Just like your condo association or homeowner association has to pay its taxes, it also has to pay for its insurance coverage. But managing risk coverage for an entire community is a little more complicated than insuring your family car.
Meeting Your Needs
Co-ops, condos and HOAs all have different insurance needs, and the price of your particular community's policy can vary with the size and market value of the property owned by the association—meaning the common areas, and the extent of liability exposure, such as pools and golf courses. Also, there are any number of carriers and any number of additional, specialty riders and add-ons you can choose from.
A good broker or agent—not to mention a knowledgeable board or manager—can make sense of it all. It also helps to have knowledgeable people on the board in a decision-making capacity. In some developments, responsibility for purchasing insurance may be delegated to a small subcommittee or even one person, but the general feeling in both HOAs and the insurance industry is that more heads are better than one.
What is the minimum of coverage an HOA should carry? Debbie Pasquariello of Boyarin Hourigan Blundell Insurance in Toms River, a community association insurer, says that bare minimum coverage requirements are outlined in an association's governing documents. The association, however, can always opt to purchase more comprehensive coverage.
A homeowners association that is not a condominium does not need property coverage (exclusive of a clubhouse), just liability, believes insurance broker and consultant, Edgar A. King of E.A. King Insurance in Allenhurst. "The liability limits should be at least $1 million, and I would strongly suggest they have an umbrella policy over that for another $1 million," he says.
Variables like the amount of physical property in common areas owned by the association and size of the development all factor into the mix as well. Speaking specifically of condos, Tom Fontana of The Property and Casualty Group in Cranford says, "If a development has 10 units, the policy should cost a different amount than one with 100 units. I think today that if there are 100 units or more, you should have a $25 million policy."
Premiums—Going Up and Down
When buying property insurance, boards and managers must face the rising cost of insurance premiums. These were going down - until 9/11, that is.
"The increases right after 9/11 were the largest we had seen in years—25 to 35 percent," says Pasquariello. "Then it settled down to around seven to 10 percent. Now, we are seeing increases in replacement cost of building materials, but rates are actually coming down, resulting in flat increases to five percent and reductions in some areas."
Premiums, as can be expected, are also higher in coastal areas than inland, thanks to the threat of flooding and damage from storms and hurricanes. "I live on a barrier island [Long Beach Island]," says Andrew Anderson of Anderson Insurance Agency in Beach Haven. "I am affected every day."
But says Anderson, for "Main Street America" condo associations that are away from the coasts, "the availability of coverage for them is typically more diverse than it is for associations near the water." He should know—he's the president of Professional Insurance Agents of New Jersey.
Some other factors that are responsible for rising premiums include the rising costs of materials and contractors, inflation, losses, increases in property values and increases in coverage amounts, liability rates and more.
Conversely, says Fontana, there are factors that cause condo insurance rates to go down at times. "The reason prices went down in the 1990s was because brokers came up with condo and co-op programs where they would put together a program with various insurers, each doing layers," or covering different parts of the policy. Although these programs have basically gone by the wayside, he says, the appearance of more insurers being on the scene can, in itself, cause prices to go down.
"To use the example of auto insurance, all of a sudden GEICO and Progressive Insurance are writing in New Jersey. That scares the hell out of the other companies," says Fontana, and makes them lower their prices to remain competitive.
Underwriters Are People, Too
The person or entity responsible for the actual insurance policy is the underwriter, who evaluates the information that is provided by the agent and the broker and inspects the property. The underwriter then applies the credits or debits to the manual rate from which all premiums are derived.
Underwriters have a range of rates they can use for a given account - the better the loss history and condition of a development, the lower the rate they will use. The guidelines for underwriters' pricing are usually decided by the insurer's upper management.
It's important to remember, says Anderson, that "Underwriters are people, too, they have good days and bad days. I've had an underwriter show great interest in writing an association policy, and I don't know what peaked his interest—maybe his bosses told him to write more, maybe there was a contest within the company, maybe he was in a good mood. There are times an underwriter does a great job for you, and three months later, a similar opportunity comes up and he's not interested."
