You have to be living under a rock not to know at least something about what is happening with insurance these days. With rising premiums and other related issues, many associations are stuck between a rock and a hard place. They can’t afford to buy insurance but cannot afford not to have it. Additionally, MCIOA and most association governing documents[1] require associations to carry full replacement cost insurance on the structures and dwellings within the property. One option for addressing rising insurance costs is to look at provisions in the association’s governing documents to see where they might be changed to provide some relief.
For example, although MCIOA allows for some flexibility on the type of coverage under the master policy (all-in vs. bare walls or original specifications), some association declarations require the association to carry an all-in policy that covers not only the exterior of the unit through the interior studs or walls, but also requires the policy cover flooring, wall coverings, appliances, cabinetry, trim and millwork and other items within an owner’s unit. Once upon a time it made sense to have the association cover these things to ensure more control and consistency when it came to insurance claims and repairs. However, many associations are trying to move away from this full coverage simply due to the added cost. If the declaration requires an all-in policy, the association may wish to consider amending that to allow more flexibility when it comes to choosing the level of coverage. Similarly, some declarations may mandate the maximum deductible that the association can carry on its master policy, which amount may not line up with the bids the association is receiving or may make the premiums prohibitively expensive. This too can be an area for amendment.
MCIOA and many association documents allow the association to assess back to one or more units the amount of repairs up to the applicable deductible under the master policy in the case of a claim affecting one or more individual units. To avoid these becoming collection issues, many associations also have requirements in their declaration that unit owners MUST carry an HO6 policy and that it must include appropriate loss assessment coverage to cover the assessment of the deductible from a claim under the master policy. If your association documents do not contain authority to assess the deductible or requirements for HO6 policies, you might want to consider amending the documents to include this language. Additionally, it is important to communicate to owners what the applicable deductible will be for everything but wind/hail damage as well as any special wind/hail deductible so that they can obtain the correct coverage
Another area that can cause issues for associations when dealing with rising insurance costs is having limits in the declaration on how much assessments can be increased from one year to the next without approval from the owners. Sometimes the declaration may exempt insurance premiums from this cap, but if not, that is another area where associations may choose to amend their documents to either add in an exemption for insurance premiums so that they are not subject to the cap or to eliminate or change the amount of the cap and/or reduce the approval requirements to exceed the cap, or both. Similarly, many association documents require approval from a certain percentage of the members to levy a special assessment, which may be needed to address a budget deficit created by not budgeting enough for an insurance increase and/or not being able to raise the assessments enough to cover it. There are also older association documents that do not provide authority to levy a special assessment or that limit the reasons for which a special assessment can be levied, meaning that this may not even be an option under the existing governing documents. These documents or provisions can be amended to provide that authority and to make it easier to levy a special assessment when needed to address an unbudgeted expense.
Depending on the situation, the association may look for alternative short-term funding to pay for insurance premiums, such as obtaining a loan. This may not be the best option, especially if the lender is requiring the association to levy a special assessment to repay the loan. This can create issues as indicated above if the association can’t get the owners to approve a special assessment, but it is also not a long-term solution given that the premiums are likely to continue to increase every year. If we are borrowing money now and paying a special assessment to cover this year’s increase, what are we going to do next year when it goes up again? Even assuming that these logistics can be worked out, there may be other barriers within the association’s governing documents to obtaining a loan, such as requiring approval from the owners just to borrow the money (as opposed to needing approval to levy a special assessment). There may also be other provisions in the governing documents that establish caps on how much the Association can borrow or what the funds can be used for that would limit the association’s ability to obtain a loan for the purpose of addressing a budgeting shortfall. These again are areas where associations may need to consider amending the governing documents in order to be able to obtain a loan to cover expenses.
Finally, your association may be able to reduce costs overall by looking at your maintenance provisions and seeing if there are areas where some of those maintenance costs can be shifted to the unit owners. Changing maintenance obligations typically requires an amendment to the declaration. However, we often see associations that are paying for maintenance to units for items that are identified in the declaration as being the homeowner’s responsibility. In those cases, it may be as simple as adjusting the association’s existing practices to align with the current documents and to stop paying for things that are supposed to be paid for by the unit owners and/or assessing back to the units expenses benefitting fewer than all units as allowed or required under the declaration.
Amending the declaration is not always easy, and it does involve some level of expense. Associations that are struggling financially may think that they cannot afford to undertake an amendment project. However, if provisions in your governing documents are making it difficult or impossible to pay expenses or to deal with the rising cost of insurance and other increased costs, it may be that you cannot afford NOT to amend your documents to remove those barriers or to allow more flexibility in budgeting.
[1] Excluding detached single family home associations where owners typically own, maintain and insure their individual properties.
