What’s the Right Insurance Policy for my Homeowners Association

Insurance is generally the largest budgeted expense for most homeowners associations (HOAs). But not every insurance policy is the same. So how do HOAs know whether the insurance policy they’ve purchased meets their needs? These are just some of the things HOAs need to be consider when they’re deciding which insurance policy to purchase.

What is the Policy Deductible?

Every property insurance policy will have a deductible. But not every insurance policy has the same kind of deductible for every kind of claim. The two main kinds of deductibles HOAs regularly see are flat deductibles and percentage deductibles.

Flat Deductible

Some HOA property insurance policies include a flat (or straight) deductible. A flat deductible is a specified dollar amount that applies to each loss. It is subtracted from the amount of a covered loss. The amount remaining is paid by the insurer.

For example, suppose that your policy includes a $25,000 deductible and a $20,000,000 limit. The property suffers a $500,000 fire loss. The insurance policy will pay $475,000 ($500,000 – $25,000).
A flat deductible applies to each occurrence. If more than one occurrence takes place during the policy period, the deductible applies separately to each. For instance, suppose an insured building is damaged by vandals in September and by a fire in October. The vandalism and the fire were two separate occurrences so each is subject to the deductible.

Percentage Deductibles

A percentage-based deductible means that in the event of a loss, the Association will pay some percentage of the total insured policy limit as the deductible – usually 1 – 5%.
For example, suppose that your policy includes a 5% deductible for wind and hail losses on property with a total insured value of $20,000,000. The property suffers a $1,000,000 hail loss. The insurance policy will pay nothing, because the value of the loss equals the deductible ($20,000,000 x 5% = $1,000,000).

Percentage deductibles can be difficult for HOAs to manage because they typically shift a large chunk of the repair cost onto the HOA and their members. But these problems can be avoided by selecting a policy with no percentage deductible. If your HOA cannot find a reasonably-priced insurance policy without a percentage deductible, then it should review its governing documents to make sure it can assess the master deductible to the owners (and encouraging its members to obtain HO-6 policies that cover loss assessment). HOAs should also be mindful that the policy limits are appropriate.

Does the Policy Have Any Exclusions?

Recently, many insurance companies have started adding exclusions (sometimes labeled endorsements) that strip away incredibly important coverages without really explaining what those exclusions mean to their policyholders. These exclusions can have massive consequences after a claim.

Matching Exclusions

In Minnesota, policyholders are generally entitled to a reasonable match between new and existing material when repairing exterior components, like siding after hail damage.That way the property can continue to have the same uniform appearance it had before the storm.Some insurance policies now come with an exclusion against matching, meaning the insurance company has no obligation to make repairs with like kind and quality materials.That means if 10 pieces of white siding were damaged in hailstorm, the insurance company could replace it with 10 pieces of black siding.It goes without saying that this severely decreases the value of the property and leads to considerable complaints from homeowners.Most insurance companies that have this exclusion allow matching to be purchased back into the policy.No Association should be without this extremely important coverage, or it will likely have to self-fund repairs with matching materials in the event of a loss.

Cosmetic Exclusions

“Cosmetic” exclusions are intended to exclude damage that doesn’t affect the “function” of a component (for example a shingle’s function to shed water).This is most typical when dealing with metal components like window wraps, roof vents, or valley metals on the roof.These exclusions are incredibly restrictive and often don’t pay for damage unless a component is physically punctured.This means softball size hail could hit the roof and damage it severely, but unless it actually punctured the shingles and metals, it would not be covered.These types of exclusions prevent coverage for the most common reason an Association wants it: to return the property to a visibly uniform appearance.As with matching exclusions, there is often a way to “buy back” that additional coverage.Some of these exclusions would bar coverage for virtually any type of damage other than a complete and total loss.Unless an Association is financially prepared to self-insure, it should never buy a policy with this type of exclusion.

The Takeaway

If your Association’s insurance policies have any combination of these endorsements, you should seriously consider shopping for different coverage.When shopping for insurance coverage, make sure you aren’t being pennywise and pound foolish. The issue many Associations have is that they do not realize the deficiencies in its Master Policy coverage until it is too late – after a loss occurs.

The Association and its representatives must be diligent and informed at the time of the Policy inception to understand the coverages at the Association and to prevent substantial gaps in the protection of the common elements.

If you have questions about what your Association’s policy covers, what type of coverage the Association should purchase, or if your Association is in the middle of a disputed claim, contact the attorneys at SJJ today.