Community Reserve Studies and Insurance Underwriting

Two major association documents insurance carriers want to see when underwriting an Association risk are financials and a reserve study. Why? In short, good management and financial stability! A reserve study is a plan to maintain and update the associations buildings and infrastructure. A quick review of an association’s financials will show if you have been funding that plan. These two items tell an underwriter a lot about how the board of directors manages an association, and if they want to do business with them or not. Due diligence and pride in ownership have a direct relationship to losses. Insurance carriers want to see that reserve studies are conducted and updated on a regular basis, it shows they have a plan and are using the plan as intended.

Impacts of failing to plan, fund, and execute:

General Liability coverage section:

Items like parking lots, sidewalks, and stairwells that are not well-maintained expose the community association to more lawsuits from trips/slips and falls.  It is harder to defend against the suit if the property is in a state of disrepair. This means the defense costs are higher and the payouts tend to be larger. In addition, poorly lit common areas from non-functioning security lighting contributes to increase in violent crime, which draw lawsuits.

Property Section:  

Poorly maintained buildings suffer increased property losses.  Insurance does not cover the old broken pipe, but it does cover the water damage to the building when the pipe bursts. A major storm causes significant property damage because the roof was a past replacement and leaked.

Directors & Officers Coverage:

Associations that fail to plan and fund usually find themselves being forced to pass large assessment resolutions; large assessments draw legal challenges from the owners.  In addition, failure to be good financial stewards leads to complaints and legal action from unit owners and lenders.

Association desirability and insurability: (effective age vs. chronological age)

Insurability translates to whether or not an association can find insurance carriers to offer coverage terms. Desirability translates to getting the best terms and premiums in the marketplace. You want carriers to fight over you because you have such an excellent, well-maintained property. Low deductibles and low premium.

The older the association the more focus is placed on the age of the systems and infrastructure.   It is the delta between the chronological age and the effective age of a building. A reserve study will help a carrier gage the effective date of a building. Effective dates help carriers decide if they want to offer terms to the association and then at what rate do, they think is fair, given the age and condition of the property. It can be the difference between having several offers to choose from or begging someone to offer you something, anything. If you are the latter, it is a challenging hole to climb out of. Large premiums and large deductibles make it harder to save the money needed to fund the repairs and replacements required to improve the situation.

By Daniel Flavin

Daniel is a certified risk manager and has been in the insurance industry for 25 years. He has extensive experience and knowledge of community associations and associated insurance risks.

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