By Anthony Smith, SJJ Law
Homeowners Associations (HOAs) hold a vital role in safeguarding the value and integrity of residential communities. Securing appropriate property insurance coverage is crucial for HOAs as they oversee shared spaces and amenities. However, choosing the right property insurance policy can be a complex task. Below are three essential considerations to be aware of when purchasing insurance.
Consideration #1: Understand and Plan for Your Deductibles
Deductibles for property insurance policies have evolved over time, becoming more intricate. Most property insurance policies for HOAs feature different deductibles for different types of losses. While some losses still involve a single flat rate deductible, others employ a percentage-based deductible. In states like Colorado, where wind and hail storms are common, percentage-based deductibles place a significant financial burden on HOAs and their members.
Fortunately, HOAs subject to the Colorado Common Interest Ownership Act (“CCIOA”) can shift the deductible expense downstream to their owners through pro rata assessments. This means owners' HO-6 insurance policies can cover the deductible assessment. However, HOAs not subject to CCIOA must either have an explicit right in their governing documents to assess the deductible back to the owners or rely on special assessments, which can cause delays or barriers to necessary repairs.
Older HOAs not subject to CCIOA should consider amending their governing documents to grant them the right to assess their property insurance deductible back to the owners.
Consideration #2: Pay Attention to Exclusions
Insurance policies may appear similar at first glance but they often vary significantly in terms and conditions. HOAs must be attentive to potential exclusions in their policies. Here are three common exclusions that HOAs should strive to avoid:
a) Functional Damage, Cosmetic Damage, and Marring Exclusions: These exclusions pertain to damage that doesn't impact the structural integrity of the property but can still detract from its aesthetic appeal. These exclusions hinder an HOA's ability to address issues that may affect the property's overall value and appeal.
b) Ordinance or Law Exclusions: These exclusions limit coverage for costs associated with complying with building codes or laws that may have changed since the property's original construction. For older communities, this exclusion can be particularly significant as repairs may require updates to meet current building codes, leaving the HOA responsible for the additional costs.
c) Matching Exclusions: Matching exclusions restrict coverage for the replacement of undamaged portions of a property to achieve visual consistency with the repaired or replaced sections. This limitation makes it challenging for HOAs to restore or replace damaged portions of a property to match the undamaged areas.
HOAs should negotiate with insurers to eliminate these exclusions, ensuring they have comprehensive coverage that adequately protects their assets, maintains aesthetic appeal, and positively contributes to property values.
Consideration #3: Be Mindful of Your Duties and Responsibilities
Finally, HOAs have important duties to fulfill to their insurance companies in the event of a loss. The most significant duties include:
a) Prompt Notice of Loss: HOAs must promptly notify their insurance companies of any loss or damage to the insured property. Timely notification is critical and generally outlined as a requirement in the insurance policy.
b) Cooperation with the Insurance Adjuster: HOAs are obligated to cooperate with the insurance carrier's adjuster during the claim investigation. This involves providing access to the damaged property, facilitating inspections, and offering necessary documentation to support the claim.
c) Proof of Loss: Insurance companies may require HOAs to submit a formal proof of loss document. This document details the loss, including the items damaged, estimated repair or replacement costs, and other pertinent information. Timely submission of a proof of loss is often crucial, as failure to provide one may result in the claim being denied.
As HOA managers and board members, understanding the nuances of property insurance policies is essential for protecting the interests of residential communities. By keeping three key considerations in mind, HOAs can make informed decisions when purchasing insurance:
First, comprehending and planning for deductibles is crucial. Whether dealing with percentage-based or flat rate deductibles, HOAs should explore their options to shift the deductible expense downstream to owners, either through CCIOA provisions or by amending governing documents.
Second, paying attention to exclusions is vital for comprehensive coverage. Negotiating with insurers to eliminate exclusions related to functional damage, cosmetic damage, marring, ordinance or law compliance, and matching can help maintain aesthetic appeal, address repairs, and protect property values.
Last, understanding and fulfilling duties and responsibilities to insurance companies is essential in the event of a loss. Promptly notifying insurers, cooperating with adjusters, and providing necessary documentation such as proof of loss facilitate efficient claims processes and ensure that HOAs receive the coverage they need.
By being well-informed and proactive in insurance matters, HOA managers and board members can effectively safeguard the assets, integrity, and overall value of their residential communities. Making thoughtful choices and fostering constructive relationships with insurance providers lead to greater protection and peace of mind for everyone involved.
Anthony (“Tony”) T. Smith has been representing property owners for most of his career. Tony’s practice focuses on the diverse legal needs of common interest communities. He regularly advises condominium and townhome associations on all aspects of operation, management, governance, and litigation.
