California’s growing dependence on vulnerable multi-family residential structures, combined with a drop in insurance coverage, will amplify the economic damage of the next major earthquake
California is far more vulnerable to a major earthquake than it was in 1994 – the last time a significant earthquake struck a populated area in the state. The state’s growing dependence on multi-family structures to meet its housing needs is a major driver of that vulnerability. This growth in multi-family structures combined with a drop in insurance coverage protecting those structures puts California at risk of significant economic damage when the “big one” strikes.
The 1994 Northridge Earthquake, which measured 6.7 (in the “moderate” range) caused approximately $20 billion of the damage to residential structures, with damage heavily concentrated among multifamily units including condos, townhomes and apartments.
While multifamily structures represented 22% of the California housing stock in 1994, they accounted for 84% of damaged units and 72% of “red-tagged” units.
Since 1994, multifamily residential units in California have grown from 2.6 million to approximately 5.4 million units today – more than doubling the most vulnerable segment of the State’s residential housing stock.
In 1994, insurance played a key part in recovery from the earthquake. Out of the $20 billion damage to residential structures, insurance paid out $12 billion. At that time, 25-35% of condo associations had a master earthquake insurance policy in force. Furthermore, 35% of individual condo owners had an individual earthquake insurance policy. This allowed insurance to play a major role in recovery, and helped prevent a major natural disaster from triggering a major economic one.
Today, however, less than 10% of condo associations have a master earthquake insurance policy and less than 5% condo owners buy an individual policy – and individual policies available cannot provide condo owners with full coverage. So while the state has seen rapid grown in vulnerable multifamily residential structures, a much smaller fraction of those structures have insurance.
“Insurance and a strong economy are critical to resiliency after a catastrophe,” said Dan Wallis, CEO and Founder of Motus Insurance. “We have just seen the crippling economic effects from the coronavirus catastrophe when there was no insurance backstop. At this moment, California has never been more vulnerable to economic ruin. California’s chronic housing shortage has forced a dramatic increase in the development of condos over the past 30 years. We know from the ‘89 and ‘94 that condos are the most vulnerable to earthquake damage – and unlike in 1994, less than 5% of condo owners have earthquake insurance.”
And a major earthquake striking California is long overdue: Dr. Lucy Jones, aka “The Earthquake Lady”, has stated that California needs to be ready for an earthquake in the 7.0 – 7.8 range, which is a multiple of the magnitude of Northridge. With multifamily fairly evenly split between apartments and condos, this would mean a loss of ~$45 billion to condos alone. Since only ~5% of condos have insurance, and the insurance available to condo owners can’t provide full coverage, this entire $45 billion exposure is effectively uninsured.
Motus Insurance has developed a solution that allows condo owners to purchase the quality coverage they need to protect their homes: the Motus Opt-In Master Earthquake Program.
Before Motus, approximately 2.5 million condominium owners in California did not have access to adequate earthquake insurance because their condo associations have failed to purchase a master earthquake policy. Only a master policy can fully cover damages to residential buildings, foundations, garages, underground pipes and other common areas – but less than 10% of California associations have a master policy due to budget considerations.
The Motus Program allows boards to get all the benefits of a traditional master policy without straining the association budget. When the California Department of Insurance approved the Motus Program, the barriers between insurance carriers and condo owners were finally removed – allowing condo owners to access the coverage they need.
“Today, as the world copes with COVID-19, the impact of a catastrophe where there is no insurance becomes very clear: severe economic damage, resulting in what is likely to be a long road to recovery,” said Wallis. “Insurance is a critical element of any disaster preparedness plan, both for individuals and for the economy as a whole, and proper coverage is something condominium boards and unit owners should carefully consider.”
For more information, call Motus today at (833) MOTUS-IN / (833) 668-8746, or visit us at www.motusins.com.