For many, the recent years have been characterized annual surges in insurance premium costs. The reasons are multifaceted: supply chain disruptions, inflationary pressures, rising labor costs, and repeat loss histories, particularly in Gulf Coast areas. However, understanding the root causes doesn’t always translate to effective solutions. The real challenge is finding ways to navigate these hikes. Archer Risk Services works specifically with Condominium Associations and Homeowner Associations (HOAs) to serve their unique insurance needs. We help our clients obtain affordable condo master policies and mitigate their risk exposure.
Here we’ll cover several proven strategies our Texas condominium and homeowners association clients have used to counteract condo insurance premium increases.
Understanding Valuation Discrepancies
One recurring problem is property undervaluation. Carriers have taken note of persistently undervalued properties and have been adjusting valuations to more accurate levels, catching many homeowners and condominium associations off guard. For example, until recently it was not uncommon to see average-grade construction condominiums valued at $80 per square foot. For a 10,000-square-foot condominium building, which is required to insure the Unit interiors, the total insured value would be $800,000 for 100% replacement cost. In reality, this building could not be reconstructed for less than $1,000,000. However, many insurers let this slide without a coinsurance penalty. Until recently.
Insurers started taking notice when the instance of claims began to rise; notably, even small losses were costing significantly more than their predicted percentage of the total value. This has led to mandatory increases in valuations to match actuarial models for rebuild costs. Effectively, it meant Condo Associations had to spend more on the total amount of insurance needed. In response, some Associations are now choosing to carry less than 100% of the replacement cost in order to reduce costs. Condominium associations in Texas, for example, need to be insured for at least 80% of the full replacement cost. If they are below this threshold, they’re obligated to notify every owner and mortgagee. A strategy some properties use is to carry less than full replacement cost value, though this comes with risks. While it’s an option, it’s not the first we at Archer recommend, even if governing documents permit it.
Revisiting Deductible Structures
Water damage and windstorm losses are the most frequent and costly causes of loss in our recent sampling of condominiums along the Gulf Coast. Revising those deductible structures can offer premium relief. By raising your deductibles, you assume more risk if a claim arises. However, the trade-off can be a reduction in premiums. For instance, higher water loss deductibles can significantly increase an underwriter’s ability to grant premium credits. The catch? The additional exposure from raised deductibles means shifting risk from the insurer to the insured or, in this case, the Unit Owners and the Condominium Association.
Many delineate this responsibility through an Insurance Deductible Chargeback Policy. Such a policy states that if a loss occurs and is below the deductible of the Master Insurance Policy, the Unit Owner must file their claim with their own insurance first. It may also state that if you damage the common property, your liability insurer may be required to cover the loss. This shifts loss responsibilities to the Unit Owner insurance carriers. Because Unit Owners are commonly already required to carry this insurance coverage, you simply shift the risk to the Unit Owner insurance carrier without increasing costs to the Unit Owners of the Association. The unit owner coverages act as a primary layer of insurance for most losses.
Relying on Loss Assessment Endorsement Coverages on Unit Owners’ Policies
One nuanced approach is to plan to reduce full replacement cost for specific coverage lines and plan to special assess for costs in excess of your limit of coverage. For instance, limiting coverage on a windstorm policy can substantially reduce premiums. This approach is a higher-risk strategy because you are certain to save on the premium; the trade-off is increased exposure for losses surpassing your coverage amount. In a windstorm loss scenario, you’d rely on special assessments to recoup costs from Unit Owners.
This strategy banks on Unit Owners having sufficient loss assessment coverage, therecapitalizing on the condominium unit owner policy (known as HO-6). The HO-6 often allows individual Unit Owners to cover special assessments and their units at lower costs than the Association. The key is educating individual Unit Owners to carry higher limits of this coverage. It is not uncommon that $50,000 in Loss Assessment Coverage can cost less than $150 per year. If your community has 300 units, that is potentially $15,000,000 in additional coverage way of the Loss Assessment Endorsements if every unit owner carries this coverage and if the source of the loss assessment is from a covered cause of loss. This approach demands intensive communication and collaboration with Unit Owners and the Condo Board.
For most Condominium Associations, the first step to managing insurance premium surges is harnessing the carriers already insuring parts of the property and trying to avoid overlapping or duplicitous coverages. By leaning on these existing coverages and reducing overlaps between Association and Unit Owner coverages, Associations can often navigate insurance increases more effectively. This strategy should be discussed with your insurance agent, attorney, Board of Directors, and unit owners before implementation.
Manage Increasing Condo Insurance Premiums With Strategy
While the tide of rising insurance premiums is challenging, there are strategic moves that can mitigate the impact. Collaboration, education, and understanding the nuances of insurance coverages are pivotal in this endeavor. The Texas Department of Insurance is a good resource for general information. The Association insurance specialists at Archer can address your specific needs; use this contact form to ask your questions or get a free quote for your Condominium Association or HOA.