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Ask the Experts: How to Handle the Spike in Insurance Premiums

California is no stranger to wildfires, and as a result, insurance companies have become hesitant to write policies for communities subject to damage caused by them. Also, the Department of Insurance regulates admitted carriers and limits insurance premium amounts allowed.

Together, these factors have caused insurance cancellations or non-renewals for several HOA communities throughout the state. Therefore, they have been limited when purchasing insurance from non-admitted companies or the “surplus” market.

Though surplus market carriers are less regulated, which often means a greater likelihood of approval, high demand drives high rates. This added expense exacerbates challenges HOA management teams and boards of directors are already facing with regards to inflation.

However, these problems don’t come without solutions. To help navigate these changes, we reached out to, Ramona Acosta, PCAM, Director of Business Development at Tinnelly Law Group for further information. Ramona gave insightful answers to these pressing questions:

Will the association be held liable for insurance coverage?

An association’s CC&Rs typically includes language regarding insurance coverage requirements. If it’s not purchased as guided by this language, the association and its board of directors may be liable for failure to obtain adequate coverage. It’s important to review documents with HOA management and legal counsel to secure the next steps forward.

Can an association borrow reserve funds if it can’t afford to pay insurance premiums?

Yes. In certain circumstances, an association may temporarily borrow funds from reserves without membership approval. To do so, it must “meet short-term cash flow requirements or other expenses” as per Civil Code § 5515(a). These include:

  • Notifying members of the board’s intent to borrow the funds
  • Sharing reasons for reserve borrowing and options for repayment
  • Outlining how funds will be reinstated to the reserve account
  • Advising whether a special assessment will be used

Can a special assessment be implemented without member approval?

It depends. Though there are many factors considered when determining an annual budget, there are outliers which may occur that can’t be accounted for in advance. Per Civil Code § 5605, boards are exempt from membership approval when levying a special assessment up to 5% of the HOA’s annual budget. Additionally, per Civil Code § 5610, an emergency special assessment may be levied without membership approval for any amount needed to cover unanticipated expenses and/or unforeseen repairs.

However, if the board decides to activate the emergency special assessment to replenish the borrowed reserve, it doesn’t automatically set a precedent of using an assessment in a similar manner in the future. Therefore, it’s best for boards to work with their HOA management company and legal counsel beforehand to evaluate the potential implications on budget planning in the future.

As insurance premiums continue to rise, how should associations plan accordingly?

When finding solutions to cover exceedingly high insurance premiums, there should also be a discussion regarding how to mitigate these expenses going forward. One option may be to reduce the scope of insurance covered required under the CC&Rs. For instance, if the CC&Rs call for a “full replacement cost,” an amendment for a “bare walls” policy could be considered, which would only cover the common areas.

Most CC&Rs allow board members to make adjustments to deductible amounts or scope of insurance coverage without warranting the need for any membership approval or vote. However, a community meeting is the best way to educate members of the options and cost comparisons of each. It also provides the opportunity for them to voice their concerns and questions, so the board can answer accordingly.

Providing clear and open communication provides a better path to a successful outcome if and when an amendment requires a vote. There are many moving parts when budgeting effectively for a community, surprise expenses included. Our HOA management team is here to help you navigate these changes and update plans accordingly. Contact us today to get the conversation started.

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