HOA risk management is a vital part of running a homeowners association. After all, every residential community has many risks involved. Insurance may be helpful, but HOAs must have a good risk management strategy in place to ensure success.
What Is HOA Risk Management?
Homeowners associations often function like a business. As a result, certain risks come with managing a planned community. HOA risk management involves identifying, assessing, and addressing various associated risks that may lead to financial loss or instability.
What Are Some HOA Risks to Be Aware Of?
There are several types of risks HOAs must be cautious of. Here are some of the most common ones communities may face.
1. Liability Risks
Liability risks include losses caused by third parties. More specifically, they refer to the liability an HOA may face if there are injuries or property damage. These often happen because of the third party’s actions or involvement in the HOA.
2. Property Risks
HOAs may face property risks when there are events that can damage properties. These include calamities and emergencies like fire, flood, and even human activities.
However, natural disasters are not the only threat to HOA property. Associations should also ensure proper maintenance of all common areas and facilities. Lack of maintenance can lead to all sorts of hazards, including accidents and injuries. An HOA may find itself embroiled in a legal battle if someone falls to harm.
3. Income Risks
A homeowners association must be financially stable to survive. Income risks refer to financial losses resulting from too many expenses or insufficient revenue. These often result from insufficient payment of HOA dues, financial mismanagement, or even severe damages caused by crises.
4. Personnel Risks
Personnel risks refer to the financial losses HOAs face because of employees, members, or leaders. These can occur when the HOA’s volunteers, board members, or employees retire, depart, or resign. Incidents involving workers’ compensation issues also fall under personnel risks.
In addition, personnel risks even include the HOA board’s negligence or improper management. The board’s discrimination toward homeowners also falls into this category. This is a common but serious risk as it may breach the Fair Housing Act or Americans with Disabilities Act, resulting in a potential lawsuit.
5. Maintenance Failures
Much like property risks, maintenance failures involve the HOA’s property. But, it happens as a result of improper or insufficient property maintenance. In this case, the HOA is responsible for the failure of the damaged properties. They must repair what’s needed regardless of whether they have property insurance coverage.
6. Homeowner Disputes
A harmonious community is ideal, but that is not always the reality. Homeowners can get into all kinds of quarrels, and it is common for neighbors to fight over small to large issues. In such instances, an HOA must be ready to intervene when necessary. Board members should listen to both sides of the argument and learn how to properly carry out conflict resolution. Additionally, the HOA should ensure that homeowners understand the rules of the association.
7. Cybersecurity Risks
In the age of technology, there is practically no HOA in the country that doesn’t use some sort of digital aid. Whether it’s in the form of a community website or something as simple as keeping files on a computer, associations have more or less embraced modern tech. Convenient and efficient as technology may be, though, it also comes with certain risks.
Associations should watch out for cybersecurity risks, chief among them is the risk of a data leak. Homeowners’ private or sensitive information, including personal and financial information, could end up in the wrong hands if the HOA isn’t careful. Boards should protect the HOA from malware and ransomware by investing in firewalls and implementing two-factor authentication.
8. Social Events
Social events are a good way to instill a sense of community in homeowners. However, they also have their fair share of pitfalls, especially if an HOA serves food and/or alcohol.
Liquor liability is a very real risk. In HOA-organized social gatherings where alcohol is served, the association could face liability when something goes awry. Homeowners can say or do all sorts of things when inebriated. Additionally, there is a higher risk of injury when alcohol is involved.
If an HOA hires a vendor to serve food or drinks, the board should make sure the vendor has all the proper licenses, insurance, and permits.
9. Personal Property Damages
It is typically not the HOA’s responsibility if a homeowner’s personal property is damaged. However, in certain circumstances, the HOA may be held liable if the damages resulted from the HOA’s property or maintenance obligation. For example, if a plumbing system that the HOA maintains ends up leaking and flooding a homeowner’s lawn, the HOA may be accountable for the damage. Homeowners insurance will usually cover most of the damages, but the owner could still go after the HOA for uncovered perils.
Why Is Risk Management for HOA Communities Important?
What are the benefits of risk management for homeowners association communities? Here are some of the reasons why risk management may be useful for your HOA.
- Maintains Property Values. HOA risk management can maintain property values. Thus, it protects not only the residents but also their investments.
