The last several years have been brutal to the insurance industry and policy holders. Things like terrorist attacks, huge court awards, shrinking reserves and a stock market in the toilet have conspired to hammer profits. The industry has reacted by ratcheting up premiums, discontinuing or limiting certain coverages, adding exclusions (like mold) and terminating higher risk clients.

Homeowner associations have seen first hand the effects of these insurance industry “corrections”. Some have seen premiums double or triple and others get pink slips even though they have never made a claim. Fortunately, the HOA insurance market hasn’t dried up altogether. As long time players are benched, others are coming up to bat, even in this roller coaster market.

One underlying principle to keep in mind is that insurance in any form presents some form of risk for the insured. The gamble is that bad things won’t happen but insurance companies know that somewhere, sometime, they will. And when insurance pays off, the costs impact the premium rate structure. So, during tight insurance markets, the Board will need to consider increasing the HOA’s risk to reduce premium cost. Here are some strategies to help see you through:

Shop Around. Not all insurance carriers have experienced the same loss history and have lower premiums. Check with national companies that have a special line of HOA coverages like State Farm, Allstate, Farmers and CAU-Community Association Underwriters for options. Call each company’s administrative office and ask for the name of the agent that writes the greatest amount of HOA insurance. It’s very important to only deal with an agent that is knowledgeable about how homeowners associations work. There are also a variety of independent insurance agents who can shop a wide market of companies to build a policy for you as well. But again, it’s important that the agent understand what HOAs are about. The wisdom of this will become crystal clear as soon as you need to file a claim.

Review Coverages. All HOAs should have Fire & Hazard, Directors & Officers Liability, Employee Dishonesty and General Liability coverages. Some other desirable coverages include Earthquake (mandatory in some regions) and Building Ordinance or Law. The latter covers increased reconstruction costs due to building code or zoning restrictions. Earthquake insurance typically has a sizeable deduction, like 10% of the coverage amount. The Board should discuss with the agent the pros and cons of eliminating certain coverages. Or, reducing a particular coverage may reduce premium. Review options with your agent.

Increase Deductibles. Increasing the deductible always reduces premium. It also means the HOA self insures for that amount. Offset raising your deductible with an insurance reserve.

Reserve for Self Insurance. Whether your deductible is $1000, $2500, $5000 or higher, that is the amount that the HOA is self insured for. To insulate the HOA from deductible expense, create a line item in your Operating Budget called "Insurance Deductible" in the amount of the deductible. Usually, the HOA should have no more than one claim a year, if that. If there is no claim filed, the money is saved and can be added to reserves. If your claims history has been excellent, instead of including the line item in the Operating Budget, do so in the Reserve Budget and spread the expense over, say, three years. Again, if no claims, the money can be reallocated to other reserve expenses.

Control Claims. It is extremely important for the Board to control the kind and frequency of insurance claims. To aide that process, an Insurance Areas of Responsibility Policy should be adopted that carefully defines what qualifies for an HOA insurance claim, and just as importantly, what does not. HOA members are charged with insuring certain things. In condos, it often is described as “from the decorated surface of the unit in”. That means unit interior damage should be paid for by the member’s insurance, even if the source of the damage came from outside, like a roof leak or an errant sprinkler head (as long as the HOA wasn’t negligent in repairing these items).

Directing claims to members’ insurance will reduce claims on the HOA insurance. The HOA insurance should typically be used for larger claims like wind, rain and fire damage that impact many units or other common area structures. (For an Areas of Responsibility Checklist, see Regenesis.net "Planning Tools").

Even though HOAs have been buffeted by the insurance storm in recent years, using these strategies will help insure success at the most reasonable cost available. Since these costs are likely to climb even higher, be prepared by taking action early.

For more on Insurance, see Regenesis.net "Insurance Issues".

Published: July 16, 2003

Use of this article without permission is a violation of federal copyright laws.

---

Related Articles:

• Ask the HOA Expert
  
• Toeing The IRS Line In Homeowner Associations
  
• Ask the HOA Expert
  

Richard Thompson owns Regenesis, a management consulting company that specializes in condominium and homeowner associations. He is a nationally recognized expert on HOA management issues. Regenesis publishes The Regenesis Report, a monthly newsletter for HOA boards, developers and managers. To subscribe, go to Regenesis.net. He can be contacted by email at .

---