Homeowners association insurance is a costly but a worthwhile expense because it offers financial protection in cases of damages or losses within the community. However, there are still plenty of HOA boards that do not realize the importance of HOA insurance. To ensure that your community is adequately protected, here are the most important HOA insurance coverages that you must have.
The Most Important Types of HOA Insurance Coverage
The insurance needs of HOAs vary greatly. Adequate insurance coverage for one community may not be enough for another. It depends on several factors including the location and size of your community, as well as how many amenities or assets there are. Nevertheless, there are certain types of insurance policies that every community must have.
1. General Property Insurance
General property insurance is essential because this will protect HOA assets from damage or loss due to earthquakes, floods, fires, and other natural disasters, as well as in cases of theft or vandalism. HOAs typically insure their structures or common areas to 100% of its replacement value or whatever value is stipulated in the governing documents.
General property insurance is a must-have HOA insurance policy. Otherwise, in case of major property damage or loss, HOAs could end up paying out of pocket. Most HOAs may not even have the funds for these expenses.
2. General Liability Insurance
HOAs must also have adequate general liability insurance coverage. This HOA insurance policy will protect the association in case homeowners or homeowners’ guests are injured in common areas.
If someone makes a claim against the HOA, general liability insurance will cover legal costs and other associated expenses. Take note, though, that general liability insurance will not cover any accidents that occur in a homeowner’s private residence. It is only for shared spaces such as the swimming pool, clubhouse stairways, sidewalks.
3. Directors and Officers (D&O) Liability Insurance
D&O liability insurance is an important type of HOA insurance coverage. It protects your board members from liability as a result of fulfilling their normal roles and responsibilities. There are instances where your HOA board may be sued for alleged breach of contract, discrimination, slander, improper management of finances, or violation of CC&Rs.
This HOA insurance policy will cover the legal fees, damages, and other expenses. Since board members are volunteers, D&O insurance allows them to perform their HOA duties without fear of personal liability.
4. Employee Dishonesty Insurance
Employee dishonesty insurance will protect the association in case an employee engages in theft, forgery, fraud, embezzlement, and other bad faith behaviors. This can also be applied to contractors, HOA management companies, and members who perform tasks for the HOA.
5. Workers’ Compensation Insurance
Workers’ compensation insurance is a must if you have employees working for the HOA. This HOA insurance policy will cover the costs of legal, medical, disability, death, and other expenses in case an employee is injured or killed while performing a job on HOA property. When outsourcing services, HOAs should choose third-party vendors who are licensed and bonded to prevent unnecessary expenses in case there is an accident in your HOA.
6. Non-Owned and Hired Auto Insurance
Non-owned and hired auto insurance will cover legal fees and other expenses in case an employee gets into an auto accident while performing HOA duties.
If your HOA regularly leases, hires, rents, or borrows vehicles, this type of insurance coverage could be essential.
7. Umbrella Insurance
An umbrella insurance policy is very important. It provides HOAs with extra protection in case a claim is beyond the limits of their underlying insurance policies. This saves the HOA from having to pay the excess out of pocket.
Associations must be able to differentiate between umbrella insurance and excess liability insurance, though. Excess insurance will only extend the limits of your underlying policies. Meanwhile, umbrella insurance will cover the excess cost even if you do not have an underlying policy.
For example, there is an auto accident and the association is sued for $2 million. However, the HOA only has $1 million in insurance coverage. With excess liability insurance, an insurance provider will only cover the excess cost if you have an underlying auto insurance policy. On the other hand, with umbrella insurance, your insurance provider will cover the excess cost even without auto insurance.
How Do HOA Insurance Providers Calculate Your Premiums?
For most associations, insurance is easily their most expensive expense each month. As such, many HOAs want to get adequate insurance coverage at the lowest pricing possible.
Insurance premiums, or the amount that associations need to pay, will depend on their insurance score. An insurance provider may ask for homeowners association insurance requirements. They will then use complex mathematical methods and tools to calculate your premiums.
Insurance providers will typically use the General Measure Model (GMM) when determining your insurance contract. However, if the contract term is one year or less, they will use the Premium Allocation Approach (PAA).
Computations for PAA have four major components: future cash flow, time value of money, risk adjustment measure of non-financial risk, and contractual service margin. The PAA is under the International Financial Reporting Standard 17 (IFRS 17), which will replace the current IFRS 4 standard come 2023. Longer-term insurance contracts can also use PAA if computations will yield similar results to the GMM.
Ensure the Future of Your Community with HOA Insurance
Despite its critical importance, many associations do not obtain and/or maintain their HOA insurance policies. Without proper coverage, a single claim — legitimate or not — could result in the financial ruin of your community. To protect the financial future of your HOA, boards must always stay on top of their insurance policies. Make sure to submit all the HOA insurance requirements to get the best premiums, as well as ensure that there are no lapses in your policies.
If you need help with HOA insurance or other association tasks, feel free to enlist the services of a reputable HOA management company like Clark Simson Miller. We look forward to serving you.
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