In the complex landscape of homeowners associations (HOAs), adequate insurance coverage stands as a cornerstone for mitigating potential risks. Failing to secure comprehensive coverage could potentially expose the association to dire financial hardships in the face of unforeseen circumstances. As such, prioritizing a robust and tailored insurance plan is imperative in safeguarding the long-term financial stability and resilience of HOAs.
Here are seven common insurance mistakes made by HOAs. Being proactive about these issues may help to prevent financial problems later.
1. Assuming you have adequate liability coverage
It’s easy to make the mistake of thinking you have sufficient liability coverage because you have an HOA master policy. Relying solely on this policy, however, could leave you vulnerable to financial loss.
Although HOA master policies do provide liability coverage for common areas, the coverage limit may not be adequate if there is a successful lawsuit against your association with a significant judgment awarded. Many HOAs purchase umbrella liability policies to give them additional protection in case the HOA is sued and for other reasons.
2. Not updating policies
An HOA’s needs may change over time. It may add or remove amenities, beef up security, make alterations to building exteriors, and other things. To account for changes, an HOA board should review its policies annually to make sure its coverage requirements are still being met.
3. Ignoring local and state regulations
An HOA may be required by a local or state government to carry insurance for wildfires, earthquakes, sinkholes, hurricanes, or other natural disasters if it is located in a high-risk area. Failure to follow insurance requirements will not only increase your risk, but your HOA may also be fined.
Some governments may also require HOAs to have other policies. A crime and fidelity insurance policy, for example, may be required to protect the association’s funds from check fraud, embezzlement, and other financial crimes. Be sure to check with local and state authorities each year to see if the insurance requirements have changed.
4. Neglecting directors and officers insurance
Some HOA boards may think they are covered for all possibilities because their HOA master policy includes liability coverage, but that may not be true. HOA master policies usually don’t cover individual board members, for example. If a board member is sued for something pertaining to the HOA, that person may be personally liable for legal fees and damages.
An HOA can protect its current board members by purchasing a directors and officers (D&O) policy. These policies provide additional liability protection to fill a critical coverage gap.
5. Overlooking service provider insurance
An HOA may occasionally need to hire service providers for maintenance and other issues. In addition to needing help with repairs, an HOA may also need:
- Pest control
- Pool cleaner
- Security service
- Property manager
- Landscaping service
- Trash removal service
Before hiring service providers, be sure to verify that they are insured. The board may also want to consider having service providers add the HOA to their policies to ensure coverage.
6. Not evaluating deductibles
An HOA board may purchase policies with high deductibles to save money. This could be a mistake, however. If a board has to dip into its reserves to cover an unexpected expense, it may not have enough to cover a high deductible if something happens.
Although policies with lower deductibles will cost more, the extra expense may be worth it. If an HOA depletes its reserves, an unpopular special assessment may be necessary, which could upset residents and make it more difficult for them to sell their homes.
7. Not communicating with homeowners
An association’s residents may not fully understand what the HOA’s insurance policies cover and what additional coverage they will need to purchase. This confusion could leave some homeowners underinsured.
A homeowners association should clearly communicate its insurance coverage to homeowners so they will have a clear understanding of the coverage they will be responsible for. The topic can be discussed at HOA board meetings where members can ask questions.
Protecting your community’s future
An HOA’s board members have a responsibility to ensure that the association has sufficient insurance coverage. They should review their policies regularly, consult with insurance company professionals, and make sure homeowners are aware of what the association covers and what it doesn’t cover.
Comprehensive insurance planning should be a priority for every HOA. It’s not something you want to leave to chance or assume that a previous board took care of it. Making sure you have the right coverage isn’t just about protecting your assets; it’s also about making your association a great place to live.
Speak with Valley’s association banking team to explore personalized financial strategies that align with your association’s aspirations and needs.
This article is for informational and educational purposes only and is not a substitute for professional advice. Valley National Bank does not provide any financial, economic, legal, accounting, tax or other recommendation in this article.