Annual Reviews of the Association ’ s
By Michael Berg
Your association Covenants , Conditions and
Restrictions ( CC & R ’ s ) likely require a review of the insurance program on an annual basis . Because the board is not made up of insurance experts , it must rely on its chosen insurance professional for advice and direction . So , essentially , the annual review likely becomes what the insurance professional provides in his or her offer of renewal . Here are some thoughts on how the board can work closely with their insurance broker to perform the annual review :
Talk to the Broker
The simplest , most important and most commonly ignored way to review the insurance program is to invite the broker to a board meeting and discuss the renewal . Having a dialog and a relationship with the insurance professional will help in many ways , not the least of which is talking in person about changes to the insurance program in the coming term . The broker should be able to provide the renewal early enough for information to be reviewed by the board prior to the meeting . Questions and concerns can be addressed at the meeting and the board can make an efficient decision on the renewal .
Part of talking to the broker is making sure that the conversation occurs at a time far enough ahead of the actual renewal date that adjustments can be made by the board , if warranted . Insurance renewals are delivered by the carrier to the representing broker 30 to 45 days ahead of the renewal . With request , that time line can be extended . Plan to review the insurance at a time when the board can ask questions without the pressure of a fast approaching renewal date .
Property Insurance Limit
The main limit of insurance for a condominium insurance program is the limit of property insurance . Basically , what would it cost to re-build the buildings in the association ? This number is not static ; it changes with market conditions and with the economy . Most insurance policies include an automatic increase to the property insurance limit , but the replacement cost of the property does not increase on a linear basis year after year .
It is important that the insurance broker re-calculate the replacement cost of the property on a regular basis . It is easy enough for most brokers to perform this calculation annually , using a replacement cost estimating program . These programs will deliver a
10 | The HOA Board Quarterly | Issue # 5 | Spring 2013
report that can be forwarded to the board for review . Is the property replacement cost being estimated from the correct residential square footage ? Where did the broker obtain the data to make this estimate ? These and other questions about the report can be asked at a meeting with the broker .
Another policy limit that could change on an annual basis is that of the fidelity bond . Did the broker ask for a copy of the income statement , balance sheet and reserve study for review at renewal ? The fidelity bond requirement is typically 3-months assessments , plus reserves . Assessments may change annually . Reserve balances increase with contributions and decrease with capital expenditures . It is important to re-calculate the required fidelity bond limit each year to make sure the CC & R and government lending requirements are met .
Governing Document Review
If the CC & Rs haven ’ t changed , it is expected that the insurance policy written to match those requirements many years ago is still appropriate , right ? Wrong ! Policy language changes , minimum limits required by legislation change , lender requirements change , and the requirements of the CC & Rs should be reviewed to ensure the insurance is adequate . Ask the agent or broker when it was that he / she last reviewed the CC & R requirements . If that review was done when the policies were originally made effective , ask the broker to perform a new review .
Review Loss History
The loss experience of an association is reported in a “ loss run ,” or “ loss history .” It is not uncommon for a loss history report to include a loss that the board was not aware of , especially in smaller associations . A review of the loss history on a regular basis is one way for the board to have a deeper understanding of the insurance program .
It is worth mentioning , that , for the most part , the request for loss history is an indication to the broker that the board is shopping the insurance for the association . It is common for a broker to withhold the loss history reports until the last possible moment . This keeps any competing brokers from working with other carriers to provide quotes because many carriers will not quote without the loss history . However , the broker has an Insurance Code and Civil Code responsibility to his / her client to provide the loss history in a reasonable amount of time which for most would be within ten