There are many different kinds of insurance that a homeowners association (HOA) should carry to protect the community and the investment of its residents. From property insurance to directors and officers insurance, there are different policies to protect different aspects of the HOA. But nowadays, basic insurance isn’t what is best for HOAs anymore, which is why more and more insurance professionals are recommending that communities carry a $5 million umbrella policy along with their other forms of insurance to properly protect the association and prevent serious financial catastrophes from crippling once flourishing communities.
What is an Umbrella Policy?
All HOAs should carry liability and property insurance, at a minimum, and there is often even a requirement set forth in the governing documents for the community’s coverage. These types of insurance cover the property the community owns like pools and parks while the liability insurance covers incidents at the property such as slip and fall claims, which are the most common. An umbrella liability policy offers additional coverage and is stacked on top of the existing liability policy. The liability insurance limits are typically $1 million / $2 million, meaning that the HOA can have a claim or claims up to $1 million per occurrence. But, the total limit for the insurance period, which is typically a calendar year, cannot exceed $2 million. If you add an umbrella policy, this increases your insurance limits. For example, if an HOA was to add the newly recommended $5 million umbrella policy to their existing $1 million / $2 million policy, it would bump up the coverage to $6 million / $7 million. This may seem excessive, but there are many reasons why insurance professionals are considering this the new normal – especially when a $5 million umbrella policy only costs the average HOA approximately $900 to $1,800 annually.
Lawsuits, Claims, and Mitigating the Risk
To some, $5 million in additional coverage may appear to be exorbitant or unnecessary. However, there is sound reasoning behind this newer recommendation. In recent years, liability claims have increased, not just in frequency, but also in settlements and lawsuits. These multi-million dollar lawsuits and claims occur due to incidents on the HOA’s property and are now more frequently due to vendors hired to perform work on a property who have then subcontracted out the job to another vendor. When this happens, and both parties do not have proper insurance when an incident occurs, the burden frequently lies with the HOA. This has been the focus of numerous claims that have cost communities millions of dollars and can quickly exhaust their insurance limits and bank accounts. So, by adding additional coverage to an HOA’s already existing policies, the community is taking steps to mitigate financial risk, protect the HOA and its assets.
For a contemporary reference, recently there was a case in northeast Las Vegas where a teenage boy suffered severe brain trauma when a swing set that had not had proper preventative maintenance performed on it broke and fell on him. The family of the injured boy is now suing the HOA for $20 million and yet, the community only has a $2 million liability policy. This situation is, unfortunately, becoming all too familiar to insurance professionals. This lawsuit could potentially bankrupt the homeowners association and in term, the individual homeowners themselves. If the association has to pay the difference from the insurance, this would be divided between the homeowners as a special assessment which could potentially bankrupt individual homeowners. If the special assessment was unable to be paid by the homeowner, a lien would be placed on the home. This is a very real and alarming scenario that could affect the lives of all homeowners in the community, their homes, and their individual financial futures. This shows that the HOA’s insurance is not just a line item to be reviewed each year on the budget, but is something that should be taken seriously by board members and homeowners alike.
Insurance for a homeowners association is not something that should be taken lightly. With the rising risks of multi-million dollar lawsuits and claims against communities, a $5 million umbrella policy is a cost effective way to protect the HOA. The dangers involved in an HOA being underinsured are vast and can stretch from draining the HOA’s assets to having a tragic impact on the homeowners that call the community home.