Winter is here! And with the cold temperatures, snow storms, and other winter culprits, it’s time to ensure you have adequate insurance to cover property damage that may be coming your way. Whether your community is damaged from exploding frozen pipes, or because of snow and hail storms, it’s important to understand possible pitfalls in your property coverage.
Many boards assume that as long as they have a hazard policy, everything is good to go, and their associations are fully protected. Unfortunately, this is not always the case and you don’t want to be surprised at the last minute.
Although there are many nuances when it comes to insurance coverage, this article will focus on three culprits all boards and managers should be aware of: wind/hail deductibles, claims made v. occurrence-based policies, and co-insurance clauses.
Wind/Hail Deductibles
As most of you have, no doubt, experienced, wind/hail deductibles are different than other deductibles for property damage. Because Colorado experiences many wind/hail events, it is considered extremely high risk and insurance companies are no longer willing to quote deductibles in dollars. The current trend when it comes to wind/hail deductibles is to set them based on a percentage of one building’s or the entire community’s total valuation. You need to be aware how your community’s wind/hail deductible is calculated as it could make a significant difference.
We are generally seeing wind/hail deductibles in the range of 5% to 10% of a building’s or of the entire community’s values. For example, if a particular building is appraised at $5 million and the deductible is 5% (of the building’s value), the association’s deductible will equal $250,000 for that building only, and for every other building that has been damaged. If the entire community is appraised at $25 million and the deductible is 5% (of the entire community’s value), the association will be responsible for paying a deductible equal to $1,2500,000 regardless of the number of buildings that may have been damaged.
What can associations do when it comes to planning, and being prepared, for wind/hail deductibles? First, all owners in the community should be encouraged to consult with their personal insurance agents to discuss obtaining loss assessment coverage. Loss assessment coverage is an endorsement to their personal property policies covering special assessments imposed for the purpose of covering assessments imposed by associations to cover repairs based on losses. Having this type of coverage, may protect owners from having to pay special assessments for the wind/hail deductibles out of their own pockets, and instead have such special assessments paid by their insurance carriers.
A second, and more difficult, option is to try and find a policy that provides a flat fee dollar deductible for wind/hail claims. Although very rare, some insurance carriers are willing to underwrite policies with a flat fee wind/hail deductible. However, in today’s world, that is next to impossible.
Claims Made v. Occurrence Based Policies
Some of the most common coverage gaps occur when associations change insurers and fail to ensure the new policy picks up where the last policy left off. How is this possible? It is possible when one policy is a “claims made” policy, while the other one is an “occurrence based’ policy.
A “claims made” policy only covers claims that are made during the period the policy is in place regardless of when the incident actually occurred. On the other hand, an “occurrence based’ policy covers claims that occurred during the policy period, even if such claims are reported after the policy is no longer in effect. Therefore, an association that is changing insurance policies from “claims made” (original policy) to an “occurrence based” policy may experience a coverage gap if a claim occurred during the original policy period but was not reported until the new policy period commenced.
To eliminate the possibility of the above described coverage gap, make sure you know whether the new and old policies are “claims made” policies or “occurrence based’ policies. If the two types of policies are different, discuss additional gap coverage with the association’s insurance representative.
Co-Insurance
Another red flag to watch out for is a “co-insurance” clause in the association’s property policy. A co-insurance clause requires the property in the community be insured up to a particular percentage of its appraised value, or the association faces a monetary penalty when it files a claim.
For example, your insurance may provide an 80% co-insurance requirement, which means the insurable property in the community must be insured to at least 80% of its appraised value. If the association’s total property coverage is less than 80% of the total appraised value, the association becomes a “co-insurer” of the property and must pay a portion of the claim out of its own pocket.
The best way to protect your community against this potential problem is to make sure the association obtains coverage for 100% of the building(s)’ replacement cost and the community’s insurance policy does not contain a co-insurance requirement. As an aside, if your community was created after July 1, 1992, CCIOA requires the association to obtain insurance in an amount not less than full insurable replacement cost (less the deductible).
If you are concerned your community may not be adequately insured, consider obtaining an insurance audit from your legal counsel, which will provide you with a full legal analysis of your policies and endorsements and how they measure up to the insurance requirements contained in your governing documents and Colorado law. An insurance audit will also let you know of any problematic provisions in the policies or missing endorsements and coverages.
Should you have any questions concerning insurance coverage gaps or insurance in general, please do not hesitate to contact one of our attorneys at 303.432.9999 or at [email protected].