Finding HOA Insurance: Strategies in Tough Times

community association fire insurnace insurance coverage wildfires Sep 20, 2023
Fire and homeowners insurance

By Kelly G. Richardson, Esq., CCAL 

Many of our client associations have had a difficult time with the rapidly increasing cost of insurance coverage to protect against damage to the property. Several of the largest property insurers have stopped writing or renewing policies in California, and rates have skyrocketed. Many clients have been forced to impose emergency assessments to handle unanticipated premium increases. 

To bring some insurance expert guidance into the discussion, we contacted Michael Berg, of Berg Insurance in Lake Forest, and Scott Litman of the Scott Litman Insurance Agency in Calabasas, two leading insurance brokers known for serving HOAs.  

As to the outlook for insurance premiums, Litman said, “Unfortunately, this is going to be a long-term problem. According to reports, claims for wildfires are increasing substantially each year.” Michael Berg explains that placement of property damage insurance is not hard for every community, but “only those that have a challenging claim history or located in wildfire hazard zones.” For those communities, he states “placement will continue to be a challenge.” Even the definition of wildfire hazard zones has changed. Many properties are suddenly considered in wildfire zones, with catastrophic impact to their insurability. 

We asked our experts, how can HOAs maximize their insurance dollars? Berg said HOAs should confirm their broker specializes in HOAs, and to make sure that the HOA has the right advice in making a business decision for their community. Litman suggested changing the HOA’s approach to “bare walls” insurance, which often requires an amendment to the CC&Rs. He said this could reduce the premium by about 5%, depending upon the insurance company. 

Bare walls insurance means the HOA only insures for the shell of the residence –the interior is only restored to the drywall, excluding fixtures (cabinets, sinks, etc), finishes (carpet, wallcovering), and interior contents. Many of our condominium client associations have moved in that direction, but the CC&Rs must first be examined. As Mr. Litman stated, it may require a CC&R amendment to align the HOA’s insurance responsibility with its damage responsibility.  

Additionally, if the HOA adopts a “bare walls” approach, reasonable advance notice should be provided to homeowners, so they are not exposed to major uninsured loss after the HOA insurance changes. Before pursuing bare walls as an insurance option, consult experienced HOA legal counsel on this important issue. 

In our experience, we find clients have insurance that is “bare walls,” but their CC&Rs require that the HOA insure the common area and “all improvements” in the complex, including interior fixtures and finishes. Other clients have bare walls provided in the CC&Rs and have “walls-in” insurance coverage added, which covers interior finishes and fixtures. Even still, other clients, typically attached townhouse or patio-style planned development home associations, are insuring the structures even though they are not common area. We recommend a careful review of the HOA’s insurance and the governing documents to make sure they match. 

Any changes in the HOA’s CC&Rs will require a vote of the homeowners, so boards will need to consider the effort and cost accordingly. However, the legal and management cost of pursuing a membership vote may be well worth the savings in insurance premiums. 

Another consideration in the “bare walls” vs. “walls-in” insurance is the fact that most homeowners already have their own individual insurance covering their buildouts and personal belongings. If the HOA is covering the interior fixtures and finishes, then the insurance is duplicating the insurance already held by most homeowners.  

Last, a technique many HOAs use to reduce the cost of insurance is to increase deductibles. Many HOAs already have pursued this strategy, and requires the HOA to absorb a greater out-of-pocket loss.

We asked our insurance experts about the common mistakes they see community associations making. Mr. Berg answered, “The biggest mistake is ignoring the business relationship with their insurance provider.” Scott Litman said, “We find a substantial amount of policies missing important coverages.” He recommended that HOA boards and managers annually review their policies.  

There are many excellent insurance experts serving California HOAs as brokers. Thanks to Michael Berg and Scott Litman for sharing their expertise and advice.  

HOAs are better served if lawyers and insurance brokers communicate regarding their mutual clients. HOAs should annually review their insurance coverage to confirm that it matches its governing document responsibilities for insurance and damage, and to make sure the association is doing the best it can in the contemporary marketplace.