Do you know if your condominium or townhome association is under insured?  Here are some useful tips to help your community avoid a costly gap at the time of a loss. Agents that are selling reduced blanket coverage building for HOA’s citing that the 125% replacement cost endorsement covers the gap are not disclosing something!  Insurance companies have specific language in the policy that requires the “stated values” or “replacement cost” to be at 100% of current construction costs or not to be lower then 90%, otherwise, the insurance company can deny extended coverage.  What does this mean?  

• Example 1

1.  An agent proposes replacing cost on an HOA at $18,000,000
2. The stated values or current replacement cost should be $24,000,000
3. The agent has essentially insured 75% of the blanket building or $18 million.
4. The agent sites in the proposal that the 125% replacement cost endorsement covers them to $24 million.
5. In essence, the insurance company is not collecting 100% of the premium they should be, rather only 75%.
6. So, insurance companies have clauses in the policy contract “That at the time of a loss, the agent must provide a statement of values or an inspection showing it is insured for 100% of today’s replacement cost”.  If not, the company will penalize the HOA and not insure for the $24 million

• Example 2

1.  An agent insures 4 buildings at $250k per building or a blanket of $1million
2. The agent does not have statement of values or an inspection on file.
3. There is a hail loss on one building of $50,000 to replace the roof
4. The adjuster is not given a statement of values or an inspection so they order an inspection at the time of this hail loss.
5. It turns out the coverage should have been insured for $350k per building so we are $100k short
6. The hail loss is $50,000 so the insurance company will penalize the HOA for not having it insured at today’s replacement cost values.  Even though it is hail.
7. Instead of getting $50,000 the HOA is given $25,000 for the depreciation and a prorated amount for replacement cost of $5,000.  So they paid $30k of the $50k hail loss because it is not insured at the proper value.

• Example 3

1. Calculation Of The Deductible – Blanket Insurance

In determining the amount, if any, that we will pay for loss or damage, we will deduct an amount equal to 1%, 2%, 3%, 4%, 5% or 10% (as shown in the Schedule) of the value(s) of the property that has sustained loss or damage. The value(s) to be used are those shown in the Statement of Values on file with us. If there is no Statement of Values on file with us, then the value(s) to be used will be the value of the property at the time of loss.    

• Conclusion.  Insurance carriers on all levels are smart.  If the property is not insured right, then the insurance company gets less premium.  Multiply this times thousands of HOA’s across the country and you can see they would be receiving millions of dollars short of what they should be getting.  So they write in these clauses as to avoid paying out on things they are not collection premium on.

  So what does the HOA do?  They have to either do an assessment or they would have to pick up the difference in reserves.  The last think is to sue the agent for Errors and Ommissions.   This can all be avoided.  Doing this right from the beginning and insuring the HOA at the right levels is very important.  Having an inspection ordered right away is the best option.