Having the right kind of HOA insurance is essential. The ideal policy protects common property at a reasonable price, shields the HOA’s financial resources, and gives residents the assurance that their home values will remain strong.
But how to find that ideal policy? Your community might be at risk due to decisions made years (or decades) ago.
The following are some of the most common HOA insurance errors. Is your community making any of them?
1. Not reading the CC&Rs
Have you ever read your community’s covenants, conditions and restrictions? Plenty of board members haven’t.
The CC&Rs should spell out the minimum required HOA insurance coverage. Unless you know what’s required, you won’t know whether your current HOA coverage is at least meeting the minimum.
(Note: “Minimum” doesn’t always translate to “enough.” More on that below.)
2. Not knowing state law
Your state may require a very specific amount of minimum coverage. For example, California specifies $2 million in liability insurance for HOAs with fewer than 100 units, and $3 million for communities with 100+ units.
It’s unlikely that your HOA’s current coverage doesn’t meet state standards. But until you check, you won’t know for sure.
Not fully understanding the CC&Rs and/state law could lead to...
3. Not buying enough HOA insurance
Suppose the CC&Rs require coverage for the interior of each unit. If you don’t specify that when buying insurance, then it’s probably the HOA – not the insurance company – that will be on the hook for paying for interior repairs.
A few other commonly overlooked types of coverage:
Boiler and machinery insurance. Also known as “equipment breakdown insurance,” this covers physical damage not just to boilers and other heating equipment but also to things like piping, pumps, compressors, pressure valves, and air conditioning and electrical systems. Coverage for these is rarely included in a typical insurance policy.
Building ordinance and demolition coverage. When a building is damaged, it’s not enough just to patch it up: It also must be upgraded to meet current codes. In some areas, a significantly damaged building must be torn down and rebuilt. A typical policy might be somewhat limited, but you can request an increased amount of building ordinance coverage. Make sure the policy would cover the tear-down and haul-away of part (or all) of the damaged structure.
Directors and officers insurance. Separate from the HOA’s general liability coverage, a D&O insurance policy protects the board members. There’s no single standard policy, which is why HOAs need to perform due diligence. Buying a low-end policy could put your board at risk in the event of future lawsuits.
Workers compensation insurance. Board members are not HOA employees. But they could possibly be injured on the (unpaid) job; for example, they might slip and fall while checking on snow and ice removal, or get hurt while setting up equipment for a community festival. Providing both D&O and workers comp can help ensure that dedicated residents continue to volunteer by reducing the risks of doing so.
Then there’s the flip side of not having enough HOA coverage…
4. Buying too much HOA insurance
Now suppose the CC&Rs don’t require coverage for the interior of each unit – but for some reason the current policy includes it anyway. That’s a waste of the HOA’s resources. Make sure the policy mirrors the CC&R’s requirements.
5. Inaccurate replacement cost limits
Suppose housing prices and/or labor costs in your area have gone sky-high in recent years, but the board failed to ask the insurance company to update the policy accordingly. In the event of loss, a policy’s co-insurance clause could come into play: Not only could the insurer reduce the settlement, it could also charge the HOA a penalty. In other words, the residents of your community will pay the price for the board’s inaction.
6. Not updating the insurer
As noted above, a rise in housing prices could mean you need more coverage. Has your HOA done any recent improvements, such as a playground expansion or a second swimming pool? These things need to be added to your policy
7. Not covering the manager
Some policies exclude the community association manager from D&O insurance. This could leave them out in the cold if they were later named in a lawsuit. Many such lawsuits don’t ask for damages per se; however, it still costs the manager money to respond.
The manager might also be excluded from a policy’s “employee dishonesty” section. In the event of embezzlement or some other crime, the HOA would not be able to file an insurance claim.
8. Not requesting third-party coverage
Some HOA boards hire management companies to take care of specific tasks (such as collecting dues) or even to handle day-to-day operations. Typically, such a company’s contract includes a “hold harmless” clause.
The lower-end D&O insurance policies do not extend coverage to third-party companies. Thus if something goes wrong, the HOA must assume the costs.
9. Waiting too long to get quotes
Maybe the board has realized that it’s shortsighted to stick with the same insurance carrier year after year, without requesting additional quotes. Actually doing something about this, however, somehow keeps getting delayed from meeting to meeting. Generally it takes a few weeks to get quotes, so waiting until the last minute could mean the current policy will auto-renew – and cost residents extra money every month.
That’s where Honeycomb can help. The company is unique in that it provides much faster quotes – typically within 24 hours – from top-rated insurers.
The bottom line
Insurance is a complex animal, and HOA insurance is a very specialized type of coverage. Generally speaking, a typical insurance agent is unaware of the ins and outs of HOA coverage. To protect your community, work with an agent who specializes in HOA insurance.