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Is Your Condo Complex/HOA Properly Insured? Why Your Policy May Not Have You Covered

Over the last several years, our firm has enjoyed the privilege of working with numerous condominium HOAs, however our recent experience has revealed a concerning trend: the majority of condominium complexes we initially look at are underinsured. The genesis of the trend seems to stem from a lack of due diligence on behalf of insurance agents who do not employ a process for correctly valuating condominium complexes, an essential element in determining the appropriate amount of insurance coverage to purchase. While the implications of being underinsured on large or total losses might be well imagined and understood, the implications of smaller losses on underinsured complexes can be easily overlooked. Your insurance policy might not be completely covering your HOA/condominium complex on large OR smaller losses. To illustrate, a recent example and its implications on a smaller loss:

The report on the right represents an all too common situation we see when working with a new HOA/condominium complex. This report, conducted through Marshall & Swift, is for building #2 of a multiple building complex. Building #2 is currently insured at $1,357,650 but valued at $2,283,971. If we “burned the building down,” it would cost approximately $2,283,971 to rebuild. Building #2 is only insured to 59% of its value, underinsured by -41%.

The implications of a large or total loss are evident here as there is insufficient coverage to rebuild and replace the building. But what happens on a smaller loss?

Let’s assume a $100,000 loss. The building has $1,357,650 of coverage, so we have plenty of insurance to cover the $100,000 loss, correct?

Unfortunately, no.

Also all too common in policies we initially look at:

This condominium complex’s policy stipulates that, in the event of a loss, a penalty will be imposed if the building is not insured to at least 80% of its value (called a “co-insurance” clause). Since building #2 is only insured to 59% of value, a co-insurance penalty will be assessed on this loss. In addition, the policy’s co-insurance clause stipulates that depreciation will be taken after the co-insurance penalty.

It’s important to know how an insurance company will calculate this co-insurance.

I’ve included the math on the right to demonstrate how the insurance company would pay in the event of a $100,000 loss, after the co-insurance penalty.

Under the current policy, on a $100,000 loss, the insurance company will pay less than $59,442. Depreciation will be further subtracted from the $59,442, as noted in the co-insurance clause above.

The HOA is left responsible for over $40,558.

The $40,558+ will likely be passed down to the condo owners in the form of an additional assessment. In this particular case, this amounts to over $3,400 per condo owner – and this is on a smaller loss.

Properly insured, in the event of a loss, the HOA would only be required to pay a $2,500 deductible. The insurance company would cover the full $100,000 loss.

A few helpful reminders for condominium HOAs:

1. When purchasing coverage for your condominium/HOA, ask your insurance agent about their replacement cost valuation process, and how they determine the amount of insurance that should be purchased. The completion of a correct replacement cost valuation is paramount in properly insuring condo complexes/HOAs.

2. Replacement cost valuations and coverage should be reviewed annually.

3. Watch for co-insurance clauses in your insurance policies.

Premiums are paid with the expectation that our insurance will take care of us in the event of a loss. Your insurance company will, as long as your agent conducts the appropriate due diligence.

Remember: purchase coverage, not just a policy, and your HOA will be well taken care of in the event of a loss – though we hope you never have to be in that situation.

Stay healthy, stay well,


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