Risk Management
Michael Berg, CIRMS, CMCA, MBA Vice President, Education, LaBarre Oksnee Insurance
A board of directors is tasked with maintaining, if not improving, the value of the assets within a community. This process involves expenses, of course. The risk of fi nancial loss needs to be managed through a risk management program designed to avoid, control, transfer, or accept that risk.
Avoid Risk: By removing potential hazards or implementing protective measures, a risk can be avoided. For example, if there is a tree in the common area that has a propensity to lose large branches or a possibility to fall over completely, removing the tree avoids the risk.
Control Risk: Large expenses will cause hardships for the membership in the form of special assessments. A reserve study identifi es the useful life of components and estimated replacement cost. Using the reserve study as a guide, an association can build a fi nancial plan such that funds are available when a component reaches the end of its useful life.
Transfer of Risk: This is the essence of insurance. An
insurance policy is a contract between the insurance company and the insured. The association agrees to pay the premium and accept a portion of a loss (aka, the deductible). In exchange, the insurance company agrees to accept the risk of certain property or liability losses. Not every event (aka peril)
is
transferred (i.e., covered by the policy). The insurance carrier outlines the covered perils in the insurance policy.
Accept Risk: There will always be exposure that cannot be avoided, controlled, or transferred. Those exposures simply need to be accepted.
MAIN INSURANCE COVERAGES FOR ASSOCIATIONS
While requirements vary by governing documents, lender
guidelines, and State legislation, the following coverages are either required or should be considered:
26 March | April 2026
General liability insurance is another required coverage and protects the association against claims of bodily injury and property damage occurring in the common area. The Davis- Stirling Common Interest Development Act (DSA) suggests a minimum limit of $2 million per occurrence GL insurance for communities with up to 100 homes or units. That minimum is $3 million per occurrence for larger communities. If these minimum limits are in place, any legal action must be fi led against the association as a whole. If coverage falls below these minimum limits, legal action can be fi led against each individual owner. Each association will have different exposure, and each board will have a different risk tolerance.
Property Insurance
Property insurance is a required coverage and applies to buildings and other common area property maintained by the association. Perils typically include damage caused by fi re, water from a burst pipe or backed up drain, and wind. Carriers in different regions of the country may add limitations or exclude certain catastrophe perils. For example, hurricane damage is typically excluded in states like Florida. A separate policy is therefore required to protect against hurricane loss. Other catastrophe coverages to consider are wind, hail, fl ood, tornado, and earthquake damage.
Property insurance policies should be written on a replacement cost basis, rather than actual cash (i.e., depreciated) value. Coverage written on a replacement cost basis provides that property will be repaired or replaced with like kind and quality at the time of loss. With an actual cash value policy, the association would receive an amount equal to the depreciated value of the component. The association’s insurance professional should review the governing documents to ensure coverage meets the CC&Rs insurance requirements.
General Liability (GL) Insurance
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