By Tressa Bishop, Alliant Insurance Services
Over the past two years, community associations in other parts of the country have been dealing with what Florida and California residents have complained about for years - - - dramatically increasing insurance premiums with skyrocketing deductibles and more limited coverage.
Severe wildfires, hailstorms, hurricanes, tornadoes, and the like, all in more heavily populated areas than in decades past, have resulted in an increase in multi-billion-dollar property losses. Insurance carriers have experienced huge financial strains due to the sharp increase in the costs of labor, materials, as well as the reinsurance they must carry to protect against such catastrophic losses. With reinsurers impacted by catastrophic losses more frequently in recent years, reinsurance rates have seen double-digit increases year-over-year. These increased costs to the carriers are passed along in their pricing. In addition to the increased cost of doing business, carriers are redrawing wildfire maps, and looking at the risk of wildfire quite differently. The Marshall Fire (December 30, 2021) severely impacted how carriers looked at wildfire risk for all communities, paying particular attention to nearby open areas with tall grasses, instead of just those nestled in the foothills or surrounded by a forest. The Lahaina Fire (August 10, 2023) caused additional carrier scrutiny around highly dense vegetation and above ground power lines both within and surrounding communities.
Many insurance carriers have exited this class of business altogether or changed underwriting guidelines to limit the amount of non-sprinklered frame construction on the books and instead write newer, 100% sprinklered, “better” construction. Most carriers have reduced the limit of insurance offered per location. For example, a carrier that would have written a limit of $80 million in 2022 is now offering only $20 million in 2024, and another carrier that would have written a limit of $50 million in 2022 is now offering only $5 million in 2024. This reduced capacity is having a drastic impact on the cost of insurance for most condominium and townhome communities as the requirement to insure to 100% replacement cost values remains.
What to consider when your insurance budget is grossly inadequate for the current market conditions and what is offered by carriers?
Amending the governing documents to reduce the amount of interior unit coverage required by the association is one strategy. Moving from all-inclusive coverage (insuring the value of all improvements and betterments made to units by any owner over time) or original specification/single entity coverage (insuring the value of the original interior finishes only) to studs out or bare walls coverage may reduce the limit of insurance needed to fulfill the association’s insurance requirement. A few associations have elected to reduce the association’s requirement all the way down to the building shell only, with no coverage by the master property policy carrier for any interior partition walls, plumbing, electrical, etc.
All things being equal, a reduced limit of insurance multiplied by the carrier’s rate results in a reduction in premium. A few wrinkles to consider: the carrier must agree to reduce the limit by policy endorsement mid-term, and/or the likelihood/severity of a rate increase needs to be considered at renewal. The association’s legal counsel should be consulted before going too far down this road, however. If applicable to the community, the Colorado Common Interest Ownership Act (CCIOA) requires that condominium associations with horizontal boundaries between units cover some portions of the interior of the units regardless of the language in the governing documents (see CO Rev. Stat. § 38-33.3-313(2) for details).
Another strategy is to remove the responsibility of insuring the buildings from the association altogether. Depending upon the language in the governing documents, this change may require a vote of all owners, as well as advance notice to mortgage lenders. Careful consideration should be given when discussing this type of a change. Below are a few notable things to think about:
- Ensuring that owners insure their portion of the building (monitoring/enforcing coverage)
- Availability of single-family home policies for owners
- Total cost of insurance for owners with the change in HO policy required
- Multiple carriers involved following catastrophic loss within the community
- An uninsured or underinsured owner and the impact on neighbors
- Legal expenses (making the change, enforcing the change, resolving disputes)
While we don’t expect premiums to fall to pre-2022 levels and carriers have not increased their capacity per location as of this writing, there are some positive signs in the community association insurance market. We’re seeing more carriers offer excess property quotes than this time last year. This increased competition is helping to keep percentage premium increases much more reasonable than in 2023 for many communities. Additionally, a significant increase in reinsurance capacity is helping those rates on the carrier side year-over-year.
As you consider various strategies to help with your community’s insurance program, working with a specialist in this niche is extremely important and there are many who are active members of CAI. Helpful resources available through http://www.caionline.org such as the Directory of Credentialed Professionals and CAI Exchange (online discussion forum) can help guide you in the right direction.
Tressa Bishop is a Senior Vice President at Alliant Insurance Services, a CAI Educated Business Partner, and is one of 125 insurance brokers to hold the Community Insurance and Risk Management Specialist (CIRMS) designation through CAI. Tressa enjoys working closely with board members and managers to ensure a solid risk management program is in place for their community. A frequent presenter on community association insurance topics, she enjoys providing education and advocating for her clients through the claims process.
