In October 2015, the Los Angeles City Council approved an ordinance mandating extensive modifications to pre-1977 concrete buildings and pre-1978 wood frame buildings in order to make them more resistant to earthquakes. In February, the Department of Buildings began to notify the owners of these buildings that they have one year to submit plans for either the required retrofit work, demolition of the building or evidence that the building does not require retrofitting. The ordinance also gives property owners two years to submit building permit applications and seven years to complete the work. Failure to comply with the new ordinances will be punishable as a misdemeanor.
This retrofitting aims to enhance safety, especially in residential buildings with soft first-floor exposure—those with windows, doors or other wide openings that are more vulnerable to collapse. However, there is a major issue with the ordinance that has not been addressed: funding. The ordinance does not indicate how property owners will pay for the work on approximately 1,400 concrete and 13,500 wood buildings that fall into the retrofit criteria.
This issue may sound familiar to Californians, as a similar ordinance passed in San Francisco in 2013 requiring seismic retrofits for certain buildings and also lacked funding provisions. The city has since added 100% financing of seismic retrofit projects over 20 to 30 years, repaid through property tax bills.
But without such provisions in Los Angeles thus far, the lack of funding within the new retrofit ordinance is a major issue for property owners, some of whom may not be able to afford to comply. The estimated cost of retrofitting for wood frame buildings is between $60,000 and $130,000, and the cost of retrofitting a concrete building could exceed $1 million.
In addition to the cost of physical modifications, the ordinance may require owners of wood frame buildings to pay relocation benefits to their tenants during the retrofitting work. Existing law in Los Angeles allows property owners to increase monthly rents by up to $75 to adjust for the cost of such modifications, but with retrofits costing as much as $60,000, it would take a 10-unit apartment building more than 10 years to recoup the cost of the modifications. The $75 per month rent increase would also have a disproportionate impact on lower income families inhabiting some of these buildings.
Good intentions drove the identification of the most vulnerable and potentially dangerous buildings, and the required retrofitting is prudent and reasonable, especially given the vulnerability of the region to earthquakes. The January 1994 Northridge earthquake, for example, destroyed about 200 soft-story apartment buildings, and 16 people were killed when the Northridge Meadows apartments partially collapsed, due in no small part to the tuck-under style parking beneath the second-floor apartments.
While these safety measures are designed with the public’s best interest in mind, they may also benefit property owners in the long term. Not only will owners have revamped structures that are better able to withstand an earthquake, but they may also see broader insurance benefits. Many insurers will not offer earthquake insurance on an older, less-resilient building that has not been retrofitted, and those that do are likely to charge more due to the increased loss exposure. Other lines of insurance may also see premium reductions, or increased eligibility for a retrofitted building. Premises liability premiums could be reduced after a retrofit that increases safety for tenants or visitors, for example, and workers compensation premiums may also take the retrofits into account.
Property owners who are unable or unwilling to have the seismic retrofit work done have the option of tearing down non-compliant buildings. Demolition projects carry with them some very specialized hazards, however, and it is critical for an insured to consult with knowledgeable insurance agents and underwriters to make sure any additional exposures are identified and handled in the manner best suited to the situation. Some considerations when demolishing a building include public safety around the site, environmental impairment liability, hazardous waste disposal, additional insureds, waiver of subrogation, subcontractors, and completed operations coverage (including additional insureds). Property owners who choose demolition and rebuilding over retrofitting work will have a strong need for insurance coverage, likely at multiple stages of the process.