Barriers Removed

As a graduate of Brown University, the celebrated Ivy League heavyweight with the same cachet as its Ivy League neighbor to the north (Harvard), Daniel Wallis did not take the same route as some of Brown’s most notable alum: Janet Yellen, former Chair of the Federal Reserve; Bryan Moynihan, CEO of Bank of America; Bobby Jindal, former Louisiana Governor; John F. Kennedy Jr. and – one of our favorites – Jacob Appel, the charismatic bioethicist, physician, lawyer and poet.

Instead, the deep-thinking Wallis has rewritten the book on – get this – earthquake insurance for condo Home Owners Associations. Through Wallis’ theoretical research, he analyzed earthquake coverage for condos associations, townhomes, co-ops, homeowner’s associations and multifamily facilities. He discovered flaws: the over-regulation of the policies was the catalyst in what would become Wallis’ creation of Motus, an innovative and forward-thinking model that is changing the California earthquake insurance landscape.

Wallis’ findings showed that multi-family structures are the most vulnerable to earthquake damage and since California grew dependent over the last 25 years on multi-family structures to meet housing needs, it left itself wide open to an economic nightmare.

For instance, the 1994 Northridge, California earthquake measured 6.7 — a “moderate” range – and caused $20 billion of damage to residential structures which was concentrated among multifamily units including condos, townhomes and apartments. Multi-family units represented 22% of California’s housing stock in 1994, yet – and this is the most staggering data of all — they accounted for 84% of damaged units and 72% of “red-tagged” units. To top that off, multifamily residential units in California have doubled from 2.6 million to 5.4 million units since the 1994 quake.

“Insurance,” Wallis says, “played a key part in recovery from the Northridge quake. Out of the $20 billion, insurance paid out $12 billion. At that time, 25-35% of condo associations had a master earthquake insurance policy in force and 35% of condo owners had individual earthquake policy. Insurance played 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 the individual policies available cannot provide condo owners with full coverage. So, if an earthquake does strike — and the HOA board doesn’t have a master policy — “the board will likely get sued,” Wallis says.

Imagine an earthquake coming in at a 7.0 – 7.8 range – which is 30 times more energy than the Northridge eruption. The top seismologist, in the most recent USGS survey, claim that there is a 45% chance of such an event occurring in the next 20 years, causing up to $200 billion in damage. With multifamily evenly split between apartments and condos, that 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, “the $45 billion exposure is effectively uninsured,” Wallis says.

When Wallis realized in 2010 that condo boards were not buying earthquake insurance, he decided that through an adjustment in regulations, the creation of a master earthquake insurance policy would solve the loophole. That’s when he created Motus’ Opt-In Master Earthquake Program, enabling HOA’s and individuals to access “commercial rates” for earthquake insurance … for the first time for California.

It took a year for Wallis’ never-before-seen alternative to receive approval from the California Department of Insurance. Before Motus, 2.5 million condominium owners in California did not have access to adequate earthquake insurance because their associations failed to purchase a master earthquake policy. Only a master policy, Wallis says, 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 — because of budget considerations.

With 30,000 California HOAs — and over 2.5 million condo owners — not covered by a master plan, Motus’ program altered the landscape. “The barriers between insurance carriers, HOAs and condo owners were finally removed.”

“We’ve made the process simple for board members,” Wallis adds. “Instead of forcing people to buy earthquake insurance, the board only needs to enroll and then the unit owner can decide if they want to buy their share of a master policy and all of the billing is done through the carrier. This protects hard-working individuals who have invested in these properties with their livelihood – and it protects the boards from legal exposure.”

Unfortunately, some boards might ultimately decide against pursuing one, despite the currently precarious economic climate which will make losses hurt even more financially. “Insurance and a strong economy are critical to resiliency after a catastrophe like an earthquake,” Wallis says. “We have just seen the crippling economic effects from the coronavirus tragedy when there was no insurance backstop. At this moment in time, California has never been more vulnerable to economic ruin.”