Depending on the area of the country you live in, insurance is either the largest single line item on your homeowner association budget or at least in the top five. In two surveys we took six years apart we found that in homeowner associations with home values in excess of $200,000, 25% of the total budget was spent on some aspect of security with insurance being the largest portion. We are an acquisitive society that likes to protect what we’ve earned. In communities with older residents, that feeling is stronger.
Buying the best policy is an obvious starting point. Understanding what makes the best policy is what we hope we can teach you. Certain critical issues must be addressed and understood, not the least of them is loss control and loss prevention. That’s the real key to lowering insurance costs and overall risk management.
Here are some questions that you must address. Ask your insurance agent and manager. Make sure you get a full understanding of the answers and the consequences. There is nothing here that is so technical that it is not understandable by every one of you. If they can’t explain it, don’t do business with them.
Question #1: Are the policies we are buying based on “occurrence” or “claims made” basis? In simplest form, this means “Are we insuring ourselves for losses that occur during the life of the policy or for claims made during the life of the policy regardless of when the actual loss event occurred?” Either policy is acceptable, but it is very dangerous to switch from one to another. Ask the agent to explain why.
Question #2: What are the exclusions in the Directors & Officers (D&O) policy? Go over each one of them and understand what you are not covered for. This aspect of your insurance is the most meaningful to you, the board member. You’re doing a volunteer job for the good of the community. It would be a shame to end up losing your home because you made an error.
Question #3: Will your agent provide a definitive statement to all homeowners outlining the limits of the master policy? This is so the individual unit owner can use that document to purchase their own supplemental coverage for their personal property or other aspects of their home not covered.
Question #4: Does the broker carry Errors & Omissions Insurance? This is a kind of malpractice insurance that every agent should have. If they make a mistake in advising you on coverage, you’ll be covered anyway. They should all have it.
Question #5: What impact will a Loss Control Committee have on our premiums? A Loss Control Committee is a group of homeowners that meet regularly (quarterly is fine) to examine the property for potential hazards. Looking for cracked or raised pavement, problems around the pool, checking on fire extinguishers, holding classes on fire escape routes and procedures. These meetings should be documented in writing and submitted as proof of activity. Most insurance carriers will provide some rate reduction for this activity.
Question #6: This one might be more for the board to discuss with the manager first and then bring to the agent. How will my rates and liability be effected by raising the deductible by $5,000-$10,000 or more and self-insuring for those smaller losses? If the association were to have a small special assessment of $25 or so per unit, that could create a special self-insurance fund that over the years could save tens of thousands of premium dollars. If raising your deductible can save you $5,000 on your premium, take that $5,000 savings and add it to your self-insurance pool created by the small special assessment. Treat that money as you would your reserve fund, i.e. invest it. The return makes it grow. Have an accountant or other numbers kind of person work out the different scenarios for you. What happens if there are no losses for the first year, two years, three years? What happens if there is? What is your loss history? This is a creative area of cost savings that can be enormously efficient in reducing your premium. It has its risks. But that’s what we’re talking about, risk management.
Question #7: Ask about pooling insurance. No it’s got nothing to do with diving boards and swim fins. Some management companies will get one blanket policy for all their associations. There are many ramifications to this concept. Here are the two most important.
There are tremendous savings to be had by reducing the administrative activity. There’s more savings to be had in the area of sales commissions. I know of one California association that reduced its premium by 50%. There is a trade-off. Better associations with a more attractive loss history (non-loss history) are mixed in with those that have a bad loss history. The result is that the bad risks get a better rate and the good ones don’t get quite what they would normally get. This is often more than compensated for by the overall savings. Talk to your manager about the possibilities.
These are seven pointed questions that should be asked and answered. They are not the only questions. Your agent should have measurable experience in homeowner association insurance. The rest is not germane. You should understand that the three areas of coverage are for property, overall liability, and Directors & Officers Liability. Understand that if you have other recreational facilities, you require additional coverage.
Keep in mind that the insurance companies are suffering their worst economic crisis since insurance was invented. The recent group of natural disasters from Florida & Hawaiin hurricanes, Mississippi flooding, and California fires have put some companies out of business and driven others out of certain states. Premiums are rising and will continue to rise for the next few years. Be creative. Measure your risks and concentrate on preventing losses as much as you concentrate on selecting your policy. Loss Control Committees can be very effective. Listen to the experts. The lowest insurance bid must be understood. It is not the obvious choice. Coverages vary tremendously.