- Safety. HOA risk management is not just about preventing financial losses. Proper management can also ensure the community’s physical safety.
- Prestige. Proper risk management can boost an HOA’s prestige and reputation. This can attract new homeowners and keep the HOA going for much longer.
- Liability Prevention. An HOA can reduce or avoid legal liabilities that may lead to financial instability by managing its risks.
- No Disruptions in Operation. Natural disasters and emergencies are a normal part of running an HOA. Anticipating these events and managing risks accordingly allows communities to continue running effectively without disruptions.
HOA Risk Management Strategies to Adopt
What HOA risk management strategies should communities consider? Here are the best ways to manage your risk as a planned community.
1. Control Risks
HOAs can decrease or evade risks by trying to control them. They can do this in two ways: risk avoidance and risk reduction. Risk avoidance focuses on eliminating all potential risks, including the events and activities that lead up to them. Homeowners associations often review and modify their rules and governing documents.
Meanwhile, risk reduction can lower the probability of risks. These include creating a disaster management plan or installing infrastructure that can reduce the impact of natural disasters. Moreover, many HOAs conduct regular maintenance activities to limit property and liability risks.
2. Finance Risks
Many risks are unavoidable. As such, looking for ways to finance these risks and cover their losses is a good idea. There are two ways to do this:
- Risk Retention. This method involves using HOA fees and finances to pay for losses out of pocket. It’s a common tactic for HOAs who cannot access or afford insurance.
- Non-Insurance Risk Transfer. This method involves transferring the risks involved to a third party. Third parties include financial firms or insurance companies. It often includes tactics like hedging, indemnity clauses, holding harmless agreements, or adding specific contract provisions.
How to Conduct HOA Risk Management
Most HOAs try to adopt both risk management strategies. They attempt to control and finance risks, but what process should they follow when implementing a risk management strategy? Here are the steps a homeowners association can take.
1. Identify Potential Loss Exposure
It’s hard to control or finance risks when the HOA doesn’t understand what it needs to protect. As such, HOAs must identify the specific risks they may face. These can include standard security and safety risks like natural disasters, dishonest personnel, and injuries to third parties. But, they may also involve niche risks the HOA is more prone to.
For example, an HOA may be located in a state with more hurricanes. As such, the HOA should make sure to purchase insurance that specifically covers hurricane damage. Different homeowners associations will have different needs, so it’s crucial to consider all the factors.
2. Conduct an Evaluation
Depending on the risk, the HOA may try to control or finance the risk — or both. Different risks will need different strategies or a mix of both to be managed well.
3. Implement Strategies
Once evaluated, the HOA should implement its risk management strategies. It should work with various professionals like CPAs, HOA managers, attorneys, and insurance agents.
4. Monitor and Enhance the Strategies
The association must evaluate its HOA risk management strategies periodically. This can ensure that the strategies work and keep financial losses at bay. If a strategy fails or is insufficient, the HOA should re-evaluate, modify, and enhance the strategy.
The Role of Insurance in HOA Risk Management
Risk prevention is the best way to protect the association. This involves conducting frequent and thorough inspections in addition to adopting changes to keep risks at bay. However, there is no guarantee that these risks won’t eventually come to fruition, even after implementing all the prevention strategies in the world. Therefore, it is equally important for an HOA to insure these risks and reduce the damage to the association.
Insurance plays a critical role in the success of any organization, HOAs and condos included. Board members should see to it that the HOA’s insurance policies are up-to-date and complete. An HOA should have everything from personal property insurance and liability insurance to D&O insurance and fidelity bonds. Although most boards hope that the need to file a claim never comes up, it is still better to have these protections in place in case it ever does.
Furthermore, an HOA rarely keeps all operations strictly within the organization. Associations need to enlist the help of third parties, such as vendors and contractors, every now and then. To minimize and properly handle risks, boards should require all vendors and contractors to carry complete insurance coverage and licenses.
Keep Your HOA Risk-Free
HOA risk management can be a difficult task. It’s not always easy to anticipate the risks of running a community. But, it’s certainly necessary if the homeowners association wants to limit financial losses and maintain the HOA.
Is your HOA having trouble with risk management? Clark Simson Miller can help. We provide the best HOA management services in the industry. Call us at 865.315.7505 or contact us online today to know more!
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