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