Board members must conduct an HOA insurance policy review every year. When done properly, this review can help identify any gaps in coverage and determine which policies are worth renewing.
What is an HOA Insurance Policy Review?
An HOA insurance review is a detailed assessment of an association’s insurance policies. This review helps ensure that current policies provide adequate protection for the community. As part of fulfilling their fiduciary responsibilities, board members must conduct this review every year.
Every association should have sufficient insurance coverage. Insurance protects the association’s long-term financial stability. It can save the association from potential risks. Given the role it plays, insurance should be reviewed regularly to ensure it’s up to standard.
Skipping a review may cause the board to miss crucial information and gaps. Before they know it, coverage limits may not meet even the minimum replacement costs of the assets they are supposed to protect. As costs go up and down annually, needs can change over time as well.
Additionally, when the board reviews its insurance policies, it can pinpoint new risks and address them effectively. For example, if an HOA has a new amenity, it will need to update its policies to include coverage for it. In the same way, if flooding has become more prevalent in the area, the association may need to obtain a more robust flooding policy to help counteract t eh peril.
How to Conduct an HOA Insurance Review
Board members are in charge of reviewing the association’s insurance policies, but many don’t even know where to begin. Here’s what to include in every HOA insurance policy review checklist.
1. Verify Requirements
First and foremost, board members should verify the requirements under state laws and their governing documents. Many states have mandatory insurance policies and coverage limits, so meeting these requirements is crucial in staying liability-free.
In Illinois, 765 ILCS 605/12 has strict requirements for condo associations. According to this law, COAs must have, at a minimum, property insurance, general liability insurance, fidelity coverage, and D&O coverage. If a review finds that a condo is short on even one of these, the association could face legal problems.
In addition to state laws, boards must also check their CC&Rs and bylaws. These documents may have minimum coverage requirements as well, including information about deductibles. The CC&Rs and bylaws can also identify which components or amenities require insurance.
2. Ensure Adequate Coverage
Every policy should undergo a careful evaluation of coverage limits. Association boards must make sure that each policy meets the minimum coverage amount. Again, state laws and the governing documents should be able to shed light on these requirements.
If there are no statutory requirements, industry standards stipulate that property insurance should at least cover replacement costs. These costs must reflect economic changes, too, such as inflation, construction costs, and even new building codes.
Liability insurance, on the other hand, should have sufficient coverage for accidents or injuries that take place on association property. Otherwise, legal fees and settlements could set the association back a significant amount, crippling it financially.
Moreover, D&O insurance should protect the board members from legal action due to decisions or actions they made while serving the community. Fidelity insurance should also have enough protection against fraud, theft, and other forms of financial crimes. It should cover both board members and HOA management, if applicable.
3. Check Deductibles
The next step is to check the deductibles of each policy. Deductible levels should be manageable and reasonable. Board members should have a funding plan in place for these deductibles, ensuring there is enough money to cover them should a claim be filed. Either the operating budget or the reserve fund should have sufficient funding for this.
It is important to weigh deductibles against premiums. Higher deductibles usually mean that the association has to pay lower premiums, but it may not be a wise financial decision. With a higher deductible, there is a higher financial obligation, and the HOA may not be able to keep up. This can lead to unsavory consequences, such as large special assessments or significant dues increases.
4. Confirm Exclusions
After ensuring that the HOA has sufficient funds to cover deductibles, the board must then evaluate the exclusions. It is essential to remember that policies don’t cover everything.
Most master policies don’t offer protection against flooding, earthquake damage, pests, or mold. If these are more common risks for the association, it is integral to obtain separate policies that cover them.
5. Negotiate With Providers
If necessary, board members should open negotiations with their insurance providers. They should talk to their insurance agent and see if discounts are available. Some renewals may come with bonuses or lower premiums if the association has a healthy relationship with the carrier.
If a policy no longer makes financial sense to the HOA, boards shouldn’t be afraid to find a replacement. Sometimes, the best decision is to cut a policy and look for a different provider altogether.
6. Seek Professional Advice
When in doubt, turning to a professional always helps. Board members are not always experienced or have the right knowledge to navigate an HOA insurance policy review. A lawyer or HOA manager can help with this significantly by reviewing the policies and providing recommendations.
7. Talk to Homeowners
An HOA insurance policy review doesn’t stop there. Board members should communicate with homeowners and let them know of any changes to the association’s insurance coverage.
In condo associations, unit owners rely heavily on the condo’s master policy. Informing owners of any changes is critical as it gives owners sufficient time to make changes to their own individual policies. This way, they can ensure adequate protection for their interior units and personal belongings.
When is a Good Time to Review HOA Insurance Policy?
Ideally, board members should review their insurance policies every year. Policies may not all renew at the same time, so it is important to set a reminder for each one. Schedule a review 45 to 60 days in advance of the renewal date. This will give the board enough time to go through the checklist and perform a careful evaluation.
A Secure Future
An HOA insurance policy review can help the board ensure financial stability in the long term. To conduct one properly, the board must verify all requirements, ensure adequate coverage, find sufficient funding for deductibles, and manage exclusions. Negotiating with providers is a good idea, and hiring a professional to help is an even better one.
Forth Group provides HOA financial management services to communities in Chicago and the surrounding areas. Call us today at (312) 379-0400 or contact us online to get started!
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