Explaining Insurance for Homeowners Associations
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Factors like what kind of coverage your HOA’s master policy outlines, costs, and annual assessments should be considered when reviewing your HOA policy. This article will explore insurance for homeowner associations and help you understand how the right policy and coverage can help protect your investment and community.
What is homeowners association insurance, and What Does it Cover?A homeowner's association is responsible for establishing and enforcing your community's rules and maintaining and repairing common areas. Part of that entails outlining what kind of insurance the property requires to cover losses, damages, and other shared risks, as well as the coverage limits and deductibles. HOA members pay monthly association fees to maintain and repair the community’s common areas and pay for insurance that protects the community’s assets.
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First-Party vs. Third-Party CoverageThere are two kinds of coverage for HOA communities: First-party and third-party. First-party insurance covers the policyholder's losses, and they can file a first-party claim against their insurance policy. An example of a first-party insurance claim would be if the association filed for losses or damages from a fire.
Third-party coverage protects an association from litigation brought forth by another entity. An example of a third-party claim would be if a resident broke their ankle after stepping in an unrepaired pothole in the community parking lot and sued the association for medical costs and damages.
Insurance for homeowner associations generally includes several types of first-party and third-party policies. The community’s policies protect building exteriors, structures, shared spaces, furnishings, and people like board members and community employees.
What is the master insurance policy for a homeowner association?The community’s master policies can provide coverage that protects several areas of the property and may include some of the following:
- General Liability: This coverage includes incidents within the community’s shared spaces, like personal injuries, theft, and property damage. If a resident or visitor has their computer stolen at the community’s gym and sues the HOA, a general liability policy should cover the damages. This coverage applies to accidents like a slip and fall on a shared walkway or sidewalk or other damages incurred in a common space.
- Property: This coverage applies to property within the community, including parking garages and lots, hallways, elevators, fitness centers, pool areas, and community meeting or reception areas. It also covers shared equipment like boilers, oil tanks, water heaters, and pool pumps.
- Directors & Officers Liability: This coverage protects board members, officers, employees, trustees, and volunteers against liability claims while carrying out their duties and making decisions on behalf of the association.
- Building: A master policy usually offers three different kinds of coverage for units in a building. They include:
- Bare Walls: This coverage includes basics like roofs, exterior floors, elevators, and exterior walls. Residents must cover things inside their units, like flooring, fixtures, furnishings, and large appliances. Bare walls coverage excludes residents’ personal property.
- Single Entity: This coverage includes basic elements like roofs, exterior floors, elevators, and exterior walls. It also covers some fixtures, standard finishes, and general appliances. Much like bare walls coverage, single entity coverage excludes residents' personal property.
- All-In: This comprehensive coverage protects elements like roofs, exterior floors, elevators, and exterior walls, as well as fixtures, additions, installations, and improvements inside the units. It does not, however, cover personal property.
- Crime Coverage: Covers against loss or disappearance of money or property due to forgery, fraud, embezzlement, or theft committed by board members or “employees” as defined in the policy.
- Commercial Auto: This coverage covers comprehensive and collision damage involving service vehicles owned, rented, or borrowed by the association.
- Workers Comp: This coverage protects direct employees and volunteers who may be injured while on the property and under-insured subcontractors and vendors.
- Umbrella Coverage: Provides extra limits of coverage beyond liability and limits on policies like general liability, commercial auto, and directors and officers.
- Building Ordinance or Law: This coverage covers upgrades and repairs (which can be costly) required to bring an older building up to code after the damage is incurred.
Exclusions and Supplemental CoverageThe role of an HOA's master policy is to provide coverage for the community in case something happens. However, there could be several exclusions that could affect homeowners. Becoming familiar with the exclusions under an HOA master policy makes it easier for boards to communicate coverage to homeowners. In turn, boards can help residents navigate home insurance policies to obtain coverage for things not addressed by their HOA insurance.
“Owners should know what the association’s policy covers so they can get a corresponding policy that ensures complete protection without any gaps in coverage,” said Jamie George, vice president of insurance at FirstService Financial. “It should be a dynamic relationship.”
Annual Insurance ReviewCommunity associations should conduct annual insurance reviews to assess what new coverage might be needed or outdated. This is essential for measuring costs and limiting risk, since different types of polices apply within a property's boundaries. Communities are constantly evolving so an association must keep up with all these changes!
Since most HOA insurance policies renew yearly, it is an excellent opportunity to have a professional assess and advise what new coverage is needed. An annual insurance review can be conducted by either an agent or broker and is especially important if the property has undergone extensive improvements or renovations or has a new asset, like a gym area or pool. The annual insurance review is also crucial if a community has partnered with a property management company within the last year. A property management company may require specific coverage to protect the property, so it is best to review this annually to ensure compliance.
Risk & Risk ManagementWhen considering a new policy or renewing your community coverage, it is essential to minimize risk. Risk can be reduced by partnering with a property management company that has experience in managing HOAs and negotiating better rates and coverage.
FirstService Residential can help your association navigate HOA insurance and find the right coverage for your community. And while no one can predict when disaster or damage will happen, having the right coverage and partnering with experts can help mitigate risk and keep your community safe.