Obtaining HOA insurance at a decent rate has been challenging in recent years. With big insurers like Allstate and State Farm discontinuing new policies and rates for existing policies skyrocketing exponentially, many HOAs are finding the need to add assessments and increase fees to cover the additional expense.
State of the Market for HOA Insurance
Soaring claims due to wildfires and dramatically increased rebuilding costs are putting insurers and insureds in a highly disadvantaged position. Many carriers have gone so far as to give notice to any homeowners in high-risk wildfire areas that their policy will not renew. Unfortunately, even buildings in low-risk regions have seen their rates skyrocket as insurers struggle to settle claims and adjust to higher construction costs.
As a result, some homeowners are going without insurance entirely. Others have secured minimal coverage at inflated rates through the state-administered FAIR plan, which has seen a 70% rise in applications since 2019.
HOAs facing reduced or cancelled coverage must turn to reinsurance to bridge the gaps between what their insurers will cover and what’s required to meet homeowner’s needs. Reinsurance policies have also increased up to 100% in some cases, meaning the cost will necessarily be passed along to the homeowner.
Going without HOA insurance is not an option, nor is finding an affordable or accessible solution. To add to the complexities of the renewal landscape, notices and offers normally sent out up to 45 days before it’s time to renew are now arriving less than 14 days before the policy expires, despite the 75-day advance legal requirement. Fewer carriers are extending offers, and HOAs have little choice but to renew at significantly higher rates or be left scrambling to land coverage.
Solutions and Strategies
With experts predicting rate increases of up to 20% or more annually, what’s the solution? As uncertainty around climate-related extreme weather events and the imminent threat of wildfires grow, there is only so much an HOA can do to mitigate risk while ensuring adequate coverage for their members.
While there are currently no reasonable alternatives to address the insurance crisis, there are a few ways to reduce risk and prevent premiums from raising HOA costs to an untenable level.
Consider Switching to a Bare Walls Policy
If the current coverage is “walls-in,” HOAs may consider switching to a bare walls policy. Bare walls policies typically cover common areas, stairwells, firewalls between units, hallways, etc., but not the contents within an owned unit. Bare walls policies cover unit damage only to the restoration of a shell condition, i.e., items typically covered by the homeowner’s policy, without coverage for finishes, fixtures, or contents.
An audit may be needed to precisely determine what the HOA policy covers.
If the HOA has all-in or walls-in coverage, changing to a bare-walls policy could be a reasonable cost-reductive measure as there will be some unnecessary coverage overlap. Whatever you decide to do, it’s critical to inform and educate homeowners as to the changes so they understand who is responsible for what in case of loss or damage.
Homeowners should be advised to speak to their insurance agents, who can review their coverage against the associations’ to remove ambiguity.
Raise Deductibles to Reduce Premiums
Raising deductibles can significantly lower your premium payments. Bear in mind you’re gambling on the idea that you won’t face catastrophic damage, but it’s a far better option than accepting less coverage in exchange for a better rate. If there is a loss, you’ll end up paying far more in the long run and perhaps not receive adequate coverage or service.
Again, homeowners need to be aware of the changes and the risk you accept on their behalf. Despite a particular peril being attributed to the HOA policy, the deductible cost would still be passed on to the homeowner in a claim scenario.
Reduce Loss Risk on the Premises
Taking steps to reduce wildfire and other property risks provides multiple benefits. Removing foliage, brush, and dense vegetation around the property may reduce the risk of fire spreading should it become an issue in your area. Many carriers offer discounted rates for properties that carry out such activities. Even if it doesn’t affect your premiums, it’s an excellent preventative measure that can reduce risk in any case.
What Constitutes Adequate Coverage for Your HOA?
Going without insurance isn’t an option. Reducing insurance simply to reduce costs isn’t wise either. Though there is no standard amount of coverage for HOAs, there are certain types of insurance you should maintain:
- General liability insurance protects the community from legal action against the HOA.
- Property damage insurance protects community property and shared amenities against physical damage.
- Workers compensation to protect from liability for any work-related injuries employees may suffer
- Directors and Officers (D&O) insurance to protect individuals from personal liability in case of a lawsuit.
- Umbrella coverage extends additional protection for claims beyond the scope of their underlying policy.
What Happens When an HOA Policy is Unrenewed
If an insurer doesn’t renew a policy based on a property’s fire risk, there may be conditions by which you can negotiate. For example, if a portion of the property is at higher risk, it may be excluded from the policy. The caveat is that should fire damage occur, it would not be payable unless the HOA could prove that the damage did not result from that source.
Of course, this is a unique scenario and certainly not ideal. And while it’s probably no comfort, California is not yet in as dire straits as states like Florida, where homeowners and HOAs pay almost double for hurricane coverage. In Oklahoma, Kansas, Nebraska, and Arkansas, rates are even higher due to tornados and other extreme weather and water-related perils. California doesn’t even come close!
Final Thoughts
HOAs in California have an uphill battle when it comes to insuring their communities. Reducing costs is a vital concern, but ensuring adequate coverage is the overarching mandate. While there are no clear solutions, you do have options. Speak to us today to find out how we can help.
