By Amy D. Boggs, Esq. / Published September 2018
Consider the scene played out hundreds of times in COA and HOA meetings throughout Florida this past year. The board president stands up in an association meeting and announces a hefty special assessment to cover the association’s hurricane losses. The crowd roars as the members demand to know why they’ve been paying for insurance all of these years if it doesn’t cover the association’s hurricane damage! The president is left trying to explain to his neighbors why the insurance the board purchased doesn’t really cover everything the board thought it would. No board wants to be in this position.
Saying that property insurance is complicated is like saying that Florida had a little rain last year. Have you ever tried to read an HOA or COA policy all the way through? There are pages and pages of definitions, exclusions, and endorsements that contradict each other and overlap, making it confusing at best. It’s my full time job as an insurance attorney to keep current on insurance issues, and even I struggle to understand some of these policies! No board can possibly understand an HOA or COA policy without help. Boards need professional help. I cannot stress enough the importance of a thorough annual review and in-person meeting with a trusted insurance agent and attorney to address the association’s insurance needs. Don’t leave this to the property manager to handle. It’s too important.
The board’s main goal in purchasing insurance is to minimize the association’s out-of-pocket expenses in the event of a loss and to avoid unexpected expenses. What can a board do to minimize expenses? There are two important policy provisions that can result in huge hidden costs to the association if misconstrued. These are coverage limits and deductibles. The board needs to understand how these will be applied in the event of a loss.
First up is the coverage limit. The board has to determine how much insurance the association needs and how the coverage limits will be applied. This article focuses on building coverage (coverage A under the policy), although there are many different types of property coverages available. Insurance underwriters typically set a basic level for coverage A, and the association can purchase that amount or purchase less insurance for a lower premium and incur a co-insurance “penalty” in the event of a loss. The penalty is a pro-rata reduction in claim payment and increases the association’s contribution to the claim in the event of a loss. This will be a surprise cost if the board did not understand that the building was underinsured and did not understand the penalty for doing so. The option of a co-insurance penalty should be discussed with the agent, and the board should recognize that it is paying less in premium in exchange for a higher out-of-pocket expense in the event of a loss.
The coverage A “limit” is the maximum amount the insurance company will pay in the event of a loss. The limit may be further broken down into sub-limits for each insured building. Applying building sub-limits can expose the association to unexpected costs if the board doesn’t understand how the limits are applied.
Consider an association that purchases $5 million in insurance for five buildings in its complex. If one buildings suffers a $1.3 million loss, then the policy would cover the entire loss because the amount falls below the $5 million limit. Suppose, however, that the policy includes a sub-limit of $1 million per building. In that case, only $1 million of the loss would be covered, not $1.3 million, leaving the association with a $300,000 expense. Although the association had $5 million in coverage, it didn’t help because the association was limited per building. Understanding the total coverage and applicable sub-limits is one key to assessing the association’s exposure in the event of a loss.
The second issue to consider is the deductible. How much of a deductible does the association want, and how does it work? Deductibles can be tricky. Each policy contains a standard deductible that applies to most claims and a separate deductible for sinkhole and hurricane claims. The standard deductible is a set amount, but sinkhole and hurricane deductibles are calculated as a percentage of the building coverage.
Hurricane and sinkhole deductibles generally range from one to ten percent of the building coverage. The deductible is a percentage of the coverage amount, not a percentage of the claim amount, as some associations painfully learned after Hurricane Irma. These associations believed that if they had a $10,000 claim and a three percent deductible, then they would owe $300 toward the claim. They soon came to realize that the association owed three percent of the coverage amount, not the claim amount. In our hypothetical that is the difference between owing $150,000 (three percent of the $5 million building coverage) and owing $300. An error in calculation of this size is hard to explain.
An important aspect to understand is whether the deductible is applied per building or applied as a global deductible. In our example above, the global deductible is $150,000 (three percent of the $5 million), and that is what the association will pay before the insurance company contributes. If the policy includes a per-building deductible, then the association has to pay a deductible for each building before the insurance company pays its share. As in the situation with sub-limits, per-building deductibles can result in higher out-of-pocket expenses than expected. In our hypothetical situation, if there is a three percent deductible per building and $1 million sub-limit, then the association has to cover $30,000 worth of damage per building as opposed to $150,000—regardless of how many buildings are damaged—before the insurance benefits apply.
Consider the real world difference between the two situations. If the association suffers $300,000 in damage to one building and nothing to the other buildings, then the association pays $30,000 and the insurance company pays $270,000 under a per-building deductible (one building, one deductible). Contrast that with a global deductible which results in the association and the insurance company each paying $150,000. In that scenario, the association is much better off with a per-building deductible. The situation changes, however, if the damage is spread out over more buildings. If the association suffers the same $300,000 in damage, but it is spread evenly over three buildings, then the association would pay $90,000 ($30,000 for three buildings) under a per-building deductible instead of $150,000 under a global deductible. So, the same amount of damage, $300,000, can result in an out-of-pocket cost to the association ranging from $30,000 to $150,000, simply depending on how the deductible is applied.
One final point on the deductible is to watch out for minimum hurricane deductibles. A minimum deductible sets a minimum amount the association has to pay for a hurricane loss, regardless of what the deductible would otherwise be under the policy. I am working with an association that has a three percent per building hurricane deductible with a $50,000 minimum requirement. The per-building deductible for the association’s claim would only have been $18,000 ($6,000 for three buildings), but they were charged $50,000 because of the minimum deductible requirement. The association was unaware of the minimum deductible because it was not listed on the declaration page with the other deductible information. Instead, it was buried in the fine print of the windstorm endorsement at the back of the policy. Ask the agent directly about any minimum deductibles that can apply.
There are many stories of unsuspecting boards who don’t realize that they aren’t properly insured until it is too late. Your association can avoid this fate by understanding how the coverage limits and deductibles work in your policy.
Attorney, The Law Office of Amy Boggs
Amy Boggs is an attorney who specializes in representing Florida policyholders in property insurance disputes. She has represented numerous COA and HOA boards and understands the complexities these clients face. Amy graduated summa cum laude as the Salutatorian of Stetson College of Law’s class of 2000. She had the distinguished honor of practicing at Carlton Fields and the Merlin Law Group before founding The Law Office of Amy Boggs in 2010. Amy is featured in local media for insurance issues and teaches CLE classes to colleagues. For more information, visit amyboggslaw.com.