emergency assistance from programs such as the Federal Emergency Management Agency (FEMA) <www.fema.gov> and the Governor’s Office of Emergency Services <www.oes.ca.gov>. 
  • Remind Homeowner’s of Their Options. 

>  It benefits the association to frequently remind members that they are responsible for separate interest property and emergency assessments if an earthquake occurs.

>  Before an earthquake occurs, remind homeowners in newsletters or mailings that (1) they are responsible to insure their separate interest property and (2) insurance is available for special assessments. 

Each disaster will require a different response.  However, this outline applies to all insured disasters, and can aid members, managers and the board consider how to pay the association’s insurance deductible when a disaster occurs.