By Brian TerHark, AMS®, PCAM®, Westward Management Group

Has anyone had any challenges with funding insurance premiums over the past few years? If so, you are not alone. According to a CBS news report, as an example, one Castle Rock community experienced a 600% annual premium increase in 2024 from $197,000 to $1,360,000. While a 600% increase was not the standard for all communities, we saw communities experience significant increases in recent years. Fortunately, we are not consistently seeing huge increases in premiums in more recent renewals. Although the insurance market is still adjusting to loss trends and stabilizing, one insurance broker has indicated they have seen some recent renewals where they were able to renew at a lower cost. Regardless of insurance premium trends, one thing remains constant…communities must adequately plan for funding their insurance needs!    

How do you plan for insurance premiums? It is not a once-a-year activity that only occurs when drafting next year’s budget. Communities should consider the following throughout the year:

• Check in with your professional insurance agent or broker, 2-3 times throughout the year, to keep up with the current trends they are seeing with similar communities. This helps you understand what your community may expect to experience at renewal. If nothing else, it helps reduce the shock and awe experience. It should also help facilitate proactive discussions with the Board and community professionals on what actions the community can take to help anticipate and respond to premium increases. Keeping homeowners informed throughout the year on anticipated significant changes can help significantly when needing to increase the assessment.

 

• Identify what actions the community can take to mitigate risk for the carrier which may result in a lower premium renewal. Your insurance professional should be able to assist the community with this. This may include property enhancements, accepting higher deductibles, etc.    

• As wind/hail deductibles continue to increase, consistently educate the homeowners regarding the need for loss assessment coverage through their own insurance policy.    

• Evaluate when the community files a claim against its current policy.  If there is a property loss and the total loss would be $20,000 but the deductible is $10,000, the community may determine not to file a claim. Be sure to seek the advice of your professionals (insurance, legal, management, etc.) when determining if it would be better not to file a claim to help ensure the Board understands the risks by not doing so. Bottom line: Your claim / loss history matters!   

• Consider adjusting the policy period so that it better aligns with your budgeting timeframe and mitigates the financial impact on the current year. If your renewal happens in March for example, and the community is on a calendar year budget, unanticipated significant increases will be especially painful for the remainder of that calendar year.   

A balanced budget…here are a few suggestions to help balance the budget:

• Create a “next year’s budget” file and make note of impactful items throughout the year. This is where you can make note of current insurance trends, deferred or desired projects / services not currently funded, legislative changes that may impact costs, etc.

• Clearly define the expense line items within the budget that the Association must fund versus discretionary expense items. It is the discretionary expense items that may have to be reduced in more difficult financial times. Proactive communication and/or homeowner engagement through surveys are very important when reducing discretionary items that some homeowners may very much value and appreciate.  

• Establish a contingency expense line item and/or fund. While this may be difficult to establish, it can be extremely important during challenging and unstable times. Extreme weather events (such as snow), unexpected maintenance items, and significant increases in insurance premiums are just a few examples of why contingency funds are necessary. CAI recommends 1-3 months’ worth of expenses be maintained as a contingency fund. Bottom line: Start planning for the unexpected today.  

• Understand revenue funding options for your community. This is most often through regular assessments to homeowners. Be sure to understand how the assessments are calculated and limitations on how much they can be increased without a membership vote.  There may be other ways to generate revenue to help cover the expenses.  Interest income from interest bearing accounts or investments, amenity use fees, etc. Some communities receive revenue from leasing mineral rights.  Be sure to check with your professionals on some of the more complex revenue options.  Local municipalities may even offer grants.     

• Consider potential impacts on revenue or cash flow from delinquencies and/or legislative changes. We have seen recent legislation that amended the Colorado Common Interest Ownership Act. C.R.S. 38-33.3-316.3 (2) requires homeowners to have the opportunity for an 18-month payment plan and in part defines a failure to comply with the payment plan by “failure to remit payment of three or more agreed-upon installments”. C.R.S. 38-33.3-123 (1) limits the Association’s ability to recover attorney fees from homeowners who fail to pay their assessments. HB25-1043 provides for the opportunity for a homeowner to obtain a 9-month stay from the Association to be able to foreclose its lien against a property.             

We all appreciate the complexity of, and challenges faced in, meeting a community’s funding needs. It is critically important to not only seek feedback and involvement from homeowners to get more buy-in, but to also touch base with those professional advisors who are here to serve the needs of the community. This includes your management professionals, legal advisors, financial advisors, reserve analysts and insurance professionals. Hopefully, this information is useful as you work through balancing your budget and funding insurance premiums into the future!  Westwind Management Group has been providing excellence in management, administrative and accounting services to Colorado communities since 1986!