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Insurance Deductibles: How they really work and association responsibility versus unit owner’s responsibility

BY BOB GOURLEY – CONDO/HOA COMMUNICATION CORNER

Offering piece of mind and financial security in the face of risk, insurance for condominium associations and other common interest communities is simply vital in sustaining a secure and fiscally strong environment. However, understanding the deductible system, coinsurance and the division of responsibility between unit owner and association responsibility can be the difference between false and true security for associations and their members.

At the very core of the insurance relationship between unit owners and associations is an understanding of who is responsible for what. For the most part, unit owners are tasked and, in many states, required to carry homeowner’s insurance for the contents of their unit and the portion of their unit that is not covered by the association’s master policy. Even if it is not a requirement for association membership, it is good policy to require individual homeowners to have their own policy for the simple reason that it provides them coverage for unforeseen events that could otherwise create a fiscal hardship for them. Theft, fire, water damage and more risks are typically covered by the homeowner’s policy. Unit owners should discuss their particular needs with a qualified insurance professional to choose the amount of coverage that is adequate for them.

Policies designed to protect the association are an entirely different subject matter, although equally important to the individual unit owner. Master policies cover the association common elements including buildings and grounds. One way to describe this coverage is “walls out,” meaning that the building exteriors up to the inside of the individual units are generally covered. Roofs, walls, hallways, elevators, lobbies and such are covered. Improvements to individual units as well as contents are generally not covered. That isn’t to say that an association cannot upgrade their policy to cover some additional items but it will vary from association to association and comes with a cost.

Additionally, associations will purchase policies for directors and officers, commercial liability, worker’s compensation and umbrella, among others. Where it is deemed appropriate, associations may also need to provide flood insurance. While all of these insurances provide fiscal piece of mind for unit owners within the association, all come with different terms and premiums based on the level of coverage and the associated deductibles and coinsurance amounts.

Coinsurance is the amount of risk that is shared by the insurer and the association and is assigned as a percentage value. The higher the coinsurance value, the lower the premium. However, as the coinsurance value rises, the potential uncovered loss to the association is also elevated. For this reason, associations need to be careful in determining their true risk when purchasing insurance with a relatively high coinsurance variable.

Deductibles are the out of pocket expense an insured entity will face when making a claim. Again, as the deductible amount increases, the insurance premium decreases. In many instances, associations can also pass along the deductible to the unit owner making claim against the association policy thus reducing their liability and expense while still providing the required insurance.

While higher levels of coinsurance and increased deductibles may generate insurance savings to the association, they clearly add risk to the unit owners within the association. It is important that unit owners give their input to their board as they weigh the sweetness of a low premium with the bitterness of financial burden to potential claim stakers.

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Bob Gourley is founder of MyEZCondo, a communications firm that produces newsletter and website content material for condominiums and homeowner associations throughout the USA. He also serves as board president of his local HOA.

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