- Category: Insurance
The cost of insurance can hamstring an HOA. That's why it's important to understand HOA insurance basics so you and your board of directors can intelligently evaluate insurance bids. Here, in part I of a two-part series, we explain how to determine what coverages your HOA must have, how to determine the value of the property you must insure, and extra coverages to consider.
Say It with Us: Read Your State Statute
First, check your state law to see if it provides insurance minimums for condos or HOAs. Florida, for instance, has a statute that establishes insurance requirements. "When I meet with associations, first I determine under what statute they were established," explains Alan S. Chesler, a partner at Alan James Insurance in Sunrise, FL, which specializes in commercial and residential property insurance, including condos, HOAs, and co-ops. "It could be under section 718 of the Florida statutes, which covers condos, or Section 720, which covers HOAs.
"Section 718 overrides most of the authority given condo associations by their documents, and they must adequately insure property for its value, which needs to be determined by an appraisal every 36 months," Chesler adds. "That's a replacement-cost appraisal, not a market-value appraisal. HOAs are covered under Section 720, which doesn't deal with insurance requirements, so we have to look at the governing documents, and whatever they say is what the board is required to do. A board can do more than the documents require unless the documents say it can't."
North Carolina also has specific requirements in NCGS 47C (NC Condominium Act) & NCGS 47F (NC Planned Community Act) that require associations to obtain and maintain certain types of insurance coverages. Currently South Carolinas Horizontal Regieme act section 27-31-240 speaks very little regarding insurance requirements, however in both cases, a board must also review the governing documents for their association for any additional requirements or guidelines.
Say It with Us Again: Read Your Governing Documents
In addition to your state's statute, you must consult your HOA governing documents. "We talk about insurance a lot with our clients and give them guidelines, but our main concern is that boards need to go to their governing documents and make sure they have what their documents require," says Kristen L. Rosenbeck, a partner at the Mulcahy Law Firm PC in Phoenix, which represents associations. "You have to have that as a minimum standard."
H. Scott Kerns, president of BayRisk Insurance Brokers Inc. in Alameda, Calif., which also insures condos and HOAs, also suggests starting with your governing documents. "Bring along a copy of your CC&Rs so we can understand exactly what the condo or HOA insurance responsibility is," he explains. "As a broker, I often have to go back and ferret that out. Many condos will cover claims to that mythical space halfway inside the unit wall versus the outside wall. Others will cover to the inside of the wall, but they won't cover substantial upgrades in a unit. For example, association insurance will cover basic cabinetry and carpeting, but it won't cover when people make the unit their own."
What guidelines does Rosenbeck provide her HOA clients? "We'd cover the documents and make sure the board understands the types of insurance it should have and what's adequate," she explains. "Sometimes boards don't understand the requirements for property versus liability versus directors and officers insurance. We break down those requirements. Beyond the governing documents, we recommend they speak with an insurance professional."
Be sure to speak with an insurance professional who knows associations. "There was a very valuable high-rise condo here in the Boston area," explains says Robert Galvin, a partner at Davis, Malm & D'Agostine PC in Boston who specializes in representing condos and co-ops. "When I became their attorney, I found it didn't even have a condo policy. It had an apartment-house policy. Associations need special insurance, and you need an insurance agent who's familiar with condo or HOA insurance."
Consider What Your Association Owns
"After reviewing the statute and governing documents, then I'd attempt to determine what the association actually owns and what it's responsible for," says Chesler. "If it's caring for the association's common property, or if it has 100 individual homes, I'd look for different types of insurance. If your association is developer-controlled, I'd look for a different type of insurance. For example, in an association in which the developer put all the property in the association's name, the policy would be more property driven than liability driven. I'd also ask the board about its threshold for risk. If your association includes just roads, lights, and maybe a gate for a gated community, I might suggest the association take the risk itself rather than buy insurance."
Galvin agrees that the type of property your association owns is important. "If you have a co-op, the insurance will be similar to that for a condo," he says. "If your association isn't organized as a condo but is a homeowners association with common property, you should have liability insurance for common recreational facilities, roads, and so forth. If there are any buildings owned by the association, those should be insured, too."
How Much Property Coverage Do You Need?
When you purchase property insurance, determining the right amount can be tough. "First assess what it would cost to replace your building if it were destroyed by fire," says Kerns. "That really drives most of the cost for HOA and condo insurance, but it's a difficult target to get to sometimes. What's the replacement cost? You can get a replacement-cost appraisal or consult a contractor or architect. Your goal is to get within hand-grenade range of replacement cost."
Then consider building code upgrade coverage. "Not all carriers offer that, or they offer it with reduced limits," says Kerns. "Here's what happens. You put up a building, and by the time it's finished, it's already probably outside of code. If you have a 15- to 20-year-old building, it's definitely outside of code. Normal insurance policies don't provide coverage for code upgrades."
Another upgrade to consider: Diminution in value coverage. "Let's say you have a $1 million building, and your local building code says if it's 60 percent damaged, you have to tear it down," explains Kerns. "You have a fire, and the inspector says, 'You're 60 percent damaged, and I'm requiring you to tear this building down. You call your insurance broker, who says, 'The insurer will pay you $600,000--or 60 percent--of your building coverage because that's the amount that's damaged. With diminution of value coverage, the insurer will have to pay you the full value of the building."
Finally, consider adding actual demolition cost coverage. "What's it going to cost to tear down your building, which involves issues like asbestos and hazardous waste?" asks Kerns. "That's not covered in a standard policy.
"Every insurance company operates differently," Kerns says. "Some will offer those coverages within the same policy. But ask about all those coverages and how to get them."
Should you find yourself in need of an insurance review, risk analysis, or just another quote - you may contact Community Insurance Group at (704) 837-0878 for a no obligation review.