The Basics of Insurance and the Homeowners Association

Insurance is one of those funny things in life, as in funny strange.  Premiums are faithfully paid to have insurance coverage but, what is strange is, even though premiums are paid, filing an insurance claim can result in premiums rising or, in the worst case scenario, the insurance policy being canceled.  The insurance that a homeowners’ association has to maintain deserves special deliberation to help continue with reasonable and affordable coverage.


What to do? Or what not to do is probably more beneficial to know in understanding how association insurance works, and how to avoid problems with continued coverage and even possibly obtaining coverage.


Before getting into the special problems that arise with the association’s insurance, let’s discuss the basics of insurance and how insurance works with regard to your association’s insurance policies.


Insurance Professionals


Retail Insurance Agent or Insurance Agent, acts as an intermediary between an insurance company and the marketplace.  Insurance agents are not insurance companies and no liabilities are taken on by agents.  Risks are transferred 100% to the insurance carrier in insurance transactions.


Insurance Underwriters, have the responsibility of making decisions regarding the acceptability of a particular policy submission and of determining the amount, price, and conditions under which the policy submission is acceptable.  Also, on existing policies, an insurance underwriter’s job is to evaluate the past performance of a particular policy and the likelihood that losses will occur on renewal.  Any factor that causes a greater likelihood of loss is charged a higher rate.



Adjuster or Claims Adjuster, is basically who settles insurance claims.  This generally involves investigation of the loss and a determination of the extent of coverage.  In the context of property insurance, the adjuster negotiates a settlement with the policyholder.  In liability insurance, the adjuster coordinates the insured’s defense and participates in settlement negotiations.  Adjusters may be employees of the insurance company, or they could be independent adjusters that represent insurance companies.


Public Adjusters, are consultants who specialize in assisting policyholders in presenting claims to insurance companies in a manner that will maximize their recovery.


Actuaries, are professionals who analyze the financial consequences of risk.  Actuaries use mathematics, statistics, and financial theory to study uncertain future events.


Independent third party insurance administrators can include underwriting, claims adjusters and claims administration.  These parties can work on a contract basis with insurance companies.  Insurance companies often utilize these companies because they have special expertise for operational efficiency.


Typical Association Insurance Coverage


Below is a list of the different types of insurance available to associations.  An association doesn’t necessarily need all of these types of coverage.  The board and the association’s insurance agent should work closely together to get the correct coverage for the association.  The association’s insurance agent is an industry professional and understands and is familiar with the association’s unique needs.



Property Insurance or Master Hazard Insurance: This type of insurance generally covers all buildings, structures, and personal property owned by the association, including common property, parks, and other real property.  This coverage is often called Business Owners Policy or BOP even though it is for an association’s coverage.


General Liability: In addition to protecting physical property, most associations have commercial liability insurance. Unlike property damage, which often can be measured in dollar amounts, liability claims can have no limits other than those imposed by courts.


Directors & Officers Liability Insurance: Provides financial protection for the directors and officers of an association in the event they are used in conjunction with the performance of their duties as they relate to the association.
Auto: (owned, non-owned, and hired): Associations with employees who drive cars, trucks, or maintenance vehicles on association property or elsewhere while carrying out association business need auto insurance.  This sometimes can cover board members doing work related to their office.


What is Insurance Coverage & What is Not Insurance Coverage:


Insurance is coverage by contract where one party undertakes to indemnify or guarantee another against loss by a specified contingency or peril.  It is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss.


An insurance carrier is a company selling the insurance; the insured or policyholder is the person or entity buying the insurance policy.  An insurance agency or insurance agent may or may not be a direct employee of an insurance carrier.  An insurance agency may represent multiple insurance carriers carrying the same types of insurance coverage.


The premium is the amount charged for the amount of insurance coverage.  Risk management is the practice of appraising and controlling risk.  An insurance policy is composed of the policyholder paying a premium to the insurance carrier in exchange for an assurance of compensation in the event of a material loss.  The policyholder receives an insurance policy which spells out the conditions and circumstances in which the insurance carrier will provide coverage or not provide coverage in the event of a loss.


How insurance basically works is, the insurance carrier collects premiums from multiple policyholders and pools these funds to pay for the losses that some policyholders may incur.  The policyholder is therefore protected from risk by paying a premium, with the premium being dependent upon the likelihood of a loss occurring.


