Insurance for HOA communities is usually a necessity and a requirement. It takes up a big line item in any association’s budget. For this reason, board members must understand what types of insurance they must obtain. It is equally important to regularly review their policies to ensure they are maintaining the coverage levels their community needs at manageable costs.
What is Insurance for HOA Communities?
HOA insurance typically refers to a master policy that an HOA or condominium purchases to cover shared property, common areas, and liability risks. It protects the association’s assets, including clubhouses, pools, and parks. That said, this type of insurance generally does not cover the individual homes (or interior units) or personal belongings of owners.
Insurance is often an association’s first line of defense after damage or liability occurs. With sufficient coverage, the HOA won’t have to dip into its funds to pay for covered repairs, accidents, or injuries. While associations pay regular premiums, which can increase over time, insurance can ensure long-term financial stability by minimizing large expenses.
Apart from a master policy, there are other types of insurance coverage that an association would be smart to have. These include a fidelity bond, workers’ compensation, and D&O insurance.
HOA vs Condo Association Insurance
While they may share similarities, HOAs and condo associations are quite different, including on the insurance front. The core difference lies in the ownership structure.
HOA Insurance
An HOA master policy covers only the association’s common areas, such as pools, clubhouses, and roads. This policy usually applies to single-family homes or detached townhouses where residents own the structure and the land beneath it.
For this reason, homeowners must carry a standard HO-3 homeowners policy. This will cover the individual home’s exterior, roof, interior, and personal liability.
Condo Association Insurance
A
condo master policy works a little differently. This type of insurance covers shared building exteriors and common elements, including roofs, hallways, and elevators. It also covers liability for shared spaces.
Unit owners must obtain their own HO-6 condo policy to cover their interior units. An HO-6 policy usually covers drywall, flooring, cabinets, and personal property.
Of course, since there’s quite a bit of overlap, unit owners must understand what their condo’s master policy covers. If it’s a bare walls-in policy, owners need more extensive personal policies. On the other hand, if their condo has an all-in policy, then some of the built-in interior fixtures may already be covered.
Does Illinois Law Require Insurance for HOA?
Whether or not an association is required to carry insurance depends on state laws and the governing documents. In Illinois,
765 ILCS 160/1-55 only requires fidelity insurance for common interest communities with at least 30 units. Management companies that handle association funds must also carry their own fidelity bond.
Insurance requirements are more comprehensive for condo associations in Illinois. According to
765 ILCS 605/12, condominiums must obtain property insurance, general liability insurance, a fidelity bond, and D&O insurance. The condo board may also require owners to carry their own insurance for personal liability and damage to neighboring units.
That said, an association’s governing documents may have stricter requirements. Board members must check their CC&Rs and bylaws for guidance.
Types of Insurance for HOA and Condo Communities
Insurance comes in many forms, but the ones below are the most essential.
1. Master Policy
A master policy is the foundational coverage for almost every HOA or condominium. It bundles a few key protections together under one policy. Also known as hazard insurance for HOA, this policy covers:
- General Liability. This portion covers legal fees and medical expenses if someone gets injured in a common area or on association-owned property and decides to sue.
- Property Damage. This portion covers all physical structures or properties that the association owns. More often than not, covered perils include fire, storms, and vandalism.
2. Umbrella Policy
While general HOA liability insurance is already included in a master policy, many communities purchase additional coverage. An umbrella policy offers an extra layer of protection. This can kick in if a major claim exceeds the limits of the general liability policy or the D&O insurance. Coverage often comes in at millions of dollars.
3. Directors and Officers Insurance
This is a crucial type of insurance for HOA board members.
D&O insurance protects board members or other volunteers from personal liability in the event that a homeowner sues them for decisions they made while serving the association. It commonly covers allegations involving breaches of fiduciary duty, mismanagement, and negligence.
4. Fidelity Bond
Also known as crime insurance, a
fidelity bond protects the association from financial losses resulting from fraud, embezzlement, or theft at the hands of board members, management company employees, or volunteers.
5. Workers’ Compensation
If the association employs staff or workers,
workers’ compensation is often required. This covers injuries that employees suffer while on the job.
Who Pays for HOA Insurance?
It is the HOA or condo’s responsibility to maintain adequate insurance policies, including a master policy, an umbrella policy, fidelity insurance, D&O insurance, and workers’ comp. As a result, the association pays for the premiums. Meanwhile, owners must pay for their own individual HO-3 or HO-6 policies.
That said, owners still indirectly pay for the association’s insurance. This is because HOAs and condominiums earn revenue through regular dues and assessments, and these dues are paid for by the owners.
How Much is Insurance for HOA?
The cost of insurance will depend on a few key factors. These include the community’s size, location, total asset value, and claims history. The extent of coverage can also influence how much an association should expect to pay.
That said, average premiums sit somewhere between $2,000 and $10,000 per year. Larger associations and luxury communities can even pay as much as $20,000 or more in annual premiums.
How to Review HOA Insurance Policies
An insurance review ensures an association has the coverage it needs to remain financially healthy. Here are the steps for conducting a thorough review.
1. Gather All Insurance Documents
Board members must first collect all information, including current policies, renewal proposals, certificates of insurance, claims history reports, property appraisals, and the most recent
reserve study. From there, the board can identify what coverage it currently has in place.
2. Review Governing Document
Many associations focus only on legal requirements, overlooking their governing documents in the process. Board members must remember to check their CC&Rs and bylaws for coverage and insurance requirements.
3. Verify Property Values
For condominiums and HOAs that insure buildings or common structures, it is important to confirm that coverage limits reflect current rebuilding costs. Underinsuring the property can lead to serious problems, especially after a major loss or casualty.
4. Evaluate Key Coverage Types
Board members must then take a deeper dive into each policy type. Review coverage limits, replacement costs, deductibles, and risks to determine if every insurance policy is up to par.
5. Analyze Claims History
Past claims should also play a role in the review. This will help the board identify any patterns and come up with a plan to address the frequency of claims. Recurring claims can indicate more serious issues.
6. Review Vendor Insurance Requirements
Associations are not the only ones that must carry insurance. Vendors and contractors must also maintain appropriate policies. Boards should verify this and request updated certificates of insurance every year.
7. Meet With an Insurance Professional
Boards can’t do everything alone. Instead, they should meet with their insurance broker or agent every year. This will allow them to ask important questions, such as:
- What coverage gaps exist?
- What new risks should be considered?
- Are coverage limits still appropriate?
- Have any policy exclusions changed?
- Are there emerging insurance trends affecting associations?
When Should an HOA Review Insurance?
At a minimum, condo associations should review their insurance coverage at least once a year, but there’s never a bad time to shop around for new insurance. Regular evaluations will help the board identify gaps and determine if their current policies offer sufficient coverage.
For some HOAs, an opportune time for the board to review the association’s insurance policies is during the annual budget planning process. Others choose to put an insurance review on the agenda for another time of year. If an association has recently completed a major upgrade to its property, that’s also a good time to review coverage.
Getting Professional Assistance
Navigating insurance for HOA communities can prove demanding and confusing for many boards. Still, insurance is an essential part of running an association. Without it, financial losses can quickly stack up and bankrupt the community. Consider hiring an HOA management company to help oversee insurance and policy reviews.
First Community Management provides expert HOA, condo, and co-op management services to communities in Chicago. Call us today at (312) 829 8900 or
contact us online to learn more!
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