Q: Our local insurance policies are being revised soon. Some neighborhood associations are reporting a tenfold increase in fire insurance premiums due to concerns about the proximity of the fire. Although our area does not seem to be in a fire-prone area according to the current situation, are we really afraid? – BC, Rancho Santa Margarita.
Answer: Many customer-facing organizations have also had a tough time due to the high cost of property damage insurance. To bring some insurance expert guidance to the discussion, I contacted Michael Berg of Berg Insurance in Lake Forest and Scott Litman of Scott Litman Insurance Agency in Calabasas, two brokers known to serve HOAs.
As for how to pay for insurance, Litman said “unfortunately, this is going to be a long-term problem. According to reports, the number of wildfire claims is increasing every year.”
Michael Berg explains that insuring property damage is not a problem for any area, but “only those facing a difficult history or those in fire-prone areas.” For those areas, he says “installation will be difficult.”
So, how can HOAs increase their insurance premiums?
Berg said HOAs should make sure their broker works for HOAs to ensure the HOA has the right advice when making a business decision in their community. Litman also suggested changing the HOA’s approach to “wallless” insurance, which often requires changes to the CC&Rs. He said this could reduce the premium by about 5%, depending on the insurance company.
Non-wall insurance means that the HOA only insures the shell of the building – the interior is only restored to drywall, excluding fixtures (cabinets, sinks, etc.), finishes (carpets, wall coverings) and interior. Many of my condominium clients have moved there, but first, the CC&Rs must be reviewed.
As Mr. Litman pointed out, there may be a need to amend the CC&R to align the HOA’s insurance liability with its liability for damages. Also, if the HOA adopts the “without walls” approach, proper notice must be given to the homeowners, so that they do not face a big loss without insurance after the change in the HOA’s insurance policy. Before pursuing bare walls as an insurance policy, consult an HOA legal professional on this matter.
Another strategy that HOAs use to reduce insurance costs is to increase deductibles, and many HOAs have already adopted this strategy, which requires the HOA to be willing to absorb a large amount of the loss.
I asked experts about the mistakes they see in HOA insurance.
“The biggest mistake is neglecting the business relationship with the insurance provider,” Berg said.
Litman said, “we’re going to find a lot of information that’s missing important information.” He encouraged HOA boards and managers to annually review their policies.
There are many insurance professionals who serve California HOAs. Thanks to Michael Berg and Scott Litman for sharing their expertise and advice.
HOAs are best served when attorneys and insurance brokers communicate with their clients. HOAs should review their insurance policy to make sure it meets their insurance and damage obligations.
Kelly G. Richardson, Esq. is a Fellow of the College of Community Association Lawyers and Partner of Richardson Ober DeNichilo LLP, a California law firm known for community association consulting. Send questions to Kelly@rodllp.com.