HOA Insurance Deductible Tug of War

Written by Posted On Tuesday, 19 April 2005 17:00

For years, there have been efforts by some insurance companies to shift exposures between condominium master policies and unit owners policies. This tug of war has intensified in recent years, as the master policy insurance market has hardened (harder to get and more expensive). Master policies provide coverage for common property and, often, unit fixtures.

Premiums for master policies have skyrocketed in recent years. In response, condominium associations have accepted substantially higher deductibles like $5,000 to $10,000. The cost of these deductibles is frequently passed on to the unit owners, but the manner in which they are passed along, varies greatly from HOA to HOA. Given these variations, there are unresolved questions as to how a unit owners policy should respond to losses arising from master policy deductibles.

Historically, condominium master policies were written as "bare walls" coverage. Under a bare walls master policy, the HOA insures only the building structure, common area fixtures, and personal property; unit owners are on their own to insure unit fixtures and their personal property.

Over time, bare walls master policies were replaced by "single entity" coverage that covers virtually all building property including fixtures in individually owned units. Those single entity master policies evolved from providing "original specs" coverage, which insured only the original fixtures in units, to "all-in" coverage that insures all permanent fixtures, including those added or substituted by residents.

Under the standard language of unit owners policies, building property coverage becomes secondary to other insurance covering the insured property, such as an HOA's master policy providing single entity coverage. In today's hard insurance market, insurers of master policies have instituted higher deductibles to eliminate small claims.

Insurance companies differ in how they respond to claims under unit owners coverage, arising from these higher master policy deductibles. Standard unit owners forms provide a supplemental coverage for loss assessments by condominium associations, but this coverage applies only to assessments for losses to common property. Some companies take the position that the coverage provided in a unit owners policy applies to any amount not recovered from other insurance for eligible property.

To illustrate, suppose that a unit suffers a $15,000 loss to an individually owned building property, that is insured by a master policy with a $2 million limit and a $5,000 deductible. Also, suppose that the owner-occupant of the damaged unit has a standard unit owners policy with a $25,000 building property limit and a $250 deductible.

Some owners insurance carriers would pay the amount assessed against the homeowner, up to $4,750, the amount above the unit owners policy deductible and below the master policy deductible. Under this line of reasoning, the additional $10,000 loss would be recovered from the master policy ($15,000 loss minus the $5,000 deductible).

Other companies take a different approach, the coverage provided by a unit owner's policy only provides coverage above the terms, conditions, and limits of the master policy. These companies object when an HOA selects a higher deductible and shuffles the added exposure to the unit owners.

Because the master policy insurance deductible issue can have significant financial impact on both the homeowner association and members, there have been a number of significant policy changes in recent years, the board is encouraged to review this issue with the HOA's insurance agent to determine a strategy which will clearly define the member insurance obligations, as they relate to the HOA's insurance. Those strategies might include:

  • Maintenance and Insurance Areas of Responsibility -- Breaks down responsibilities by specific components.

  • Owner Insurance Fact Sheet -- Provides owners with details of their insurance obligations.

  • Insurance Guidelines -- Advises how insurance deductibles will be allocated, how claims are filed/processed and insurance obligations.

  • Right to Inspect/Repair High Risk Components -- Grants the homeowner association the authority to inspect, repair, or replace high risk components (like leaking windows) inside a unit to minimize claims related to them.

  • Require Owner Insurance -- Requires owners to carry certain types and amounts of insurance.

  • Strict Liability Provision -- Makes owners liable for any damages if they originate from their unit.
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