An HOA insurance policy review is a critical component of every yearly plan. Board members must sit down and evaluate all current policies to identify any gaps that need to be addressed. A review can also help pinpoint any underlying issues with coverages and risks. Unfortunately, not all HOA boards know where to even begin with an insurance review.
What is an HOA Insurance Policy Review?
An HOA insurance review is a comprehensive evaluation of a homeowners association’s insurance policies. This review usually takes place annually to ensure that the policies provide sufficient protection for the community. The board must review the HOA insurance policy coverages as part of fulfilling its fiduciary duties to the association.
The Importance of an HOA Insurance Review
Insurance plays an essential role in ensuring financial stability and managing risk successfully. Thus, it is vital to review all related policies annually.
An HOA insurance policy review will allow the board to confirm that the coverage limits are up to par, meeting the replacement costs of assets at a minimum. Costs can change year over year, as inflation and construction costs fluctuate.
Reviewing insurance policies can also help address new or emerging risks. If a community has had a new pool installed, for instance, it will need to update its policies to cover this amenity. Similarly, if certain perils are becoming more prevalent, boards must consider obtaining coverage for them as well.
If nothing else, an annual review keeps the association in compliance with legal obligations. State laws and the association’s own governing documents may have minimum baselines or coverage requirements. The board can ensure its policies stay within these requirements by regularly reviewing them.
HOA Insurance Policy Review: What to Look Into
While an insurance review is important, most association boards don’t know the first thing about the process. Let’s break down what the board must consider when conducting a review.
1. Check State Laws and Governing Documents
First, board members must check both state laws and the association’s governing documents. In many states, the law sets minimum mandatory insurance coverage and lists the types of insurance that HOAs and condominiums must obtain. For example, in Illinois, condo associations must carry property insurance, general liability insurance, fidelity insurance, and D&O insurance (765 ILCS 605/12).
An association’s bylaws and CC&Rs may also dictate the types of coverage a community must have. These documents may also stipulate the minimum coverage limit the board must get. Moreover, the governing documents can help shed light on which assets the association is responsible for and must therefore insure.
2. Assess Coverage Adequacy
The next step is to determine whether each policy has sufficient coverage. Again, state laws and the association’s own governing documents will offer guidance in this area. If none exist, best practice dictates that property insurance should have coverage for up-to-date replacement costs. The board must check if valuations have taken inflation, rising construction costs, and new local building codes into account.
For liability insurance, the HOA board must ensure that there is enough coverage for injuries and property damage in common areas. For D&O insurance, there must be sufficient protection for board members against personal liability arising from decisions they made while in office.
Associations should also carry fidelity or crime insurance. Coverage for this type of insurance must include losses arising from fraud, theft, and embezzlement by the board or management.
Finally, boards must consider getting coverage for unlikely incidents. Unlikely as they might be, it is better to have protection in place when they do transpire, rather than being left without any defenses.
3. Evaluate Deductibles and Funding
After assessing coverage limits, the board must then confirm that the deductible levels are appropriate. An association must have a plan and be able to cover the deductibles in the event of a claim. Boards should ensure that the association’s reserve funds or current dues are sufficient.
Striking the right balance is crucial here. Higher deductibles might afford the association lower premiums, but they can cripple the community financially if the board fails to manage its funds properly. Poor budgeting and planning can lead to large special assessments or a significant increase in regular dues.
4. Consider Exclusions
Board members must understand their insurance policies inside and out. Some might think that simply having property insurance is enough, but this type of policy doesn’t cover everything. In fact, most policies don’t cover flood, earthquake, or mold. These risks typically require a separate policy altogether.
5. Think About Amenities
An association with more amenities will usually require broader coverage because of greater exposure to risk. Certain amenities and features, such as elevators, pools, and gyms, also tend to carry additional liability. Checking if the association’s policies align with the risks these amenities bring is essential for long-term stability.
6. Consult Professionals
Board members are not always equipped with the experience or expertise needed to conduct an in-depth review of an HOA insurance policy. This is why it is important to seek input from professionals, such as lawyers or HOA managers. These people can provide valuable insights and guide the board in making well-informed decisions about the association’s insurance.
7. Try to Negotiate
Some policies will require updating or a renewal. Board members shouldn’t be afraid to exercise their right to negotiate. Speaking with the association’s insurance agent can help lower premiums and deductibles. It can also help the board settle on a policy that works for everyone.
8. Communicate With Homeowners
After the review, the HOA board must notify homeowners of any changes to the association’s insurance policies. This way, homeowners remain in the loop about what is and isn’t covered.
Communication is even more important in a condominium setting. Since the master policy can cover limited common elements, sharing policy details will help unit owners secure appropriate individual coverage.
A Protected Future
Clearly, an HOA insurance policy review can go a long way in protecting the association’s finances and ensuring long-term stability. Board members must complete one every year to ensure its policies are up to standard. When in doubt, consulting professionals is always a good idea.
Cedar Management Group provides effective management services to HOAs and condo associations, including insurance assistance. Call us today at (877) 252-3327 or email us at help@mycmg.com to get started!
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