Every now and then, a homeowners association should perform an HOA insurance review. This review helps protect the association and keep it in good financial shape.
The Importance of an HOA Insurance Review
Proper insurance coverage is essential to any homeowners association. Once you have all the necessary policies in place, though, you can’t simply pay the premiums and put it on autopilot. Insurance is something you have to review and update on a continuous basis. This simple act helps safeguard your association from certain financial ruin.
At the very least, you should conduct an HOA insurance review once a year. But, there are some events that should also trigger a review. One such event is when you make any major upgrades to the property.
For example, if you just built a new tennis court, you have to make sure to update your policy so that this addition is included in the coverage. If a disaster strikes and damages the tennis court before you get the chance to update your policy, you will need to shoulder the costly repair expenses. While you might be able to squeeze out the money needed from your operating or reserve fund, more often than not, this kind of unbudgeted cost requires you to levy special assessments.
Reviewing and updating your association’s insurance is part of your job as a board member. When you fail to do this, owners can accuse the board of breaching their fiduciary duty. This can ultimately lead to a lawsuit against the association and even specific members of the board. Defense, too, requires another form of insurance — directors and officers (D&O) insurance.
This kind of friction in the community can last for a long time, even after your board wins the case or steps down. And, to think, all this could have been avoided if you had just conducted an HOA annual insurance review.
How to Perform an HOA Insurance Coverage Review
It is easy to pencil in an insurance review in your board’s schedule. But, when D-day actually comes, most HOA boards have no idea how to begin the process. When conducting an HOA insurance review, here are the things you should never forget to do.
1. Check State Laws
For some associations, insurance is not only important — it’s mandatory. For example, in California, homeowners associations must acquire a minimum D&O insurance policy (Civil Code 5800) and a minimum liability insurance policy (Civil Code 5805). Similar statutes also exist in some other states.
But, it is not enough to check state laws on HOA insurance once and then forget it. Laws can change, and your association may no longer remain compliant. As such, during your insurance review, you must also check for any changes to state laws that can affect insurance requirements for HOAs.
2. Comply With Industry Standards
Your insurance policies should meet standard mortgage underwriting guidelines. This is so you can comply with Fannie Mae’s requirements when you apply for conventional loans. See to it that your association obtains a statement that allows for casualty coverage for the full replacement value of the property. This way, you won’t have to pay out of the association’s pocket.
In addition to this, it is standard procedure to have both liability insurance and D&O insurance. Liability insurance covers damages in case someone gets injured on association property, while D&O insurance covers defense expenses in the event board members are personally named in a lawsuit.
3. Talk to Your Agent
There are many insurance agents and providers in the market, but it is best to seek one with experience in dealing with community associations specifically. Insurance policies can be difficult to understand. Talking to your association’s insurance agent, though, helps a lot.
Your agent can clarify terms and policies as well as help ensure your HOA receives coverage consistent with the requirements in its governing documents. Your association’s agent or broker can also assess your community’s needs and make recommendations based on that.
If needed, your insurance agent can also help your association adjust your insurance mid-policy. This usually happens when you have a major improvement project that you want to include in your plan. To help fast-track the process, make sure to document everything and keep records of your receipts.
4. Review Your Governing Documents
Make it a part of your insurance review to refer back to your association’s governing documents. Doing so helps ensure your HOA isn’t paying too much for its policies. Sometimes, associations find themselves paying for insurance that should have been the owners’ responsibility.
Your association’s governing documents should contain provisions concerning insurance requirements. A lot of times, though, these documents use vague language, making it all the more confusing for boards to figure out what policies are necessary. When in doubt, you can always ask help from an attorney to interpret your governing documents.
5. Consider Coverage for Unlikely Incidents
Some insurance policies are a given. But, there are also other policies that, while not as obvious, can save your association from financial distress.
A good example of this is fidelity bond coverage. This policy covers the HOA in case a board member, employee, or management company commits theft or other fraudulent acts. While it isn’t as urgent as other plans, fidelity bond coverage can compensate your association in the event of a crime.
If your association’s budget can manage it, consider acquiring insurance for unconventional incidents. You might scoff at it now, but if and when the time comes, you’ll be glad you have it.
A Good Board Asks for Help
Clearly, an HOA insurance review is critical to ensuring the financial health of your association. Not all boards, though, know how to review and update their policies. But, just because you don’t know how to do it doesn’t mean you should leave it as is. A good HOA board always seeks professional help where necessary.
Clark Simson Miller is an HOA management company offering insurance services in addition to financial management, back-office administration, and more. Call us today at 865.315.7505 to learn more about our services or contact us online to get a free proposal.
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