It is important for community association boards to review their insurance policies to ensure that the deductibles are compliant with their governing documents and serve the interests of the Association. Matters involving insurance remain some of the most confusing and misunderstood aspects of community association management, and this includes how board members may traditionally think of deductibles. In our everyday lives, it is common and preferable to have insurance policies on homes and automobiles with low deductibles—as this allows easier access to insurance proceeds in the event of a loss. As will be discussed below, however, it is generally preferable in the community association context to have a relatively higher deductible than we would choose for a personal policy.

     In community associations, and condominium communities in particular, insurance deductibles serve an important gatekeeping purpose. Generally, owners are responsible for repairs to their unit or lot, and if damage occurs, they either take care of it themselves or submit a claim to their own personal insurance carrier. When a casualty event does occur, that causes damages exceeding the deductible of an association’s insurance policy, this typical repair and maintenance scheme may no longer apply, and the association may be forced to turn in a claim on the community’s policy and then utilize available proceeds to make repairs to the damaged unit(s). Also, when the damage is caused by a casualty event exceeding the deductible of an association’s insurance policy, it will often be determinative as to whether the individual owner is responsible for dealing with damage and the needed repairs, or if the association is responsible for doing so. Boards need to be aware of this and regularly review their deductible levels to ensure that this threshold to the association’s policy is not too low.  

     There are many reasons why boards should be consciously taking steps to limit the number of claims it is required to make on an association’s policy. As many communities have been experiencing first-hand, the insurance market for community associations has recently been in a severe state of flux, and many associations are dealing with the realities of losing insurance coverage, the inability to find coverage via traditional insurance providers, and of skyrocketing premium costs. One key factor that insurers review when looking to continue coverage or in quoting insurance premiums is the loss history of an association. Communities that have frequent claims made on their policies, therefore, are going to see increased costs and are at an even greater risk of losing traditional coverage when compared to those that have fewer claims. Accordingly, if a board can take steps, such as increasing the deductible, to limit the number of claims that are submitted on the association’s policy, it is taking a prudent step to protect its claim history and place the association on stronger ground when shopping for insurance coverage.

     Further, and to be clear, the point of raising deductibles is not to remove benefits or deprive owners of insurance coverage. Instead, it is to protect the association’s claim history and to appropriately shift the insurance burden for relatively small losses on to the owner’s individual policies. For example, if ten owners in a community each suffer individual and unrelated casualty events that are covered by their own insurance, that only amounts to one claim for each of those owners. If each of those claims, however, exceeds the association’s deductible then the association will be forced to submit ten separate claims on its single policy, and this could result in future loss of coverage or a spike in premiums.  Associations instead should view their insurance coverage as something to be utilized for more extreme and high-dollar casualty events, not smaller instances such a leaking water heater or overflowing toilet, and owners should be educated and encouraged to purchase their own policies to provide individual coverage.

     Finally, the reality is that dealing with insurance claims that involve repairs to units can often be complicated.  Boards are forced to deal with owners who justifiably want updates and for repairs to move quickly but may hold unrealistic expectations.  Beyond that, some owners simply refuse to cooperate with the association and delay or refuse access in attempts to control the repair process themselves. In short, handling these matters can be a pain and boards should seek to limit association involvement in dealing with repairs to individual units or lots wherever possible.

     While boards should be reviewing their current deductibles, it is important to note that it is also necessary to review your association’s governing documents before making any changes to deductibles. Governing documents typically state that the deductible on the association’s casualty policy cannot exceed a certain amount, most commonly $10,000. Recently, however, the insurance market has shifted, and associations sometimes cannot find policies with deductibles that meet the requirements of the governing documents. If your association is in that position, your board may want to consider amending the governing documents to remove the deductible limit and give the board flexibility to find an insurance policy that works for your association. Often, such an amendment can be accomplished through a board vote. If you are interested in learning more about such an amendment, please contact our firm.

If you have any questions about insurance, deductibles, or any other issues that may impact your association, contact Williams & Strohm, LLC at (614) 228-0207.