I do flood adjusting during catastrophic storms.

It is unlikely to see catastrophic damage except in an extremely major earthquake, and since we plan to sell it within the next 5-6 years, we have opted not to retrofit it. 

I believe it tends to give me a slightly lower return, because the sponsor is going to be more careful, and if there is a severe downturn will prevent me from taking catastrophic losses.

You might want to just start by compiling what kind of terms you are imagining in case of every possible catastrophe you can think of (death, debt, theft, lawsuit from within, lawsuit from without, members wanting to sell off their interest, etc) which may weed some out to begin with and then approach a lawyer who may have other things to offer that you should consider as well as what type of formalization you should have.

I have catastrophic insurance ($10k deductible) so although I might be able to file a claim, it likely wouldn't be worth dealing with the insurance company.Any thoughts on whether I should replace it this year or wait until problems occur? 

Real Estate investing is a full time sport with the potential for catastrophic financial risk.

Also, if it is vacant and something catastrophic happens like a pipe freezing, it will be noticed and communicated quickly. 

I would get a STR policy and add an umbrella policy to cover any kind of catastrophic event.

If you properly screen, you won't have the catastrophe and usually the deposit, or very little of it comes in to play. 

While something catastrophic could happen, it’s unlikely and I think HO insurance is enough and maybe add an umbrella policy if you’ve got a lot of equity or a couple properties in the entity.