What is HOA special assessment insurance? Everything your association should know

What is a special assessment?

A special assessment is a fee imposed by a homeowners association (HOA) on unit owners to cover unexpected expenses. These assessments are typically used to pay for major repairs, capital improvements, or emergency costs that exceed the HOA's reserve funds or master insurance policy.

Unit owners are typically required to pay their share of the special assessment based on the allocation formula in the governing documents. These charges can range from a few hundred to several thousand dollars per unit, depending on the nature and cost of the repair. Because they can be sudden and significant, special assessments can create financial stress for residents. That’s where HOA special assessment insurance can help.

This article is not intended to and does not constitute legal advice or create an attorney-client relationship. Board members should consult their association’s attorney to discuss the legal implications of their decisions or actions prior to proceeding.
 

What is special assessment insurance?

HOA special assessment insurance, also called loss assessment coverage, is a type of optional insurance that protects individual homeowners from financial responsibility when their HOA levies a special assessment tied to property damage or liability claims.

This coverage is often offered as an add-on (endorsement) to a homeowners insurance policy. In simpler terms, HOA special assessment insurance can pay a resident’s share of the bill when a special assessment is needed. It’s one of the few tools that helps offset the unpredictable nature of these expenses.
 

How to avoid special assessments

While special assessments can be difficult to eliminate entirely, board members can take steps to reduce their likelihood and financial impact. Here are practical strategies to help avoid being caught off guard:

1. Choose the right insurance coverage

   As a board member, it is your responsibility to stay up to date on what’s already covered under your HOA insurance policy. Further, looking for ways to optimize your community’s coverage will pay dividends in the long run.
   
   If your residents belong to a homeowners association, they typically pay for two types of property insurance: home or condo insurance and HOA insurance. Just as your lender requires that they get home or condo insurance as a condition for taking out a mortgage, their HOA will require that they pay dues as a condition for HOA membership. A portion of membership dues pays for the community’s HOA insurance. Also referred to as the master policy, HOA insurance covers physical damage to shared spaces and general liability if a guest is hurt in communal areas.
    

2. Build your reserves

   A well-funded reserve account allows the HOA to handle large projects and emergency repairs without relying on special assessments. Reserve studies should be updated regularly, and contributions should reflect realistic future needs.

   "One of the biggest factors that drives a special assessment is when reserves have been underfunded. For example, when there's a large expense two or three years out and an association has not incrementally increased their fees to bolster reserves that would otherwise cover it, that can force a special assessment."
   
   Jack Boselli, senior vice president of client accounting at FirstService Residential

3. Be proactive about repairs

   Delaying repairs or upgrades can lead to larger, costlier failures down the road. Associations that follow a preventive maintenance plan may avoid emergency repairs that lead to special assessments.
    

4. Minimize risk at every opportunity

   Many of the events that lead to special assessments are preventable — for example, injuries from poorly lit staircases or water damage from uninspected plumbing. Regular inspections, safety upgrades, and vendor compliance reviews can help reduce exposure.
    

5. Work with experts

   From legal counsel to engineering consultants and financial advisors, having the right experts helps boards make informed decisions that are compliant with Delaware HOA laws and minimize financial exposure. Proactive planning can reduce the need for sudden assessments.
    

6. Explore loan options

   Borrowing money for capital projects is sometimes a viable financing alternative. For example, a community that intends to replace roofs over the course of several years might discover that it would be more advantageous to replace all of them at the same time, thereby eliminating bills for interim repairs. A good property management company will have the resources to present financial alternatives to its associations and identify the most cost-effective options for your community’s HOA insurance policy and capital projects.

   "Instead of just saying you need a one-time assessment, your property manager should be able to help you get a loan and go through the approval process with your community."
   
   Isadora Goh, vice president of client accounting at FirstService Residential

   Lauren Starner, senior vice president with FirstService Residential, adds, “With a loan, you’re paying for a capital expenditure over a period of time versus a one-time assessment that you might not be able to afford but you need.”

Reality-based budgeting 

Occasionally, we see boards resist the best practice of raising regular assessments — either because they don’t want to deal with the residents’ reaction to it, or because they don’t want to pay more themselves (or both). However, in our experience, the decision not to raise regular assessments invariably results in the need for a special assessment.

One of the easiest ways to avoid having to impose a special assessment is to develop budgets that are reality-based. A realistic budget is comprised of two basic categories: the amount of money you need to properly care for your community and the amount of money you must put into your reserve fund according to your reserve study. Then, budget for those two categories each and every year.

While special assessments are not completely unavoidable, by following these four guidelines you can successfully steer clear of them while maintaining your community’s fiscal health.

Learn more about financial planning in your association in our featured webinar here.

If your property management company isn’t offering sound budget guidance and funding alternatives, contact FirstService Residential today to learn how we can help simplify life in your community.