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Insurance Options To Consider

Written by: Ellen Schuster, Esq.

May | 29

Insurance building blocks

Part 2 of 3: California HOA Insurance Issues

Insurance carriers throughout California are non-renewing homeowner association insurance policies. As a result, premiums and deductibles for available policies are increasing exponentially and the level of coverage offered is decreasing. In part two of a three-part monthly series, we discuss what to do when insurance policies are cancelled.

Given the state of today’s insurance market, many boards are asking about their options when presented with a much higher premium than before or the inability to obtain full coverage of the property. Boards facing insurance challenges can consider the below options, although several are far from ideal. As with all insurance matters with potential legal implications, community managers and boards should consult with the association’s insurance broker and legal counsel to learn whether these options will work for your association.


Go “Bare Walls”

For condominium associations whose property insurance policies typically cover the full building, including the separate interest units, it may be possible to obtain “bare walls” or “walls out” coverage instead. This type of policy often covers everything in the building except the separate interest units. Owners would be expected to insurance their separate interest units with their own individual policies. Additionally, the association’s governing documents may require an amendment (see further information below). This kind of change in coverage may come with a unique set of challenges and may not ultimately reduce the overall cost, so consult with the association’s insurance broker and legal counsel to discuss the risks and benefits of this type of coverage and how to properly communicate changes to owners.


Increase the Deductible

It may be possible to decrease the premium by increasing the deductible. However, whether this option is available – or prudent – depends on the individual circumstances of your association. Consult with the association’s insurance broker and legal counsel about whether this option is suitable for your association. Boards may also consider adopting a policy describing how insurance deductibles are handled if the governing documents do not already address that issue. Legal counsel should prepare the policy.


Consider Less Than Full Replacement Value

Another option is to obtain coverage for less than the full replacement value of the property, even temporarily. However, this option, in particular, poses risks to the association, so it should be considered very carefully and only with the guidance of the association’s insurance broker and legal counsel. One risk of note: potentially decreased availability of financing for buyers by lenders such as Fannie Mae and Freddie Mac.


Amend the Governing Documents

Your association’s governing documents may contain specific insurance requirements, including maintaining a policy which covers the units (sometimes referred to as a “walls in” policy) or coverage for full replacement value of the property. Boards may consider amending these provisions to provide greater flexibility or less responsibility for the association. Amendments to the CC&Rs, Bylaws, and Articles require member approval.  Legal counsel can advise on the types of amendments which may benefit the association and their approval requirements. Legal counsel should prepare the amendments.


Adopt a Policy

Regardless of an association’s specific insurance concerns, boards can consider adopting a water damages and leak policy. The policy should provide a consistent process, in compliance with the governing documents and the law, for the community manager, board, and owners to follow when addressing a water leak or other water damages issues. The policy can include details about how insurance claims and deductibles are handled. Legal counsel should prepare the policy.


Work Closely with Your Insurance Broker

With current market conditions, it’s important to work closely with your insurance broker and ensure they are specialists in working with HOAs. Your association’s policy is only as good as its endorsements so it’s imperative your broker understands the complex requirements and nuance involved with insuring HOAs. 


These options may be less than ideal, but they may be worth considering as boards navigate the challenging and uncertain insurance market in California. Contact your insurance broker and attorney to discuss what options may be available to your association.


Read part one here: Your Association’s Insurance Policy is Cancelled – Now What?