In recent years, allocating HOA insurance deductibles has become a top priority among community associations. This is largely due to the increase in premiums, which associations are struggling to keep up with. While insurance can be a tedious issue, it’s one that associations can’t afford to neglect. After all, insurance plays a crucial role in protecting assets.
What Are HOA Insurance Deductibles?
An HOA insurance deductible is the amount the association pays out of pocket before the insurance policy pays for the covered expenses. Generally, HOA insurance deductibles and insurance premiums have an inverse correlation. This means that the higher the deductible, the lower the insurance premiums, and vice versa.
Insurance deductibles allow insurers to share the financial stress with policyholders. They save the insurance provider money while ensuring that policyholders share the cost of the claims.
Deductibles also help prevent insurance fraud, ensuring policyholders have a financial stake in the policy. If policyholders must pay deductibles, they are less likely to make fraudulent claims to cash in on their payout.
What Deductible Is Best for HOA Insurance?
The deductible for HOA insurance can vary from as little as $1,000 to as high as $25,000 (or even more). However, the deductible should ultimately depend on the association’s needs and resources. An HOA board should evaluate the association’s revenue and its reserves. If a crisis does happen, the HOA should know how much money it has at its disposal. This will help dictate the right deductible.
In general, though, average HOA insurance deductibles range from $2,500 to $10,000.
The Rise of HOA Insurance Premiums
Insurance premiums have substantially increased over the last few years. Homeowners associations and condos are being forced to review their policies as providers hike the cost of premiums. This increase can be attributed to a few factors.
First, there has been an uptick in the frequency of natural disasters. In California, wildfires and severe drought, brought on by climate change, have been happening more often. As a result, insurance providers hesitate to offer associations wildfire coverage. Some communities have been forced to pay enormous premiums, while others have forgone the coverage.
Second, many communities have been subject to stricter reserve fund requirements. In Florida, the collapse of the Champlain Towers in Surfside led to legislation requiring condominiums to have adequate reserves. Many condo associations didn’t have enough funds in their reserve account, while others had no such account to begin with.
Finally, the frequency of claims has also impacted deductibles. Insurers have grown concerned that claims are becoming more common, and even small claims can be expensive. When these small claims accumulate, they can negatively affect the insurer’s profit, especially after adjustments.
How to Allocate HOA Insurance Deductibles
In the past, it was typical for HOAs and condos to have $1,000 deductibles. Nowadays, though, it’s more common to see deductibles in the $5,000 to $10,000 range. Some even go as high as $25,000. Given the financial strain of HOA insurance deductibles, associations are now looking for ways to allocate the responsibility.
There are primarily three schools of thought when it comes to allocating insurance deductibles:
- The HOA should cover all deductibles as an expense in the same way it allocates insurance premiums to members.
- The person benefitting from the proceeds of the insurance should cover the cost of the deductible.
- Since many claims stem from insufficient or delayed maintenance by the owners, those responsible for the lack of maintenance should cover the expense of the damages.
Allocating to Owners
If the HOA does allocate deductibles to the owners, there are three ways to do it:
- Without insurance, the owner responsible for the maintenance should pay the deductible. This is a simple approach, but the downside is that an owner who isn’t at fault may shoulder the responsibility for a deductible.
- In the absence of insurance, the owner responsible for the maintenance of the damaged property should cover the deductible unless another owner caused the damage due to their negligence. This option is favorable because it holds the negligent party responsible for the expense. However, it’s generally more difficult to ascertain whether a person has been negligent. It’s not always in black and white.
- The owner of the unit from which the problem stems should cover the cost of the deductible, even if another unit suffers the damage, regardless of negligence. This option is also quite simple but has the same problem as the first one. It may hold an owner responsible even if they did nothing wrong.
Association boards should consider adopting one of the three ways above to allocate deductibles to owners. Keep in mind that the HOA’s governing documents should address allocation. If the bylaws and CC&Rs are silent, it’s necessary to create a resolution or amend the governing documents. When in doubt, it’s best to seek legal advice from a lawyer.
The Importance of Homeowners Insurance
Homeowners should understand that having their insurance policies is essential. It’s even more essential now that many associations seek to transfer risk and allocate deductibles to owners. For condo unit owners, an HO-6 policy should come as a priority.
Homeowners insurance and HO-6 insurance may help cover the cost of HOA insurance deductibles. However, it still depends on the policy’s scope. Sometimes, an owner may increase coverage for this with an endorsement, which comes with a small additional cost.
Seeking Professional Assistance
Clearly, an association cannot get out of paying HOA insurance deductibles. To lessen the financial burden on the association, many HOAs and condos are looking to transfer the responsibility to owners. This isn’t always easy, though, especially if the HOA board has no idea where to start.
An HOA management company like Clark Simson Miller can help. We offer insurance assistance, among other things. Call us today at 865.315.7505 or contact us online to learn more!
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