Why Does Our Association Need an Annual Insurance Review?
You know that your association needs to have the right insurance coverage in place. So you have property coverage, liability insurance, workers’ compensation, directors and officers (D&O) and an umbrella policy in place. Premiums are paid regularly and on time. Did you know that’s not enough? Insurance is one area, especially property and liability coverages, that you cannot take a “set it and forget it” approach and still achieve optimum financial well-being for your association.
It’s important to have your insurance coverage reviewed every year, as a matter of course, when you renew your policies. Kevin Wallace, senior vice president for finance and accounting at FirstService Residential, has 25 years of experience in property management. He recommends an annual review, at the very least: “Associations need to track their purchases and get an expert opinion to determine if additional coverage is needed,” he said. “Depending on the complexity of the community and its requirements, an agent, a broker or appraiser can conduct the assessment.”
Beyond an annual check-up, your association board must update coverages whenever you make any significant improvement or upgrade to the property. Imagine investing in a new gate system, not upgrading the association’s insurance coverage to include it and it being destroyed by a storm before it’s properly covered.
Your association won’t have insurance funds available to repair or replace those upgrades. That lack of funds could result in the need for a special assessment, which will lead to strife within the community and possibly lawsuits against the association – and individual board members. Even if your board successfully fights off a lawsuit, the conflict in the community will negatively impact residents’ lifestyles and the resulting legal fees will negatively impact your budget. If you partner with a professional property management company, failure to maintain proper insurance coverage can also be a breach of contract with that company and may cause the manager to terminate the contract.
“The board’s primary fiduciary responsibility is to protect, maintain and enhance the property,” Wallace said. “Not having the proper insurance coverage in place may be a violation of that responsibility.”
Wallace said it’s easy to minimize risk by simply updating your insurance as needed. “Any major change should trigger a review,” he explained. “We aren’t talking about things like a coat of paint. If the completed project adds to the value of an asset, or adds a new asset, you need to have it valued and your insurance policy updated accordingly. That goes for removing assets as well. It’s not financially responsible to pay for coverage that isn’t needed.”
How can you do that? A knowledgeable insurance agent or broker should be able to conduct a review of your policy when you notify them of a change and let you know if additional coverage is required. For complex properties, an expert appraiser may be brought in. Even if you don’t need additional coverage – your policy may be adequate to cover the change – it’s prudent to make that call, just in case.
What happens when you need your insurance updated, mid-policy? Katherine Beltran, product manager for FirstService Financial, which provides best-in-class financial services for FirstService Residential-managed communities. She explained when you contact your insurance agent, they will likely ask questions about the project. Beltran recommends keeping copies of all receipts and other documentation about the cost of a project and having them handy when speaking with the agent – they’re a great way to establish the baseline value of the addition. The agent will then check the existing policy. You may have a blanket policy that already covers the change in assets. If a change to your policy is needed, the agent or broker will write what’s called an endorsement.
“If you add a pool, we’re not going to write you a whole new policy,” Beltran explained. “We simply add a sheet to the policy that says ‘coverage of a pool was added and will cost $X through the end of the current policy.’” She cautions that it’s important to follow up and get confirmation that the endorsement was completed.
It’s important to have a good relationship and established trust with your association’s insurance agent or broker. A good broker will look out for your interests and get the best coverage at the best price for your association. But even the best insurance representatives can’t cover assets they don’t know about. Always update your insurance coverage when you make changes to your property, and do so immediately. Otherwise, you risk having to issue a special assessment to cover repairs and losing credibility with your association, which will negatively impact almost every facet of your community.