Ask the HOA Insurance California Experts: Why are Premiums Spiking by 30%?
Did you know? Insurance premiums are rising at an exponential rate (15% to 30% in many cases), with some associations struggling to obtain coverage. How will this affect your HOA insurance? California insurance experts can answer your questions.
In our virtual Q&A, The Uncertain Future of Association Insurance, FirstService Financial Vice President of Insurance, Jamie George, discussed what type of insurance coverage your association needs, the hardened markets and how to handle brush zones.
Watch the video below to learn how to protect your board and association.
1. What is causing the rate increases (particularly in the liability area)?
Insurance market conditions are becoming increasingly challenging. The liability, property, and umbrella coverage sectors are hardening, leading to difficulties in obtaining new policies or renewals and increased premiums. Even worse, some insurers are pulling out of the market altogether. Natural disasters have caused a surge in worldwide claims, driving up claim costs. Notably, the number of liability claims involving attorneys is on the rise, further fueling skyrocketing costs.
“We’re seeing a great hardening of the market right now due to global conditions (since reinsurance ties back to the global market). A lot of clients are experiencing premium increases, underwriting guidelines are tightening, and carriers are pulling out of the market. Claims, liability and litigation have all increased. To that end, association boards should be increasing their insurance line items by at least 10% and up to 30%, depending on their property type and if they’ve had losses.”
- Jamie George, Vice President of Insurance at FirstService Financial
2. What steps can your association take to mitigate these 15% to 30% insurance increases?
The insurance market has become more stringent, leading to limited options in reducing premiums. While associations can scour for better rates, compromising coverage for lower costs can result in more expenses in the long run. It's crucial for associations to assess their property limits to ensure adequate coverage and avoid both over or underinsurance. This careful consideration can potentially save your association thousands of dollars. Additionally, raising deductibles may be worth considering to decrease premium costs.
The most important thing you can do is be proactive and work with an HOA insurance expert to mitigate future challenges. For example, FirstService Financial assists nearly 4,000 FirstService Residential clients with the placement of insurance policies annually. Because of their expertise with association insurance, they can provide added value to communities and high-rises with education, loss control programs, policy review and analysis and support of the renewal process.
3. Is your association located on or near a brush zone?
A brush zone is an area of land characterized by dense vegetation that's particularly vulnerable to catch fire during wildfire season. The dimensions of these zones vary among state and federal agencies and insurance carriers, each with their own definitions and standards. It's recommended that you consult with your insurance provider to pinpoint the precise location of your brush zone. Some carriers may offer discounts if your association agrees to clear some vegetation around the property. But more importantly, removing the surrounding foliage, even if it doesn't affect your premiums, is a proactive measure you can take to minimize wildfire damage.
“Insurance carriers take into consideration many things to determine their brush zone dimensions. They look at the density of vegetation and forestry surrounding your association. Then they assess their losses before deciding what they should include in their zone. My previous client had a carrier that only wanted to cover one side of the highway in their zone because they deemed the other side was too far from the fire hydrants.”
- Jamie George, Vice President of Insurance at FirstService Financial
Visit California Fire Hazard Severity Zone Viewer to check brush zones and get important fire prevention information.
4. What type of coverage should your association carry?
There are six insurance coverages every association should carry:
- General Liability
- This coverage will protect your association from any third-party liability claims on property or bodily damages of others. Commonly known as slip-and-fall coverage, general liability coverage pays if someone is injured or property is damaged in your community.
- Property Damage
- This coverage will protect your association’s property and physical assets.
- Directors and Officers (D&O)
- This coverage will protect your board from exposure to monetary and non-monetary complaints and claims based on their decisions while in service to the association.
- Crime or Fidelity
- This coverage will protect your association from theft of money and embezzlement.
- California has a statute requiring associations to maintain fidelity bond coverage for their directors, officers, and employees in an amount equal to or more than the combined amount of the association’s reserves and total assessments or three months. Read more about California Civil Code 5806 here.
- Umbrella
- This coverage goes above and beyond your general liability underlying coverage. Umbrella coverage will cover any additional costs after you’ve exhausted your general liability coverage in the event of an accident. If you have any amenities or assets that may result in liability (e.g., playground, swimming pool), it is highly recommended that you carry umbrella coverage.
- Workers’ Compensation
- This coverage can help your staff and protect your association in the event you are included in a lawsuit related to a vendor’s employee. Some workers’ compensation policies will recommend additional volunteer coverage for your board of directors and committee members. If something happens to someone while volunteering on the property (e.g., they slip and fall during a meeting or event), this coverage would help them with additional copays once they’ve maxed out their coverage.
