By Ryan Hurley, AssuredPartners
What happens when products such as insurance, where the perception of quality is often based on how little it costs, suddenly becomes universally perceived as cost prohibitive? As consumers, we all recognize the importance of maintaining adequate insurance coverage, even if its sole purpose is to comply with mortgage lending requirements and applicable state laws. However, as premiums continue climbing towards record highs, these rising costs are beginning to impact community associations, especially condominium and townhome communities who, for the most part, are required to maintain adequate property insurance coverage on their residential structures.
As budgets continue to be blown out by unexpected rate increases, (in some cases as much as 500% or more over the expiring premium), many board members must make difficult decisions, which may even include the temptation to underinsure the Association's building property to intentionally save money. Before heading down the road of bad choices, we need to understand that there are many ways to adequately protect residential buildings other than relying solely on the traditional condo/townhome insurance approach.
The traditional condo/townhome insurance model, where the associations maintain high-limit property policies with low standard policy deductibles, is proving less effective and more expensive than ever. This model, when coupled with the Personal Lines HO-6 Insurance Carriers firmly (and rightfully) adhering to their 'excess' insurance role when losses occur within their insured's unit, results in more losses showing up on condo/townhome communities' loss history reports, which further drives up renewal premium and can even compromise an association's future insurability.
To manage costs without compromising coverage, we must begin thinking outside the box to design a more practical approach to transferring risk. Fortunately, covenant-controlled communities are a perfect candidate for implementing unorthodox coverage strategies thanks to the contractual influence the CC&Rs and supporting policies/procedures have over the association's master property policy and owners' personal HO-6 policies.
For many years, condo/townhome board members and individual unit owners have worked together to amend their association's governing documents to reduce the burden placed on the association by assigning more insurable interests to the respective owners, usually through amending the insurance section of their CC&Rs from “all-in” or “original construction” responsibilities to a version of the “bare walls” coverage model while staying within the guidelines set forth by CCIOA. This time-tested, proven strategy has helped reduce associations' master insurance costs while enabling individual homeowners to have more significant control over the reconstruction processes when losses occur within their homes. Yet this is just the beginning of what is possible when we intentionally establish policies and procedures to spread risk between the association and individual owners.
For example, we can establish non-traditional coverage models using peril-specific wildfire deductibles and/or a sub-limit to reduce the obligation on the primary insurance carriers for communities in high-risk wildfire zones. Including parametric insurance products and establishing contractual language to trigger the individual owners' HO-6 policies to fill in the gaps, we can further stack deductibles and limits to reduce the primary layers' costs without compromising the coverage quality. These non-traditional risk management strategies will soon become even more valuable as Colorado legislatures continue working on House Bill 1288, a quasi-governmental backed "last resort" insurance product, to offer primary coverage options to homeowners and associations in areas deemed uninsurable by the private insurance markets due to high risk of wildfire.
However, to effectively design and implement these non-traditional coverage models, we must address how board members often direct their community managers to shop for alternate insurance options. As stated for years by many of my insurance counterparts throughout CAI, the old-fashion approach of blasting out RFPs to as many agents as possible does not work and will likely lead to much higher premiums. It may even compromise a community's ability to insure its property to total replacement cost values as agents block each other out of the limited carrier availability in this volatile insurance market. Furthermore, these new coverage strategies don't come in a “one size fits all” box, but require input from a knowledgeable HOA Insurance Agent working with an experienced HOA Attorney. Board members who take the time to interview multiple insurance agents before selecting a single agent to design their renewal coverage platform will have far better pricing and coverage options for their upcoming coverage term.
Throughout our industry, we all agree that change is inevitable, and how we respond to it will dictate our success in the future. This is an opportunity for us to collectively work together to develop more efficient ways to insure Colorado's condo/townhome communities. By intentionally developing risk management strategies to address costs while implementing policies/procedures to expedite reconstruction processes when losses occur, we can reestablish more predictability during the budget season while better managing losses as they occur within our communities.
Ryan M Hurley, Executive Vice President
I started my insurance career in the late 1990s as a personal insurance agent before transitioning to commercial insurance. I have specialized exclusively in Colorado's Community Association Insurance Industry for nearly twenty years. As the head of AssuredPartners' Community Association Insurance Department, the value my team offers our client communities is the unique understanding of the relationship that exists between the personal lines and commercial insurance forms that make up a complete community association coverage platform.
