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“Another Premium Increase? We Can’t Afford It!”

By now, I’m sure we are all tired of the hard market. Every single association has seen increases each of the past few years.  The question is, how much of an increase?

An association with an insurance company that specializes in co-op and condominium insurance may have “only” seen increases of 15-20% each of the last few years.  Most associations have enough funds in their reserve to cover those kinds of increases, but what about the association that has had their insurance coverage canceled because they have an unfavorable loss history?  Or because their electric contains Federal Pacific Stablok circuit breakers, which are frowned upon in the insurance industry?

We have seen scenarios in which these associations had their insurance premiums skyrocket. One property we know of increased from $200,000 to almost $900,000 because they have an unfavorable loss history and, to make matters worse, ongoing work on the building!  We have seen plenty of other associations that have seen 100%, 200%, or higher increases.  In some instances, these increases could last for several years until the loss history becomes more favorable, upgrades are done to the building, or until the market changes and carriers decide they are going to look the other way.

Where does the money to pay the insurance premiums come from?  Since it is a common expense, if there is enough money in the reserve account, it would come from there, but what if the association doesn’t have enough in the reserve account or doesn’t want to exhaust it? The only two ways I can think of besides refinancing if they are able to (which isn’t something that can be done quickly) is to either raise maintenance fees or assess the owners.  Raising maintenance may work in some situations if the shortfall isn’t too large and the association has the funds available to pay the insurance policy or is able to finance the insurance policies.  Sometimes, the increase is so drastic that the association doesn’t have enough available to even pay the deposit on the finance agreement.  In that case, an assessment may be the only way to go.  When you divide the increase by the number of units, it is a much more palatable figure.  We had one association that had an increase of about $130,000, and their initial response was, “We cannot afford it.”  When I told them to divide that figure by the number of units (671), it worked out to $193 per unit.  Nobody wants to do an assessment, but looking at it on a per-unit basis ($193) vs. the overall amount ($130,000) is much easier.

I know plenty of boards don’t like to raise maintenance or assess owners, but the truth is that one or the other, or both, are a necessity.  Over the course of time, expenses are going to increase.  That is simply a part of life.  If the amount of money the association is taking in doesn’t increase each year, or at least occasionally, how can you expect to pay your expenses?  It’s like an individual who never gets a salary increase, yet their expenses increase each year.  At some point, there is going to be the need for rainy-day funds.

Something that can be done in conjunction with any of the options above is to think about increasing the association’s property deductible.  Not only does this reduce the association’s insurance premium, but the association can then assess the owners each time there is (assuming there is a claim) a proportionate amount of the property deductible.  If the owner has Homeowner’s Insurance, their policy should include a coverage called Loss Assessment.  The owner can submit the assessment to their carrier for reimbursement, and as long as the claim resulted from a covered peril under the homeowner’s policy, like a fire, burst pipe, or a hurricane, their carrier should reimburse them.  Most homeowner’s policies cap the amount they will reimburse towards a deductible, but even if that cap is $1,000, an association with 50 units and a $25,000 deductible would only have a $500 assessment.  An association with 100 units would only have a $250 assessment.  Loss Assessment is a very affordable coverage, so each owner should make sure they have at least $10,000, which is generally about $4.

Something like this is one of the many reasons boards should require that owners have Homeowner’s Insurance.  If it’s not required in the governing documents, a conversation with corporate counsel about what options are available should be had. Knowing all owners have insurance provides the board not only with options in terms of assessing owners but all owners having insurance helps keep the peace when a claim occurs.  If an owner experiences damage to their unit or contents and has no insurance, they are more apt to sue another owner or the board. If an owner has no insurance and their apartment becomes uninhabitable due to a covered peril like fire, and they don’t have the ability to rely on an insurance policy to pay their additional living expenses, they are more apt to sue another party. Overall, each owner having insurance can help keep the association’s loss ratio down in some instances. Lower loss ratio = lower insurance premiums.

In this day and age and this crazy insurance market we are in, every building needs to be prepared to have funds available in the event it is needed. We are here to help in any way we can. Check out our Homeowner’s Insurance Monitoring program, and call, text, or email us anytime.

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