Consultants and Purchasing Groups
Some readers may wonder whether there are consultants or brokers out there who can help HOA boards and/or management get the best deal for their insurance dollar. Insurance professionals interviewed for this article agreed that there may be, but that an intelligent, well-managed board and/or manager themselves can do a thorough job of interviewing insurance agents.
"I suggest the manager and/or the board interview and select their agent as they would any other professionals, for their expertise in this field," says Pasquariello. "A good agent will check the marketplace to make sure the association has the best coverage with the best premium."
Some boards and associations may be interested in buying insurance in bulk, thus reducing their premiums because they are in the same "risk pool" - or purchasing group made up of entities that have similar risk characteristics. Such bulk buying may have been more common in the past, however.
Marshall McKnight, a spokesman for the state Department of Banking and Insurance (DBI), says that it is in fact possible for condo associations to form such a purchasing group, but "the department is not aware of any condominium association risk pools currently being formed."
In general, the professionals interviewed for this article frown on risk pools. Pasquariello comments that "the first-named insured has all the rights to amend the policy, cancel it or submit a claim. The scheduled named insured do not have any of these rights. If one or more associations have an adverse loss experience, it can affect all in the pool, causing rates to increase even for the good risks."
Of course, there are other, more common ways a development and its board can reduce its insurance premiums. One way is to meet with a good insurance agent or underwriter, who can have many constructive suggestions on risk management techniques to reduce losses.
McKnight also recommends that associations have regular safety inspections and raise their deductible amounts. But perhaps the best way to keep those premiums down is to be proactive and to try and prevent any dangerous situations that could result in insurance claims.
"If something happens to one of the owners, like a slip and fall," says Fontana, "fix the problem right away, and make sure someone calls right away. Be on top of accidents. If I show you a five-year loss run with no claims on it, you know I'll get a good price [the next time the board needs to renew its insurance]."
For some condo and condo developments or HOAs, the basic property and general liability insurance just isn't enough. They have swimming pools with machinery, boiler rooms, gyms/spas, golf courses and more - and all of these must be insured.
In addition, many boards and managers may want fidelity bond insurance (which protects organization in case of dishonest acts by employees), errors and omissions coverage (which protects the insured against the consequences of negligence, mistakes or the failure to take appropriate action), and/or directors and officers liability (which protects the board).
If you want any of these types of insurance, you don't have to go far. In general, according to the professionals interviewed for this article, the same company that provides the general umbrella policy also provides equipment/machinery insurance, golf course insurance, fidelity bond insurance, and so forth.
Interestingly, some associations may be tied by their governing documents into buying types of specialty insurance that they don't really need.
"In many cases," says Anderson, "these documents are drafted by attorneys, who may not be well versed in insurance. In an effort to be very broad, they may throw in types of insurance that aren't needed. For example, an HOA that does not own any traditional real property except for streetlights, sidewalks and water basins may have a requirement [in its documents] for boiler and machinery insurance."
In a case like this, he says, the board should get together with its insurance agent, and then with its attorney, who will help them remove these superfluous requirements from their bylaws.
Don't Have To Shop Around
Is there a benefit to staying with the same insurance carrier year after year, or is it a good idea to test the marketplace and switch providers on a regular basis?
If your agent is not doing a good job and isn't helping you keep your premiums down, it's best to look for a new agent. But if you're satisfied with your carrier, it's a good idea to wait at least three years before shopping for a new one, say both King and Anderson.
Otherwise, says Anderson, "Your insurance gets what we call 'shopworn.' If you shop it too much and there's too much wear-and-tear [too many carriers in too short a time], it will wear the underwriters down and they'll pass on your development."
But if you and your board keep an eye out for ways to reduce your risk - by abiding by strict safety standards, having regular maintenance and security assessments, and not letting potentially dangerous situations languish before fixing them—and make your community association as attractive as possible for prospective insurers, you can keep your premiums under control.
Raanan Geberer is a freelance writer living in New York City.