Each year an association’s board of directors is entrusted with budgeting for the upcoming fiscal year. This would typically be spearheaded by the management firm, if one is retained, and would be predicated on historical information, known increases in pricing of goods and services, and other factors material to your specific needs. One thing is for sure, if you are a condominium association, invariably the insurance premiums can be one of the largest line items on your budget. This is because of the requirement to insure the property.

Past premiums are not always a predicator for the future. You should consult with your agent to understand the trending in the industry as the market place is cyclical. Don’t just plug in say a 5% increase with no consultation. Right now we are in a soft market and the premiums are usually as expiring or sometimes even less based on no changes in exposures or frequency of claims. However high risk insurance such as Earthquake is still subject to change because of new earthquake modeling subscribed to by insurance companies, competition, and if there are catastrophic losses elsewhere in the country such as a hurricane. For an HOA the likelihood of any volatility in premiums for General Liability, Director & Officers, and Crime coverage is minimal.

While the primary focus for insurance is on the premiums, is your association budgeting for up to the amount of the property policy deductible or for uninsured losses? This is recommended and it is suggested that such monies not be lumped in with maintenance or your operating account but be clearly identifiable. Whether you fund this annually or not is a decision you’d need to make, especially if your association carries Earthquake coverage where the association’s deductible could be substantial and is never funded.

Listed below are some other considerations associated with your insurance that  may have budget implications.

1. Know What Needs To Be or Should Be Covered

It is imperative that you know what your association documents require you to insure and what is prudent. For condominiums, the number of associations I come across that don’t know whether their insurance is supposed to include coverage for the fixtures, equipment, and appliances in the residential unit is astounding. What about the betterments and improvements made by the unit owner? This is critical to know and impacts both the association and the unit owner from both a coverage and cost standpoint.

In your declaration or CC & R’s there’s often no guidance or requirements for  limits of liability coverage or other insurance. If your association has amenities such as a pool, fitness center, play ground, etc. carrying a $1,000,000 liability limit would seem very unwise in this day and age. Being frugal to the detriment of the association benefits no one. Have your agent provide you with optional coverages and limits of insurance so that the board can make an informed decision and include any approved changes in the budget.

2. Insurance To Value  

Condominiums have a requirement to be insured to full replacement cost value (see #1 to address the determination of what property should be considered), a responsibility that rests solely with the board of directors. Relying on your insurance company or a guaranteed cost provision doesn’t negate your responsibility, good though this option might be. For example, I’ve seen property policies that are written with a guaranteed replacement cost provision but the Earthquake insurance has been written with a separate insurance company with a specified property limit and with penalties for underinsurance. How was that value established? Isn’t an earthquake loss more likely to result in a potential total loss in some cases?! Remember too the property coverage you purchase must enable you to rebuild or repair the damage to meet all of the current building codes applicable in your area. Such considerations would normally be factored in to any third party insurance replacement cost valuation appraisal. Wouldn’t budgeting for a periodic appraisal or having an annual update be a worthy consideration and a defense for a board in their efforts to comply with the declaration?

3. Association Declaration – Insurance Section Amendment                                   

Many condominiums and HOAs have amended the insurance section of their association declarations to bring clarity to what is to be covered by the association’s insurance; to shift the burden of the association’s insurance deductible or otherwise uninsured amounts to unit owners affected by a loss under certain circumstances; and, in some cases, to mandate unit owner insurance. These have cost implications to the association and the unit owner that can be beneficial.

4. Risk Management                                                                      

All too often a board of directors believes that the premiums being proposed are derived by the insurance company and that they have no say in them. Of course the limits of coverage and policy terms are all negotiable but have you ever thought of the long term benefits of improving the risk i.e. reducing the likelihood of a loss occurring? Consider having a long term ongoing risk management plan that really makes your association more attractive to a prospective insurance company and will reduce your potential for a loss. The benefits may be realized at the front end in lower premiums and over the long term by reducing the number of claims and the associated expenses. Examples of cost effective measures might include an emergency plan, home owner education on what if scenarios (where are the water shut-offs for example), contractual requirements for service providers or contractors on site, ensuring compliance with your declaration, or installing seismic gas shut-off valves to prevent fire following an earthquake. Any such measures undertaken by you need to be conveyed to your insurance company. The costs associated with any risk management program might be next to nothing at the outset but the implications can be far reaching for your budgeting process.

In conclusion, when working on your budget for next year and you drill down to the line item for insurance premiums do a little soul searching. Is the premium based on the required and prudent coverage? Are there circumstances that might cause a big change in insurance premiums? Are funds elsewhere in the budget for deductibles, uninsured losses, or proactive risk management? Has your agent met with you to discuss how risk management can help you prevent losses, reduce costs, or even impact the budget currently being worked upon?  The consequences of not doing a little due diligence up front can easily become an unbudgeted expense item later. The English saying penny-wise, pound-foolish rings true!

by Duncan Kirk, CIC, CIRMS 
Agent/Owner –  The Unity Group – Insurance & Employee Benefits

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