Rising HOA insurance rates are crippling association funds, leading to reduced coverage, higher dues, and budget shortfalls. As insurance is a must for many communities, boards are struggling to meet insurance requirements while still maintaining a healthy financial position. Fortunately, there are some strategies boards can employ to minimize the effects of insurance spikes.
Factors That Affect Rising HOA Insurance
Homeowners associations and condominiums are responsible for protecting their finances and physical assets. This typically comes in the form of insurance. In fact, many states require HOAs and condos to maintain adequate coverage.
Yet in recent years, insurance has become an expensive line item in most community budgets. The Foundation for Community Association Research discovered that 93% of managed associations have suffered an increase in insurance rates. Master policies have increased by 90.4% over a two-year period.
Premiums are rising, and coverage has decreased significantly. Carriers are even discontinuing service to community associations entirely, thereby limiting options and causing costs to spike even further.
When determining rates, carriers consider several factors, such as:
- The type of community
- The association’s governing documents
- Total replacement cost
- Deductibles and exclusions
- The age of the building or assets
- Square footage and number of units
- Risk exposure and mitigation practices
- Relevant geographic risks
- Claims history
- Amenities and facilities
- The type of construction
Insurance premiums can vary greatly from one association to another. Two HOAs in the same area can have considerably different costs depending on their profiles.
What’s Causing High HOA Insurance Costs?
There are two main causes affecting insurance costs: inflation and severe weather events.
Inflation is rising rapidly, driving up the cost of construction materials and labor. As prices rise, claims are becoming more expensive for carriers, prompting them to raise insurance rates.
Weather events are also becoming more extreme and unpredictable. North America has been experiencing more frequent hurricanes, wildfires, and floods. These natural disasters are making carriers suffer significant losses.
When combined, inflation and weather have made it riskier for carriers to insure HOAs and condominiums. Those that still provide coverage are becoming more selective, implementing stricter underwriting standards.
Because of these factors, communities now face higher premiums, larger deductibles, more exclusions, and decreased coverage.
What Can Boards Do About Increasing HOA Insurance Costs?
Associations can cope with rising HOA insurance premiums by reviewing their coverage every year, maintaining strong insurance and property records, prioritizing preventive maintenance, budgeting for higher insurance costs, evaluating deductibles against HOA funds, shopping the insurance market carefully, communicating insurance costs with homeowners, and focusing on insurability (not just premiums).
Let’s discuss each strategy below.
1. Review Insurance Coverage Every Year
Boards must evaluate their HOA insurance policies annually. Waiting until the renewal date comes along may already be too late.
Regular reviews, particularly with an insurance professional, can help identify gaps in coverage and determine if the HOA is in a good financial position to accommodate the policy. The review should cover policy limits, exclusions, deductibles, replacement costs, and potential exposure risks.
Replacement costs are especially important. The value of buildings can change drastically as construction and labor costs rise. If an HOA uses an outdated replacement cost estimate, the carrier may require a substantial increase in coverage. This, in turn, can result in higher premiums.
2. Maintain Strong Insurance and Property Records
Now more than ever, insurance carriers look for documentation that shows how an HOA manages its property and mitigates risks. Boards should maintain clear and accurate records that they can easily provide when renewing their policy or filing a claim.
While records can vary from one community to another, it is generally recommended to maintain the following:
- Maintenance history and completed repairs
- Roof replacements and inspections
- Plumbing and electrical upgrades
- Balcony inspections and repairs
- Fire alarm and sprinkler inspections
- Safety inspections
- Wildfire mitigation and defensible space work
- Vendor contracts
- Reserve studies
- Incident and claims reports
- Meeting minutes related to major maintenance or risk management decisions
3. Prioritize Preventive Maintenance
Maintenance plays a significant role in minimizing property damage and liability claims. Boards should conduct regular inspections for all components and maintain records of these checks. A review of the association’s claims history can also help identify recurring problems or patterns.
For example, if the HOA consistently files water-damage claims, it may indicate a larger plumbing issue. Addressing the root cause can prevent breakdowns and minimize future claims. Carriers feel more confident in providing coverage when the association shows its commitment to preventive maintenance.
4. Budget for Higher Insurance Costs
Boards have no direct influence over rising HOA insurance, so it’s important to focus on what they can control — and the budget is one of them. Since insurance is required for most associations, boards must include it in their long-term financial planning. It’s best to assume that insurance will continue to rise rather than hope it will soon level off.
Every new year’s budget should account for a higher premium than the last. This gives the board a cushion of sorts, allowing dues to adjust accordingly and making special assessments less likely.
5. Evaluate Deductibles Against HOA Funds
Higher deductibles allow for lower premiums, but the board must consider whether the association can comfortably cover the amount after a loss. It may seem prudent to raise deductibles now, but an HOA can’t pay for them after a loss if its reserve or operating accounts are inadequate.
When evaluating insurance policies, boards should compare potential deductibles with available funds. Moreover, boards should verify that homeowners have sufficient loss assessment coverage on their respective HO-6 policies.
6. Shop the Insurance Market Carefully
While sticking with the same carrier might show loyalty, it can trap an association into a corner. Board members should shop around every now and then to look for more competitive rates. If the current carrier raises its premiums, it is worth checking what other carriers in the market charge for the same policy.
Of course, price shouldn’t be the sole consideration. Boards should also compare deductibles, exclusions, claims service, and coverage.
7. Communicate Insurance Costs with Homeowners
Insurance is often one of the largest line items in an HOA budget, contributing to higher dues. Homeowners may protest the expense, but this is usually because they don’t quite understand what’s going on behind the scenes.
Boards should explain the changes in insurance costs and the factors affecting premiums. It is also a good idea to communicate what steps the HOA is taking to manage its insurance expenses. Communication helps limit pushback and reduce delinquencies.
Additionally, boards must inform owners of their own insurance responsibilities. In general, they must each carry an HO-6 policy with adequate loss assessment coverage.
8. Focus on Insurability, Not Just Premiums
While the premium itself is important, boards should not focus only on that. Insurability is the chief concern, with factors such as claims history, maintenance, building age and condition, and financial planning all playing a role. Market conditions are beyond the board’s control, so it’s better to focus on addressing preventable risks and keeping the community attractive to carriers.
The Best Way Forward
Whether they like it or not, association boards must deal with rising HOA insurance costs. Eliminating insurance from the budget altogether isn’t an option, but preparation and risk mitigation can help make insurance rates more manageable. When in doubt, consulting an HOA management company or insurance professional is recommended.
Westward360 is a trusted partner for HOAs and condo associations across the United States. To get started on expert association management, contact us today or request a proposal online!
