Annual insurance Budgets

September 13, 2013    Jon Crain, Armstrong|Robitaille|Riegle    Homeowner Tips

For Associations that have fiscal years that run from 1/1 to 12/31, budgets and insurance disclosures are looming around the corner. Below is some information we hope is helpful in dealing with this annual requirement.

In the past we could anticipate little or no increase in annual premiums for association insurance costs. This was especially true for PUD’s that have minimal property coverage. With condominiums and townhomes that maintain Blanket Property coverage on the structures, there were slight increases in premium due to the increasing per square foot replacement cost of the structures. However, there are signals that the “soft” market we have experienced for the past 10 years is starting to change. Indications from many markets is that going forward there will be some rate increase in either property or liability or both. Most importantly, there are two dates that can affect rates - July 1st and January 1st. These are the predominant renewal dates for reinsurance contracts for many of the primary insurance carriers. Accordingly, we would recommend that for budget purposes, you consider at least a 5% to 10% increase in the insurance line item in anticipation of the changing market this year and in 2013.

Although we don’t expect wild increases at this time, some increase may certainly affect most, if not all, associations going forward and budgeting for an increase is a prudent idea.

Property deductibles are on the rise. $5,000 to $10,000 is typically the average deductible now in force instead of $1,000 to $2,500. Some associations are creating a cushion in the insurance line item to absorb losses which fall under the deductible. For instance, if there is a $4,000 water damage loss and the current deductible is $5,000, the association would be responsible for the entire loss. Without budgeting for these “higher” uninsured/under deductible losses, it may negatively impact the budget; especially if there are multiple losses under the deductible during the fiscal year. Finally, Earthquake insurance is the “wild card.” Even though we have had no substantial earthquake losses since the 1994 Northridge earthquake, other catastrophic losses around the globe do impact the rates. In addition, capacity constraints, which limit the amount of insurance a carrier will write in any one specific geographic area, are continually changing due to reinsurance treaties. Premiums may change considerably at any time. If the association maintains earthquake insurance, which usually represents a sizeable percentage of the insurance budget, it is recommended to contact your agent to have them provide you with a realistic cost for budget purposes.

**The information contained in this HOA Tip of the Week is for information purposes only and is not specific legal advice or a substitute for specific legal counsel.

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