The past few years have seen association insurance premiums rise dramatically. Whereas deductibles on association policies were typically $1,000 not many years ago, today it is more common for associations to have $2,500, $5,000 or even $10,000 deductibles. As insurance deductibles continue to increase, associations are reviewing how to allocate those deductibles.
Insurance professionals note that insurers’ biggest concern is generally frequency of claims. Even small claims can be expensive. In addition to the claim itself, the insurer has the expenses of adjusting the claim. A number of small claims may wipe out the insurer’s profit. One of the key elements of risk management is risk transfer. This practice allows an association to shift certain risks of loss away from the association and to the party responsible for assuming the particular risk. The use of higher deductibles and the allocation of deductibles to owners may assist the association in controlling insurance costs.
There are different philosophies as to how insurance deductibles should be allocated. Some take the position that all deductibles should be paid by the association as an expense to be spread throughout the community in the same manner that insurance premiums are allocated among everyone in the community. Others take the position that the person who receives the benefit of the insurance proceeds should pay the deductible. Yet others conclude that since many claims are the result of inadequate or deferred maintenance by owners, those responsible for the lack of maintenance should bear the cost of the resulting damages.
Typically if deductibles are allocated to the owners, they are allocated in one of three ways:
The first option has the advantage of simplicity, yet an owner who has done nothing wrong may have responsibility for a deductible.
The second option is attractive because it assigns the liability for the deductible to the party who may negligently cause damage. The disadvantage of this approach is that it is more difficult to administer because determining whether or not a person has been negligent is not always clear-cut.
The third option also has the advantage of simplicity, yet as with the first option, an owner who has not been negligent or done anything wrong will be strictly liable for any damage that results from a problem in his or her unit.
As associations look for ways to shift risk to the owners, it becomes even more important to educate owners on the importance of maintaining HO-6 policies. Individual insurance may assist with the payment of association deductibles. Depending on the scope of coverage on the owner’s policy, the deductible will often be covered under either the loss assessment coverage or under Coverage A of the property section. In some instances, an owner may increase such coverage with an endorsement at a small additional cost.
If your association’s governing documents do not address the allocation of deductibles, and your community is seeking ways to shift insurance risks to owners, you should consider adopting insurance guidelines that will allocate deductibles to the owners under one of the three methods described above. If the guidelines are not simply a reiteration of the provisions of the recorded documents, the board should record a board resolution, setting forth the allocation of deductibles to ensure that all owners are on record notice of the requirements. The board should also distribute the guidelines to all owners and address the deductible issue in the community newsletter to enhance awareness of the guidelines so owners may take appropriate steps to protect themselves under their insurance policies.