Navigating the basics of homeowners association insurance

Homeowner's associations (HOAs) have many responsibilities that can be difficult to keep up with. One of the main ones is selecting community association insurance. HOA’s should carefully consider the type and extent of coverage they purchase from an insurance provider. The right policy can help protect your investment while minimizing risk.

Factors like what kind of coverage your community association insurance master policy outlines, costs, and annual assessments should be considered when reviewing your HOA policy. This article will explore insurance for homeowners associations and help you understand how the right policy and coverage can help protect your community.
 

What is HOA insurance, and what does it cover?

HOA insurance, or community association insurance, refers to a type of insurance policy that is typically purchased by a homeowners association to protect the common areas and shared assets within a condominium complex, planned community, or residential development. HOAs are responsible for managing and maintaining these common areas, and community association insurance is crucial to mitigating financial risks associated with potential damages, liabilities, and legal issues.

Here's what HOA insurance typically covers:

1. Property Insurance: HOA insurance typically covers damage or loss to the common areas and structures owned and maintained by the association. This can include things like the clubhouse, swimming pool, playgrounds, landscaping, and parking lots.


2. Liability Insurance: It provides liability coverage for bodily injury or property damage claims that may occur in the common areas. For example, if a visitor slips and falls by the pool or if a tree in a common area falls and damages a resident's car, this coverage can protect the HOA from lawsuits.


3. Directors and Officers (D&O) Insurance: D&O insurance protects the HOA board members and officers from personal liability in case they are sued for decisions or actions taken on behalf of the association.


4. Fidelity Bond: This type of coverage helps protect the association from financial losses resulting from dishonest acts by employees or board members, such as embezzlement or theft of association funds.


5. Workers' Compensation: If the HOA has employees, workers' compensation insurance may be necessary to cover medical expenses and lost wages for employees who are injured while performing their job duties.


6. Equipment and Property Coverage: This can include coverage for equipment used to maintain common areas, such as lawnmowers, tools, and other machinery.


7. Ordinance or Law Coverage: This covers the costs associated with bringing the common areas into compliance with new building codes or laws if they are damaged and need repairs or rebuilding.

It's important to note that while community association insurance covers common areas and shared assets, individual homeowners are typically responsible for insuring their own units or dwellings. Homeowners are encouraged to purchase their own HOA insurance policies, often referred to as HO-6 policies, to protect their personal property and provide personal liability coverage within their units.

The specific coverage and policy details of HOA insurance can vary, so it's essential for board members and residents to thoroughly review their policy and consult with HOA insurance professionals to ensure they have the appropriate coverage for their community's needs.
 

First-party vs. Third-party coverage

There are two kinds of coverage for HOA communities: first-party and third-party. First-party insurance covers the policyholder's losses, and they can file a first-party claim against their insurance policy. An example of a first-party insurance claim would be if the association filed for losses or damages from a fire.

Third-party coverage protects an association from litigation brought forth by another entity. An example of a third-party claim would be if a resident broke their ankle after stepping in an unrepaired pothole in the community parking lot and sued the association for medical costs and damages.

Insurance for homeowner associations generally includes several types of first-party and third-party policies. The community’s policies protect building exteriors, structures, shared spaces, furnishings, and people like board members and community employees.

What is the master insurance policy for a homeowner association?

The community’s master policies can provide coverage that protects several areas of the property as mentioned above as well as some of the following:

• Building: A master policy usually offers three kinds of coverage for units in a building. They include:
   
  1. Bare Walls: This coverage includes basics like roofs, exterior floors, elevators, and exterior walls. Residents must cover things inside their units, like flooring, fixtures, furnishings, and large appliances. Bare walls coverage excludes residents’ personal property.
  
  
  2. Single Entity: This coverage includes basic elements like roofs, exterior floors, elevators, and exterior walls. It also covers some fixtures, standard finishes, and general appliances. Much like bare walls coverage, single entity coverage excludes residents' personal property.
  
  
  3. All-In: This comprehensive coverage protects elements like roofs, exterior floors, elevators, and exterior walls, as well as fixtures, additions, installations, and improvements inside the units. It does not, however, cover personal property.


• Commercial Auto: This coverage covers comprehensive and collision damage involving service vehicles owned, rented, or borrowed by the association.


• Umbrella Coverage: Provides extra limits of coverage beyond liability and limits on policies like general liability, commercial auto, and directors and officers.

Exclusions and supplemental coverage

The role of an HOA's master policy is to provide coverage for the community in case something happens. However, there could be several exclusions that could affect homeowners. Becoming familiar with the exclusions under an HOA master policy makes it easier for boards to communicate coverage to homeowners. In turn, boards can help residents navigate home insurance policies to obtain coverage for things not addressed by their HOA insurance.

“Owners should know what the association’s policy covers so they can get a corresponding policy that ensures complete protection without any gaps in coverage,” said Jamie George, vice president of insurance at FirstService Financial. “It should be a dynamic relationship.”
 

Annual HOA insurance review

Community associations should conduct annual insurance reviews to assess what new coverage might be needed or outdated. This is essential for measuring costs and limiting risk since different types of policies apply within a property's boundaries. Communities are constantly evolving, so an association must keep up with all these changes!

Since most HOA insurance policies renew yearly, it is an excellent opportunity to have a professional assess and advise what new coverage is needed. An annual HOA insurance review can be conducted by either an agent or broker and is especially important if the property has undergone extensive improvements or renovations or has a new asset, like a gym area or pool.

The annual HOA insurance review is also crucial if a community has partnered with a property management company within the last year. A property management company may require specific coverage to protect the property, so it is best to review this annually to ensure compliance.
 

Risk and risk management

When considering a new policy or renewing your community coverage, it is essential to minimize risk. Risk can be reduced by partnering with a property management company that has experience in managing HOAs and negotiating better rates and coverage.

FirstService Residential can help your association navigate HOA insurance and find the right coverage for your community through our affiliate FS Insurance Brokers. Exclusively available to FirstService Residential communities, it's one of the ways we continue to add additional value and solutions for the communities we serve.

Want to learn more? Contact a member of our team and see how we can support your community’s vision.