5. What is the right amount of coverage for your association?
Determining the most suitable insurance coverage for your association can be an intricate process and depends on several factors, such as location, assets, and other considerations. However, to provide you with a comprehensive overview, we have compiled a list of standard coverage amounts for each insurance type:
- General liability coverage should be $1 million per occurrence and $2 million aggregate.
- Property damage coverage depends on what your association owns in buildings and physical assets.
- Directors and officers (D&O) coverage should be $1 million.
- Umbrella coverage begins at $1 million and can go up to $50 or $100 million depending on the type of community you have (e.g., a single-family home community will typically carry less than a high-rise association).
- Workers’ compensation should be $1 million.
6. How do condos decide and navigate deductibles for major water damage (Association Insurance vs. Homeowners' Insurance)?
This depends on your association’s Declaration of Covenants, Conditions and Restrictions (CC&Rs) and whom they determined to be responsible for the water deductible – either the association or the unit owner. With the rise of insurance rates, you can expect stricter underwriting practices and insurance providers offering association renewals that come with higher water deductible amounts in order to minimize losses. While there are programs available to lower high deductibles, the most effective solution is to educate homeowners about carrying loss assessments on their HO-6 (condo) insurance. We strongly advise homeowners to communicate with their agents and thoroughly review the association's master coverage, deductibles, and governing plans to better prepare for any liabilities or responsibilities.
7. What are some insights on liability for associations that have playgrounds?
If your association has a playground or recreation area, it’s highly recommended that your association carry umbrella coverage on top of general liability. We highly recommend adding umbrella coverage on top of your general liability policy to ensure you're covered for unexpected expenses beyond your initial coverage limits. With umbrella coverage, you can rest assured that all your bases are covered and your association is fully protected for any possible incidents.
“A few years ago, a Nevada HOA (not managed by or affiliated with FirstService Residential or FirstService Financial) was held liable for a swing set injury that resulted in a $20 million lawsuit. The swing set had reportedly failed before, but the board chose not to maintain it or remove the structure. The board did not have the additional umbrella coverage with their general liability, so they were only protected for $1 million of the damage.”
- Jamie George, Vice President of Insurance at FirstService Financial
8. Which communities should be carrying earthquake insurance?
Earthquake insurance is a costly coverage to have, and only 8% of associations carry this type of HOA insurance. California associations must have a separate earthquake policy since it is not included in your property damage coverage. Check with your carriers for various earthquake coverage options depending on your location and state.
9. What types of incidents should you report to your insurance carrier?
As the policyholder, you are typically responsible for filing claims with your insurance carrier; however, there may be certain circumstances where it's more beneficial to accept the loss.
In case of an injury on your property, time is of the essence. It is crucial to notify your general liability carrier immediately and obtain an incident report from the involved parties while the details are fresh. If the injured party decides to file a lawsuit, the case will remain open for about two years. However, if they choose not to pursue legal action, your association is still protected.
When it comes to incidents involving your property, it's important to weigh the cost of damage against your deductible. For example, if your building has a $25,000 deductible and the total damage cost is only $8,000, you’d want to avoid reporting it to your carrier and keep that incident off your loss run report. On the other hand, if the total cost of damage exceeds your deductible, it's essential to report the incident to your carrier immediately.
For D&O incident claims, be sure to notify your carrier in writing within 90 days. It’s best to have a conversation with your broker about which types of claims you need to report.
10. What impact do ongoing HOA lawsuits have on insurance rates or insurability?
Ongoing lawsuits generally make carriers nervous, which could potentially affect your coverage. To evaluate your rates and coverage, carriers typically examine a 5-year loss report for your association. As such, it’s crucial to partner with a well-versed HOA broker. Importantly, note that involvement in a lawsuit doesn't always signify guilt.
11. Who should your board meet with to discuss insurance coverage?
If your association is in need of insurance coverage, it’s essential to work with an experienced HOA broker who can help you determine the right policies for your unique community or high-rise building. For single-family HOAs or condominiums, it’s especially important to present an in-depth reserve study to your broker. Additionally, partnering with a skilled broker and obtaining a thorough appraisal can help ensure you make the best decisions for your high-rise building.
As a member of the board, it is your responsibility to keep your broker informed about any updates or additions to your community that require coverage. This includes new facilities such as playgrounds, pools, spas, or lounge areas. Failure to communicate these changes with your broker may result in financial loss for your association. Collaborate with your management team to assess your association's needs for better protection and ensure that your broker is informed of any changes in a timely manner.
What next?
How can you set your association up for success? Be prepared and communicate often and early with your agent or broker. Ensure your board knows when your renewal date is and start the conversation early (90 to 120 days before, to be exact!). Make sure to keep your insurance agent updated on any updates or changes in your community or high-rise so they can promptly notify you if your coverage is sufficient. While you can't stop natural disasters or unexpected lawsuits, you can stay prepared for them.