The definition of insurance is to provide financial coverage by contract whereby one party undertakes to guarantee another against loss by a specified contingency or peril. Insurance in all forms is primarily dealing with risk, therefore an insurance policy is just a way of sharing risks with other parties with similar risks. While certain risks are insurable, certain risks are non-insurable.
Simply stated, insurable risks are risks in which the insurance provider can calculate potential future losses or claims. Historical statistics are used as the foundation of calculating premiums for insurable risks. Thus the probability of occurrence can be calculated from the available historical data based on the frequency of past occurrences. The risks can be calculated and the potential for loss can be measured. For example, the likelihood that a clubhouse will burn down out of the total number of clubhouses insured can be determined from the number of clubhouses that burnt down in previous years.
Non-insurable risks are risks which insurance companies cannot insure because the potential losses or claims cannot be calculated. Thus, a potential loss cannot be calculated so a premium cannot be established. A non-insurable risk is also known as an uninsurable risk. An example for HOAs is sinkholes. Because sinkholes are not predictable, they are deemed non-insurable events. That is why most insurance policies exclude coverage for this type of event.
Acts of God can also be deemed non-insurable events. All risks involving natural disasters are referred to as acts of God. Because of this, earthquake and floods are deemed non-insurable events on a conventional insurance policy. Special endorsements or additional specific coverage is needed for these types of natural disasters. Events such as war, terrorism, and radioactive contamination are also considered non-insurable.
HOA boards should consult their insurance agent regarding any specific coverage or lack thereof. The HOA’s insurance agent can draw a clear distinction between insurable and non-insurable risks.
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