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November 5, 2006
Insurance Rates Skyrocket - Where Does an HOA Get the Money to Pay?
Question from a reader: "Our earthquake insurance costs skyrocketed this year? What can we do about it?"
Wow, this is a big problem today. Most HOAs are getting slammed with high bids for renewal of earthquake insurance (if they are lucky enough to even get a quote) and this again raises the age old question of where the balance lies between insurance and risk. There is an article on my website (the californiacondoguru) called "Earthquake Insurance, To Buy or Not to Buy, That is the Question", and I highly recommend that you read it. It talks about what to do before saying "No" to earthquake insurance. Some Boards assume that because the cost is so high, its best just to drop it. I do not support that philosophy. I believe there are some prudent steps that should be taken to involve the membership in the decision, and to gather sufficient information so that the members and the Board can determine together what the best option is for the Association. And of course, the governing documents have to be consulted to see if purchase of it is a requirement, or just an option left with to the discretion of the Board. And even if the decision to purchase it or not is left wiith the Board, it may be that the vote of the owners is required to pass a special assessment to get it. And it may be that there is not time to take a vote on a special assessment before the premium comes due, so what to do? what to do?
If a Board is facing double or triple insurance (or exponentially higher) premiums for insurance deemed to be prudent and/or necessary by the Board, which increases have been a common occurrence in recent years, without sufficient warning to allow for prudent budgeting, the money has to come from somewhere. Some boards deal with this by imposing an emergency assessment (not ruling on the legality here, just saying it happens). Others borrow from the reserves. Others respond by asking the owners to approve and pay an assessment for the cost. Because of delays and special voting requirements taking effect July 1 of this year, in California balloting owners for approval of any special assessment has become quite a bit more difficult, time consuming and costly, so Boards may try to avoid this remedy if they can find the money elsewhere and pay it back over time.
Good Idea? Bad Idea? It depends completely on the circumstances of the individual HOA, what the documents require or allow, what the capabilities and interests of the members are, and the level of risk that can reasonably be borne.
Posted by Beth Grimm at November 5, 2006 7:54 PM