The Best HOA Insurance Policy: Avoiding Supplemental Fees
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As a trustee, one of the most efficient strategies for optimizing your HOA insurance policy is ensuring you are making the most out of your community’s budget. For trustees, supplemental fees are typically unwelcome necessities. They are primarily needed because reserves have been underfunded and must be supplemented to pay for large capital projects such as replacing roofs or mechanical equipment.
Assessments are also sometimes imposed due to increased insurance premiums or budget shortfalls. And because they require residents to pay money above and beyond their regular monthly assessments and are often a significant amount (sometimes hundreds or thousands of dollars), they are typically not well received. But we can help.
At FirstService Residential, we work closely with associations to put proper financial plans and budgeting tools in place that will help you strengthen your community’s finances and avoid, as much as possible, having to impose assessments over the long-term. Let’s review them.
Take a Proactive Approach to Your Reserve Study
One of the best ways to understand your community’s potential/effective HOA insurance policy, future liabilities and ensure money is available when it becomes necessary to pay for them is to follow the guidelines put forth in your reserve study. We have seen some boards hesitate to strengthen reserves out of concern residents will question the reasoning behind carrying large reserve fund balances. However, the most equitable course to follow for current and future residents is to pre-fund capital expenditures.
“One of the biggest factors that drives a supplemental fee is when reserves have been underfunded,” said Jack Boselli, President of FirstService Residential. “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 supplemental fee.”
While your reserve study is one of the best defenses against having to impose assessments, it is not set in stone. Rather, it is a living, breathing document that needs to be tweaked over time. The common use components reviewed in your study have life spans that are estimated and can change over time due to overuse, weather events and plain, old tough luck.
A good rule of thumb is to have professional contractors regularly assess the condition of common use components to stay on top of when they will need to be refurbished or replaced. If you plan for and address issues sooner rather than later, you can avoid a supplemental fee down the road.
Discover Funding Alternatives for Capital Projects
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 ensure the most cost effective options for your community’s HOA insurance policy and capital projects.
Isadora Goh, director of finance at FirstService Residential sees it this way: “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. Lauren Starner, regional director with FirstService Residential adds “With a loan, you’re paying for a capital expenditure over a period of time versus a onetime assessment that you might not be able to afford but you need.”
Update Your HOA Insurance Policy
Learn More about HOA Insurance
HOA insurance covers the condo building and common areas owned by a homeowners association — it’s paid for by members’ and residents’ HOA dues. As a board member, it is your responsibility to stay up to date on what’s already covered under your HOA insurance policy to see what’s already covered. Further, looking for ways on how 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.
When it comes to insurance, the goal of trustees should always be to continuously audit home or condo insurance needs and determine what is already covered by the HOA master policy. It may cover more than you think and it’s possible that your master policy is over insured and that you’re paying for line items your community may not need.
Optimize Your Insurance Coverage
Insurance costs have been steadily rising for associations in recent years and there are several reasons for this. The uncertainty that the pandemic ushered in caused insurance renewals to come in at a higher price point than in previous years. Many property insurance carriers are now offering reduced coverages at higher prices. And in some markets, the number of insurance carriers have been decreasing. There is also a growing reluctance among some insurance providers to cover smaller associations.
In addition, natural disasters seem to be occurring with increasing frequency which also contribute to rising HOA insurance policy costs. “Out West, there have been an enormous amount of fires over the past couple years which has caused community insurance costs to skyrocket whether or not the association has had claims,” said Starner.
As we have witnessed time and again, insurance is a line item that cannot be ignored. Partnering with a property management firm that has a strong financial arm can be extremely beneficial because it can help you to navigate the complexities of insurance coverage and ensure you are budgeting for it properly so you’re not caught off guard and under protected or underfunded.
Bobet Bennett, senior vice president – financial services with FirstService Residential, offers this perspective: “The budget process is supposed to be objective. If an objective budget recognizes what insurance will really cost, then don’t try to alter or avoid it. Many trustees tend to think about insurance and what an increase will mean in terms of how their own pockets will be impacted. If they just kick the can down the road or plan on not insuring properly, eventually a supplemental fee will become necessary.”
To properly budget for HOA policy insurance costs:
- Consider what your association has experienced over the last year regarding your insurance needs and what coverage you wish you had.
- Review your current coverage with your property management company to gain its insights on possible gaps.
- If your property management company has insurance resources, tap into its buying power to secure the best possible rates for the coverage your community really needs.
The main discrepancy between an HOA policy and a condo policy is determining when the resident is solely responsible for personal property coverage. Your master policy won’t protect your residents’ belongings, so as the board member, you want to ensure your residents are insured for the replacement cost of their personal belongings to avoid potential conflicts or miscommunications down the road.
Additionally, your residents’ condo insurance can/should include:
- Dwelling coverage
- Liability coverage
- Medical payments coverage
- Loss assessment coverage
- Loss-of-use coverage
Key Takeaways for HOA Insurance
- If your residents belong to an HOA, they pay membership dues — some of which go toward the community’s HOA insurance or master policy.
- A master policy is a form of property and liability protection for home or condo association members in the event of damage to the structure of the condo building or common areas.
- Your residents’ personal condo owner policy should supplement the coverages in the HOA master policy.
In an ideal world, your residents’ HOA insurance and your condo insurance policies would complement each other perfectly. But in some cases, your mortgage lender may require more condo insurance than you actually need.
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 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 supplemental fee.
One of the easiest ways to avoid having to impose a supplemental fee 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 reserves fund according to your reserve study. Then, budget for those two categories each and every year.
While supplemental fees are not completely unavoidable, by following these four guidelines you can successfully steer clear of them while maintaining your community’s fiscal health.
If your property management company isn’t offering sound budget guidance and funding alternatives, consider partnering with FirstService Residential. For more detailed information about successful association budgeting strategies, download our new guide, “Effective Budgeting: 8 Secrets for Success.”