What is not insurance coverage or, more accurately, what does insurance not cover?  Insurance is not a maintenance program.  A leaking roof that should have been replaced would fall under neglected maintenance and would be excluded from insurance coverage.  However if a storm comes along and blows the roof off, that generally would qualify as an insurable event and would be covered.  Typically an insurance loss must be unexpected, sudden, and accidental.


What are Insurability Risks


Insurable risks typically share seven common characteristics:


  1. A large number of uniform exposure units: The existence of a large number of homogeneous exposure units allows insurers to benefit from the so-called “law of large numbers,” which in effect states that as the number of exposure units increases, the actual results are increasingly likely to become close to expected results.


The exception to the large number of uniform exposure units criterion is with Lloyd’s of London.  Lloyd’s of London is a secondary insurance provider that insures high risk exposures such as associations that have been canceled in the primary market because of claims issues.


  1. Definite Loss: The event that gives rise to the loss that is subject to insurance should, at least in principle, take place at a known time, in a known place, and from a known cause. An example of definite loss is a fire that burns the association’s clubhouse down.


  1. Accidental Loss: The incident that constitutes filing a claim should be unexpected and not preventable, or at least outside the control of the beneficiary of the insurance.


  1. Significant Loss: The magnitude of the potential loss must be significant and worthy of insurance.


  1. Affordable Premium: If the possibility of a claim is high, or the premium cost to insure too high so that the insurance expense is higher relative to the amount of protection offered, it is unlikely that anyone will purchase insurance coverage.


  1. Calculable loss: Probability of loss and a reasonable estimate of cost of the loss must be at least estimable, if not fully calculable. Probability of loss is generally an experiential exercise, while cost has more to do with the ability of a reasonable person to make a reasonably definite and objective evaluation of the amount of the loss as a result of a claim.


  1. Limited risk of catastrophically large losses: Insurable losses generally do not happen all at once and individual losses are not severe enough to bankrupt the insurance carrier.




Insurance Cancelation


Association Insurance is generally canceled for three primary reasons:


  1. Excessive claims in a policy period – generally speaking, an association would not have their insurance cancelled for an occasional claim over a period of years – even if one claim is major. But if there are too many claims during a policy year, an insurance company may cancel the insurance policy. Repetitive claims of a similar nature, especially water damage claims, are very concerning to an insurance carrier because they indicate a much higher probability of additional claims in the future. This is why it is important to know the policy’s deductible and in certain situations possibly self insure for some claims. A rule of thumb many associations prescribe to is that a claim has to be twice the amount of the deductible to file a claim if the association has had excessive claims within a policy year. A good claims history can keep premiums low. Only file high value claims when necessary.


  1. Large claims or fire claims – large claims or fire claims are costly and for lack of a better word hit the underwriter’s radar. If a fire or large claim happens, this is one of the times it pays to have a long and claim free history with an insurance company. If you have been with an insurance company for multiple policy years, an underwriter will take this into account and it can be beneficial to being renewed.  Generally speaking, cost savings must be substantial to switch from one insurance carrier to another; because if you are hit with a large claim in a policy first year, the association maybe looking for coverage in the secondary market.


  1. Unacceptable risks found on the property – associations being in disrepair or potential disrepair can result in policies being cancelled. At the time of an insurance policy’s renewal, an underwriter may perform a property inspection. Sometimes this is done to spot check the condition and safety of a property, which may result in the policy being canceled. Issues like leaky roofs or old roofs, outdated plumbing, high crime area, etc. that are potential risks of occurrence can result in an insurance cancellation notice at renewal. What can be done, if the issues are fixable, is to correct the condition or make the repairs as soon as possible, and ask the insurance underwriter to re-inspect and reconsider the cancelation.


One important factor to consider about an association’s insurance policy is that it is not like obtaining personal insurance.  If an association’s policy is canceled, primary market insurance companies will generally not insure that association and the secondary insurance market will have to be utilized.  The secondary insurance market is dominated by Lloyds of London and premiums will generally be three times or more than the primary insurance market.  Also, Lloyds of London generally has ten thousand dollar and higher deductibles and will sometimes exclude coverage on everything but fire.  WDPM



Copyright – William Douglas Management, Inc. 2016