Condominium and HOA Insurance – Risk Management Budgeting

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Condominium and HOA Insurance – Risk Management Budgeting

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.

Insurance Due Diligence

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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Budgeting Insurance Costs: Rocket Science Or Guess Work?

[ Blog/News ]

Budgeting Insurance Costs: Rocket Science Or Guess Work?

For the majority of associations, September and October are budget season. This can be a stressful time, particularly if the association has run over budget or the board has already pre-determined that the net result should be no increase in monthly assessments to unit owners for the upcoming year. In reality, this is a time for a reflection on the financial health of the association and an opportunity to right the ship if the prior budget had been unrealistic, had been impacted by unexpected expenses, or is unsustainable based on the reserve study or other considerations.

As a manager or board of directors peruses each line item that makes up the budget, rest assured the cost for insurance will be right up there as one of the largest expenses. This applies only if you are a condominium or an association required by your documents to insure the real property (a few homeowner associations with townhouses are required to insure their property as if it were a condominium). In some cases, where the association purchases earthquake insurance, this line item may actually be the association’s largest expense. This big number draws extra scrutiny and unfortunately is sometimes given the hatchet treatment or given less than a dose of reality. So what might be the considerations when establishing estimated insurance premiums to be used for the upcoming year?

Let’s start with the basics

As a board member or a manager do not just plug in a number for the upcoming insurance premiums in a vacuum, be it the same as expiring or a percentage increase. Your insurance agent should be consulted. Their crystal ball is likely to be less foggy than yours as they would be familiar with the changes in rates or premiums that they’re seeing from the current insurance company(ies) as well as trends and appetite in the market if other companies are being asked to provide a proposal. However there are many other considerations aside from market trends that can have an impact on the premiums for the coming year. Let’s look at some of these:

Increased Property Replacement Cost Value.

You would be remiss in using the same replacement cost values for your buildings or property as per your current insurance policy. These costs are trending up right now. Changes in property values are sometimes automatic and triggered by an inflation guard endorsement built in to your policy. This typically would range anywhere from 2 – 8% depending on the insurance company. Remember, almost universally, you are required to insure the property to 100% of replacement cost so it is in your best interest to know what these numbers should be. Having an Agreed Amount policy, Extended Value, or Guaranteed Replacement Cost endorsement does not negate the responsibility although it is helpful. If unsure, you have nothing to lose and everything to gain by having a third party insurance replacement cost appraisal done which should include all of the property to be insured (some reports I read exclude the costs of property intended to be insured). The bottom line: if the property replacement cost value is increased by 4% then the premium is likely to be going up 4% assuming that the property insurance rate is as expiring. A 4% increase in property replacement cost value and an estimated increase in insurance rate of 4% will result in an increase in property premium of over 8%.

Claims history.

Yes, this does factor into the potential for a change in premium. This is more so if there has been a frequency of events rather than one large loss. In cases where the recent loss record has been exemplary and a frequency of losses that occurred more than three years ago is now dropping off the radar, a good case can be made for reducing premiums, gaining a lesser increase, or potentially getting alternative proposals from an insurance company that might otherwise have declined the risk. Also, if your association buys high risk insurance such as Earthquake or Flood coverage you are unfortunately going to be impacted by events outside of your control such as a hurricane that causes billions in damage or a new unfavorable earthquake modeling study of the Puget Sound area, the results of which are adopted by many insurance companies.

Reserves and/or monthly assessments.

Changes in these numbers will have an impact on the limit of insurance required for Crime insurance based on the mortgagees requirements. While likely a small premium adjustment in the big picture, there are times when increase in limit may result in an increased deductible too. Does your association budget for a Crime deductible let alone Property, Earthquake, or Directors & Officers coverage where deductibles can be substantial?

What else can impact insurance costs?

What has the association done this past year in terms of proactive maintenance (examples: new roof, all hot water tanks replaced); risk management (examples: seismic gas shut-off valve installed, barbecues banned from decks, railings with 6 inch gaps have been replaced and brought up to code); or generally done to make the risk more desirable by either mitigating, transferring, assuming, eliminating or financing risk? Every insurance company has its unique appetite for risk and bandwidth of credits and debits they can use. Your agent should be the messenger of changes that can help your association gain the ‘best of class’ rates and premiums.

To summarize, it is important that due diligence is used in establishing the estimated premiums to be used for the proposed budget. Your insurance agent should definitely be a party to such discussions as one of your trusted advisors. If there is concern about a turbulent history of significant unbudgeted insurance premium changes, there’s a simple solution. Your annual policy period can run from whatever date you choose. Why not have the association’s insurance renew around the time of your budgeting process so that you can use real numbers and, if necessary, spread the cost over two budget periods? Many of our firms’ community association clients have elected to do this and are all the better for it.

Here’s to a successful and smooth budgeting season!

By Duncan Kirk

Article first appeared in the August 2013 issue of WSCAI Community Associations Journal.
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Chapter Magazine

Journal July-August 2022

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Journal Advertising Partners:

  • Newman HOA CPA Audit & Tax
  • CIT Group Inc. - Logo
  • Rafel Law Group PLLC - Logo
  • The Copeland Group - Logo
  • Bell-Anderson & Associates - Logo
  • Community Association Underwriters - Logo
  • Ruff Construction - logo
  • Charter Construction - Logo
  • Popular Association Banking
  • SSI Construction
  • Sagewater
  • RW Anderson Services - Logo
  • Pacific Engineering Technologies, Inc - Logo

  • Pacific Western Bank - Small Ad
  • Association Reserves of Washington - Ad