By Devon Schad, Schad Agency
Every year, an association must renew or select a new insurance policy for the association. Often boards struggle with choosing one of the most expensive line items on the budget. Here are some quick tips associations can use for some basic guidelines in selecting a policy.
It may sound cliché to use someone with experience, but this is the most critical place to start. Does the agent or agency have experience writing associations? Check if they are a member of CAI by selecting FIND A SERVICE PROVIDER on our chapter website. Inexperienced agents often lack the knowledge to effectively diagnose the coverage requirements or miss critical coverage components which may leave the association and manager compromised. An experienced agent should be able to read the association Covenants, Conditions & Restrictions and make sure all proposed coverage complies, as well as recommending coverage to meet DORA, FHA, mortgage companies, and the secondary mortgage market. Don’t be caught with your Decs down.
The most expensive part of any association policy is the property coverage. The limit chosen is in direct correlation with the cost of that portion of the policy. Associations should ask if the limit proposed is adequate, how was the rebuild calculated, and are all the buildings and property covered? Most policies today are replacement cost, but policies with extended replacement cost or guaranteed may have clauses that require the association be first insured to value before those coverage extensions apply or the policy may have a co-insurance clause that causes a penalty if the insured value is below that required amount. If the value is too low, or not shown be sure to ask more questions. Coming up with the value of rebuild is not a perfect science, but care and thought should be used when evaluating the rebuild amount the association selects, and the parameters of the policy being considered.
Basic, Broad and Special
As insurance has matured, so has the coverage forms. A basic form policy will only cover a loss if one of the named perils such as fire, windstorm, hail, or vandalism. Broad form includes all of the basic perils plus weight of snow, ice, or sleet and sudden and accidental water damage. In reality both forms leave associations exposed to losses not named and should only be used in the rarest of cases such as when a special form is simply impossible to purchase. Most policies today are Special-form that cover all losses unless excluded.
Replacement Cost vs Actual Cash Value
Replacement cost (RC) is the cost to replace the damaged property with materials of like kind and quality without any deduction for depreciation. Actual cash value (ACV) is the cost to repair or replace minus depreciation. Most mortgage companies and FHA loans require a replacement cost policy although exceptions may be made for roofs to use ACV. If considering an ACV policy for the roof, the association should consider the actual cost to replace the roof, the deductible, and the potential exposure.
Scheduled vs Blanket
A scheduled policy will list a limit that is specifically assigned to that building or structure. That limit is the most the insurer will pay for the item listed. A blanket policy will have a single limit listed, rather than assigned, and could be used for one or all structures/buildings reducing the exposure. Generally, a blanket policy will cost more than a scheduled policy.
Wind and Hail
As most homeowners still wish for a hailstorm to cover the cost to replace their roof, associations now cringe at the thought as carriers continue to increase the wind/hail deductible and the potential exposure to the association and the homeowners. Generally, policies come with a straight deductible (one deductible that is applied to the entire loss), a per building set limit, or a percentage which is either based on the total insured value (total of all property and business income limits) or per building (based on the rebuild value of that building). Regardless of the deductible selected the association should have a plan in place in which they will handle a loss, balancing the likelihood of the loss versus the actual cost of the loss itself.
Admitted vs Non-Admitted
Admitted carriers must comply with state regulations, be approved by the state’s insurance department including its rates, and be backed by the Colorado Insurance Guaranty Association (CIGA) (A fund to help pay claims of insolvent carriers). A non-admitted carrier does not have to comply with state regulations. Mishandled cases cannot be appealed to the state insurance department, and they do not participate in the CIGA. However, non-admitted carriers may provide options for harder to place associations, lower wind/hail deductibles or unique coverages not afforded by the admitted market. If using a non-admitted market, make sure they have a high AM as to reduce the risk of insolvency.
Understanding what the total will be is an important factor but is often overlooked. Some companies allow for payments over time and may charge for doing so and others require the payment in full which may require the association to use premium financing. Also, agencies may charge additional fees over and above the insurance costs such as for certificates.
When going to bid it is important to utilize not only the new agent, but also the incumbent. Often the new agent will have the prior insurance information and can utilize that to craft a policy that they believe will win the account. Allowing the incumbent agent to see what is being proposed can provide an additional perspective and the agent may adjust coverage options for comparison. Be sure to bring in both agents to speak as insurance is generally not apples-to- apples. This will ensure the association can see all points of view and select what is best for their circumstances.
The End is the Beginning
Selecting a policy does not end the relationship, rather it is the beginning. Understanding how the agency will help during claims, help answer an owner’s questions, and help with creating information for owners to know what coverage they should have is critical in understanding when the relationship begins.
Devon Schad took over the helm of the Schad Agency six years ago. This family owned & operated agency began in 1976 and today insures hundreds of associations across Colorado. Outside of insurance you can find Devon spending time with his family, skiing or snowboarding, coaching his daughters in soccer or serving as a volunteer for CAI, Highlands Metro District #1, and the ZBT Foundation.