By Stephane Dupont, The Dupont Law Firm
Over the last several years, Colorado common interest communities have seen an increase in the number of hail, flood, wind and other casualty related events. While, historically, proper insurance coverage has absorbed the brunt of the financial impact from these events, increasing insurance deductibles and coverage gaps now beg associations to not only carefully review their existing coverage but to also advise owners as to why they should, or must, obtain insurance to cover association assessed deductible expenses and to advise and plan for the possibility of an uninsured loss.
Proper Insurance Coverage is the best Funding Mechanism
The best manner to protect against the financial effects of a casualty event is for an association to ensure that it has obtained proper insurance coverage in accordance with the requirements of its governing documents and applicable law. This means that an association should make a concerted attempt and effort to amend its governing documents, if necessary, to clarify and clearly define and delineate the insurable obligations of both the association and homeowners.
Unfortunately, most association insurance policies come with high dollar deductibles. This is especially the case with regards to wind and hail claims which may carry a 3-5% deductible in the event that a claim is filed. While this may not seem significant at first glance, the deductible expense is commonly assessed on the value of an insured building which may contain multiple units or townhomes. It is, therefore, not unusual to see deductible expenses in the tens or even hundreds of thousands of dollars. Fortunately, loss assessment insurance coverage (commonly called HO-5 or HO-6 coverage) provides reimbursement to homeowners for most special assessments or loss assessments relating to repayment of large association deductible or uninsured expenses. Reminding homeowners to obtain this coverage, even if not specifically required by the association’s governing documents, is often the most significant action that an association can take to protect the homeowners against large assessments relating to deductible expenses. Sending this information to new owners and reminding them regularly through e-mail blasts, newsletters, or a brief letter provided to owners together with their proposed annual budget are just a few methods that an association can communicate this information to owners.
Transparency Relating to Gaps in Coverage
There are times when there is a lack of available insurance in the marketplace to cover a particular form of loss. For example, associations located in certain areas may not be able to purchase flood insurance. If a flood occurs, the cost of repair may fall entirely on the association and, ultimately, its owners. To make matters worse, homeowner obtained loss assessment coverage may not cover payment of loss assessments related to a flood. Associations that are in this unfortunate situation will want to clearly communicate this lack of coverage to owners in the community and work together to help mitigate its financial effects should such an unfortunate loss occur. For example, in the event of a flood, the association and its owners may be entitled to receive limited financial assistance from the Federal Emergency Management Agency (FEMA). Public assistance programs may also be available to assist homeowners with uninsured expenses incurred.
Time to Assess
An association will need to ultimately decide how deductible expenses and/or uninsured expenses will be funded after reviewing their governing documents. Typically, a special assessment or ‘loss assessment’, can be assessed against the homeowners to recover the expense. It is advisable that associations consult with an attorney to confirm that they are following the assessment procedures correctly.
Once a special or loss assessment has been approved, the association will want, to the extent feasible, to provide homeowners with sufficient time to file and process claims with their insurance carriers before the assessment comes due. Rushing the payment due date will often result in a sizeable amount of delinquencies and possibly delay the collection of the funds from the homeowners further.
If, by chance, the association is unable to pass the requisite assessment it may be forced to explore the adoption of a new or revised annual budget to fund the repairs or consider utilizing a portion of its reserve funds to fund the repairs. If reserve funds are permitted to be utilized, a plan should also be promptly implemented to replace the reserve fund withdrawal(s). Neither option above is advisable and, therefore, it is a good idea for associations, prior to the occurrence of a casualty event, to review their governing documents to confirm that there are no unreasonable obstacles to passing a loss assessment and then attempt to amend and revise the documents to avoid any issues.
Stephane Dupont is the owner and an attorney with The Dupont Law Firm that provides, at an affordable cost, comprehensive legal services including collections, litigation, covenant enforcement, contract review, covenant interpretation and general counsel work on behalf of common interest communities throughout Colorado.
