By Tressa Bishop, Alliant Insurance Services

As condominium and townhome community boards of directors continue to feel significant pressure to reduce the insurance line item in their budgets, changing who is responsible for insuring the residential buildings is becoming a more prevalent solution. 

Can We Do This?

After consulting with the association’s legal counsel to verify whether this type of change is allowed (by statute as well as the community’s governing documents), the process can take anywhere from a few weeks (Board Resolution) to several months or longer (Declaration Amendment). 

The timing of switching from insuring the buildings on the association’s master insurance policy to requiring each owner to insure their unit as a single-family home to include their portion of the exterior of the building is important to consider. In addition to mortgage company notification requirements as outlined in the Declaration, Boards should allow ample time for each owner to secure an appropriate insurance policy to ensure they are properly covered. 

Ch-Ch-Ch-Ch-Changes

Change seems to be constant in the insurance industry, including personal lines insurance. There are carriers that decline to quote single-family homeowners policies for units that are attached to other units. Their rationale ranges from issues with the ownership structure of the buildings to the increased chance of liability claims from neighbors who share the party-wall(s). Some carriers require not only the insurance responsibility be shifted to the owners, but also the maintenance responsibilities. On the association’s insurance front, carrier ratings differ for associations that retain maintenance responsibilities for the buildings they no longer insure. 

Insurance, Maintenance, and Reserves 

Confusion frequently arises when owners are responsible for insuring the building exteriors and roofs, but not maintaining them. If a hailstorm damages the roof, the owner’s insurance would be used to repair or replace it. What happens when two-thirds of owners replace their roofs following the hailstorm using funds from their insurance carrier but one-third does not, either due to their carriers denying the claim or their refusal to file a claim because they aren’t experiencing any leaks nor visible damage from ground level? 

Since the association is still required to maintain the roofs, the regular monthly or quarterly assessments will continue to include collecting funds the for the eventual roof replacement as part of their reserve plan for the general common elements. If a change is made to the insurance and maintenance responsibility, what happens to the reserve funds previously earmarked for roof replacement? Thinking through those potential situations and challenges will be important prior to enacting any change to the insurance and maintenance responsibility.

Is It Always Less Expensive to Change the Insurance Responsibility?

The answer is one that you frequently get from well-meaning insurance professionals: It depends. 

The total cost of insurance for each owner will vary significantly following a change to the insurance responsibility. Some owners will end up paying less than when the association insured the buildings and others will end up paying more. Some owners will have an easy time switching the type of homeowners policy with their current carrier and others will have to move to another carrier, oftentimes requesting quotes from multiple carriers before finding appropriate coverage that they deem affordable.

Consult Industry Experts and Use Available Resources

As always, any time there is a major change such as this, it is imperative to consult industry experts including your HOA attorney, specialized insurance professionals, management company resources, and other peers in the community association space. CAI’s online forum is a fantastic resource where homeowner leaders and managers can ask questions of others in the industry who have gone through similar decision points in the life of their community. Thinking longer term about the financial impacts of changing the insurance and maintenance responsibility is critical to fulfilling your fiduciary duty for the community.

Tressa Bishop, Senior Vice President at Alliant Insurance Services, is a CAI Educated Business Partner, and is one of just under 130 insurance brokers (as of this publication date) 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 high-quality risk management program is in place for their communities. Her ability to communicate effectively and negotiate aggressively for coverage has allowed her to positively impact the communities she serves following loss.