Question: Our community liability insurance policies are coming up for renewal soon. Some neighborhood associations have reported a tenfold increase in fire insurance premiums due to concerns about the proximity of a wildfire. Although our community does not appear to be in a fire danger zone according to real estate sources, are we in for a huge shock? — BC, Rancho Santa Margarita.
A: Many of my client associations have also had increasingly difficult times with the rapidly rising costs of property damage insurance coverage. To bring some insurance expert guidance to the discussion, I reached out to Michael Berg of Berg Insurance in Lake Forest and Scott Litman of Scott Litman Insurance Agency in Calabasas, two brokers known for serving HOAs.
As for the outlook for insurance premiums, Littman said that “unfortunately, this is going to be a long-term problem. According to reports, forest fire claims are increasing significantly every year.
Michael Berg explains that obtaining property damage insurance is not difficult for every community, but “only for those who experience a challenging claims history or are located in bushfire danger areas.” For these communities, he states that “accommodation will continue to be a challenge.”
So how can HOAs maximize their insurance dollars?
Berg said HOAs should make sure their broker specializes in HOAs to ensure the HOA has the right advice when making a business decision for their community. Littman suggested exploring changing the HOA’s approach to “bare wall” insurance, which often requires an amendment to the CC&Rs. He said this could reduce the premium by about 5%, depending on the insurance company.
Bare wall insurance means that the HOA only insures the shell of the home – the interior is only restored up to drywall, excluding fixtures (cabinets, sinks, etc.), finishes (carpet, wall coverings) and interior contents. Many of my condominium client associations have moved in this direction, but the CC&Rs must be reviewed first.
As Mr. Littman stated, the CC&Rs may need to be amended to align the HOA’s insurance liability with damage liability. Additionally, if an HOA adopts a “bare wall” approach, reasonable advance notice must be provided to homeowners so that they are not exposed to large uninsured losses following changes to the HOA’s insurance. Before choosing bare walls as an insurance option, consult experienced HOA legal counsel on this important matter.
Another technique many HOAs use to lower the cost of insurance is to increase deductibles, and many HOAs have already followed this strategy by requiring the HOA to be willing to absorb a larger out-of-pocket loss.
I asked the experts about the common mistakes they see when it comes to HOA insurance.
“The biggest mistake is neglecting the business relationship with their insurance provider,” Berg said.
Littman said, “we’re finding a significant amount of policies that are missing important coverages.” He recommended that HOA boards and managers review their policies annually.
There are many excellent insurance experts serving HOAs in California. Thanks to Michael Berg and Scott Littman for sharing their expertise and advice.
HOAs are better served if attorneys and insurance brokers communicate about their mutual clients. HOAs should review their insurance coverage to confirm that it meets their responsibilities in the insurance and claims governing document.
Kelly G. Richardson, Esq. is a Fellow of the College of Community Association Lawyers and a partner at Richardson Ober DeNichilo LLP, a California law firm known for community association counsel. Send questions to [email protected]