Have you received an increased HOA insurance premium from
your old standby insurance company? The one who used to be the most
competitive? You are apparently not alone. Those companies have experienced
rate increases this year and HOAs are noticing.
HOA coverage is pretty complicated, and there are there are
a number of conditions which may have caused an increase. Let’s take a closer
look at the background and the elements involved in coverage and in producing
If you are reading this, you already know that an HOA is a
private association, formed with the purpose of managing a residential
subdivision. Their exact responsibilities and powers are dictated by a
governing document called the CC&Rs, or Contracts, Covenants and
Restrictions. A subsection called ByLaws are the exact rules by which the
association operates, including creating a managing board of directors,
elections, responsibilities, job descriptions, levying fines and more. These
are the governing documents.
The above documents also define the exact responsibilities
of the association vs the members in matters such as how much and what type of
insurance must be obtained by the HOA.
Each year, various sections of California laws are updated
with respect to what HOAs are allowed to do and what they are required to do,
as well as how they are restricted. The first development tract in which I was
an owner, for example, disallowed the sale of the homes to Jews. As a Jew,
moving into that complex, and having purchased my home from another Jewish family,
I was unaware of those sections of the CC&Rs, and clearly, by the time the
first family had purchased their home, the Civil Rights laws had preempted that
This past year, a number of discrimination cases were filed
and settled, causing payments to be made by HOAs. This threat of increased risk
can drive up rates for all HOAs as insurance carriers prepare for possible
battles in the courts.
So what types of HOAs exist?
There are some associations, which only manage the common
areas of single family homes in a community. They make sure that there is
visual uniformity in appearance of the homes and that the grounds are kept.
There are some associations which are responsible for the
actual structure of the buildings. This is especially true in the case of
condominiums and townhomes but can apply to single family units and duplex
units within the community as well. All of these powers and responsibilities
are given in the governing documents.
Is your HOA responsible for interior insuring floors,
cabinets and other structures? Ask your governing documents, as these responsibilities
vary from HOA to HOA.
So what are the parts of the insurance policy?
Property first. What coverage is needed in order to properly
insure property to value? Should coverage be just for exterior walls, or should
it include those kitchen cabinets and floors? How about other fixtures, walls,
tile and so on? And what value should be placed on all of the property?
Fortunately, insurance agents have tools that provide guidelines
on replacement value of property. Agents must be skilled in using these tools
for calculating total insured value of the property.
You should be aware that the cost of materials has a lot to
do with property coverage rates. As building materials become more expensive,
property pricing goes up. Insurance companies sometimes have automatic
increases, which may or may not be necessary—it’s an area for review.
And how about common area equipment and structures, such as
pool equipment, recreation equipment, fences, pools, spas and dozens of other
items owned in common by the members of the association. All of these must go
into the consideration of total insured value.
Then what is a reasonable deductible to apply to coverage?
Do you want it to apply to the smallest loss, or are you a risk taker as an
association and want a higher deductible? How much higher? An agent needs to
explore this with the insured, as the answer is not standard. Are you covered
enough, or too much? Another area for review.
Is your coverage for replacement cost at full value, or
depreciated value like a car? A loss could hurt—badly by the time you
depreciate value and subtract your deductible.
What other areas should be considered?
Liability coverage: Will it cover just physical damage that a
member might do against a non-owner or some other third party, or their
property? How broad, exactly is the liability coverage included in the policy?
Is your liability coverage limit $1,000,000? Really? 200
units in the group, $40,000,000 of assets, and you think a lawsuit is going to
stop at $1,000,000? Let’s plan for a worse-case scenario, or even the worst-case
scenario, with more coverage.
I know of one claim levied by a renter in a complex against
the handyman of the complex, claiming he touched her inappropriately. Will your
liability cover that, or will your association be writing a big check? Not
guilty? Prove it. and by the time you prove it, how much have you spent in
legal fees? Pay to make it go away? How much will that take?
And speaking of handymen, does your HOA have employees? You
will certainly need workers compensation coverage, because as an employer, the
law requires that you protect your workers from injury. Are you getting the
best rates for your workers compensation coverage?
Do they drive their own vehicle for the HOA to pick up
supplies? Do the board members? Do they run for stamps, food for a party? The re
is a coverage for that as well, in case they are involved in an accident while
doing work for the HOA. Will your HOA be covered when it gets sued?
And speaking of board members, they are directors and
officers of your HOA. There is a possible scenario in which the HOA members
hold them responsible for errors in judgment, or even perceived errors in
judgment or management. Is your board covered for that? If you are a board
member, did you sign on to work part time for nothing and be vulnerable to a
lawsuit for doing what you thought was best? I thought not. It’s an area for
Oh, and by the way, your Treasurer is in charge of plenty of
money. Is the HOA covered in the event that he or she decides to use HOA monies
to fund a trip to the Caribbean…….permanently?
Does your HOA operate a website? You could be accused of infecting
any visitors. After all, are you keeping track of buying and maintaining
certificates? Website security updates? Do you have coverage for that? Even if
you are not infecting, if you are accused of it, you still have to defend
yourself. That can cost you.
And finally, let’s talk about my favorite; earthquake
coverage. Do you have it? No? have you heard of the Northridge quake in 1994
and that we are overdue for another one? You do have it? Great; how is it
structured? What is the deductible? What assets are covered? Is it simple
building coverage, for earthquake, or does it cover more, like your
foundations, pollution, mold, debris removal?
You need an insurance agent who can make sure that your HOA
is covered and covered correctly and fully. Who will that be? If you have
questions, let us know. We have thirty years of experience in the business of
insuring commercial property, and we can help.