by A. Hunter Faulkner and Maxwell A. Salain
With a major hurricane making landfall somewhere in Florida on nearly an annual basis over the past several years, Florida’s property insurance market is in turmoil. Many carriers have left the state and those carriers still willing to write policies in the state have drastically increased the cost of their annual premiums. Many of our clients have reported annual increases of 20-30% per year over the past several years. The turmoil of rising insurance costs and a limited pool of insurers not only impacts homeowners, but also community associations who are required under Florida law to maintain property and casualty insurance for association property.[1] However, community associations do have options to help alleviate the fiscal pressure of rising insurance costs.
Options to Lower Insurance Costs
Community associations, particularly homeowners and condominium associations have four main avenues available to them to reduce their insurance cost burden. These options are:
- Self-Insurance
- Group Insurance Policies
- Raising Policy Deductibles
- Obtaining Coverage via a Lower Rated Carrier
These options fall into two main categories: (1) traditional insurance alternatives; and (2) adjustments to existing association insurance policies and procedures. Determining which alternative best suits your association should be carefully considered based on the association’s reserve funding, ability to collect on assessments, and management structure.
Traditional Insurance Alternatives
Community associations in Florida have two major alternatives to traditional insurance coverage. Associations may self-insure by forming and obtaining coverage through a self-insurance fund.[2] Or, three (3) or more associations are permitted to obtain a group policy covering all the associations in the group collectively, in lieu of each association holding individual polices.[3]
Self-Insurance
As noted above, Florida law permits community associations to satisfy their property insurance requirements through self-insurance.[4] However, this process is not as simple as setting up a specified reserve fund and cancelling coverage. Rather, Florida law requires that the association obtain coverage through a self-insurance fund, which is regulated by the Office of Insurance Regulation.[5] Essentially, this means that the association will be required to form an independent entity, managed by the association, and apply to the Office of Insurance Regulation for approval to self-insure. Once approval is granted, the self-insurance fund would then be permitted to offer coverage to the association, thus allowing the association to self-insure. The self-insurance fund can cover an individual association, or a group of associations can collectively form such a fund to cover the group of associations. An in-depth discussion of the process and necessary steps to obtain approval will follow in a later article in this series.
Group Insurance
For some associations, a middle ground between self-insurance and traditional coverage may be the best fit. Florida law provides for such an option. Florida law provides that a group of three or more community associations formed under Chapters 718, 719, and/or 720 are permitted to obtain a joint policy covering all associations, provided that coverage is equal to the probable maximum loss for the communities in a 250-year windstorm event.[6] Such a policy avoids the administrative burden of having to “manage” a self-insurance fund and provides the additional comfort of working with a traditional insurance carrier. A group insurance policy effectively allows a group of associations to collectively bargain with insurance carriers. And, in some cases, the 250-year windstorm loss could be less than the amount of coverage the associations are currently required to carry. A group policy may be a strong option for community groups which have multiple associations in a development or in communities that have a master and sub-associations.
Adjusting Your Current Policy
When evaluating an association’s insurance costs and policy, there are two main areas that are within the association’s control, that is who the insurance is purchased from and the deductible. Condominium associations, specifically, are required to maintain adequate property insurance, which is based upon a statutorily required appraisal.[7] In other words, simply taking less total insurance (under insuring) the association property is not an option. Homeowners’ associations on the other hand, have more discretion as their insurance requirements are generally set forth in the governing documents. However, in almost every association’s governing documents, adequate property insurance is required.
Raising the Deductible
Raising the insurance deductible is a viable option for some well-funded associations to lower their insurance costs. A higher deductible shifts a greater percentage of the risk of loss from the carrier to the insured, thus resulting in lower overall premiums. However, this option should be considered with great scrutiny. Many associations have deductible requirements included in their governing documents and condominium associations are required to maintain deductibles consistent with prevailing practice for similarly situated associations.[8] For associations with well-funded reserves and which are located in geographic areas less likely to suffer major damage, a higher deductible may be a viable option.
Obtaining Coverage via a Low Rated Carrier
While obtaining coverage via a lower rated carrier is likely to result in reduced costs, it will also result in higher risk to the association. When evaluating whether a lower rated carrier is an option, the association should verify that its governing documents do not require any certain level of carrier (for example: at least an A- rated carrier). Additionally, the association should consult with its management company and determine if there are any contractual requirements imposed by the management company. Many property management companies require their associations to obtain coverage from highly rated carriers. Lastly, a lower rated carrier will likely be more difficult to work with and substantially increase the likelihood of underpayment of potential claims, as well as having a higher risk of nonpayment in the entirety.
Conclusion
Rising insurance costs are a substantial and growing burden on community association budgets throughout the state. Reducing insurance costs is mission critical to many associations who lose a larger portion of their budget to insurance each year. For many associations, a path to lower costs exists. As discussed in this article, there are several alternatives and techniques available to Florida community associations to help lower insurance costs. This series will provide an in-depth look at alternatives to traditional property insurance and how your association can implement one. Dealing with insurance can be complicated, but Jimerson Birr is here to help. Reach out to us if your community association needs assistance.
[1] See generally, Chapter 718, 719, and 720, Florida Statutes.
[2] Fla. Stat. § 718.111(11)(a)(1.); Fla. Stat. § 720.308(1)(c).
[3] Fla. Stat. § 718.111(11)(a)(2.); Fla. Stat. § 720.303(11).
[4] Fla. Stat. § 718.111(11)(a)(1.); Fla. Stat. § 720.308(1)(c).
[5] Fla. Stat. § 718.111(11)(a)(1.); Fla. Stat. § 720.308(1)(c).
[6] Fla. Stat. § 718.111(11)(a)(2.); Fla. Stat. § 720.303(11).
[7] Fla. Stat. § 718.111(11)(a).
[8] Fla. Stat. § 718.111(11)(c)