Understanding the scope of homeowner association insurance coverages is basic to protecting the vital interests of the owners. Do you understand what the HOA’s duties are when a fire, windstorm or burst pipe damages the common elements or unit interiors?
The HOA’s insurance duties are addressed in the governing documents. The insurance company’s duties are based on the wording of the policy. The two documents often contradict. Surprisingly, the insurance policy often pays for the repairs that aren’t even an HOA’s responsibility. Are there reasons why such broad coverage may not be in the HOA’s best interest? If an owner negligently causes a loss, is it fair that the repairs be done under the HOA’s policy?
Traditionally, HOA insurance policies have fallen into one of three different categories. The narrowest is called “bare walls” and covers very little of the owner’s fixtures and finishes. Next, and most common, is the broader coverage known as “single entity.” This type expands coverage to include standard fixtures and finishes provided by the builder. The broadest coverage is referred to as “all-in” which includes coverages for owner installed upgrades such as cabinets, light and plumbing fixtures.
Many homeowner association insurance policies are the “all-in” type which creates a dilemma. While the HOA could cover many owner claims, it’s unwise to do so. The HOA’s policy is somewhat like an auto policy in that multiple claims may increase future premiums or cause the policy to be cancelled. So, many HOA governing documents require the owners to insure their own interior finishes and fixtures and the HOA insurance only comes into play if there is multiple unit damage due to, say, a fire. This spreads the risk around and keeps the HOA’s insurance viable.
Since the HOA and owners each have distinct repair and insurance responsibilities, it’s very important that those responsibilities be clearly defined in writing by event or component. In common wall HOAs, “Inside=Owner” and “Outside=HOA” won’t cut it because there are exceptions. And at some point, “Inside” and “Outside” meet. Where exactly is that dividing line? A way to clarify this is called the “Maintenance & Insurance Areas of Responsibility.” It lists specific grounds and building components like the Roof, Gutters & Downspouts, Plumbing-Interior, Plumbing-Exterior, etc. and assigns responsibility either to Owner or HOA.
The Areas of Responsibility not only eliminates many disputes, it advises both the HOA’s and owners’ insurance agents what kind of coverage is necessary. It also helps the board and manager perform consistent maintenance because there is a clear roadmap. This document is one of the building blocks of community harmony. Don’t wait for the next insurance event to come crashing or burning in. Write your own “Areas of Responsibility” and be prepared. There is a sample Areas of Responsibility at Regenesis.net.
Regenesis publishes The Regenesis Report, a monthly newsletter for HOA boards, developers and managers. He can be contacted by email at email@example.com.