Who Pays the Association’s Insurance Deductible in This Hypothetical?

By Curtis G. Kimble.

I attended the fourth annual Utah Community Association Insurance Forum Wednesday which is put on by leading experts in community association insurance.  We discussed the new 2011 insurance laws that apply to HOAs, and which are especially applicable to condominiums and attached housing communities, such as townhomes.

We discussed some hypothetical situations and how the new 2011 insurance laws come into play to determine the outcome.  In one situation, an association with attached townhomes, where each owner owns their own lot and the home on the lot, has CC&Rs recorded in 2003 that do not require each owner to insure their dwelling and lot.  A windstorm damages roofs and siding on three contiguous, attached homes.  The total damage is $9,000.  The association deductible is $10,000.  Who pays the $9,000?  How is it figured out?

The first question is whether the new insurance laws apply to this association.  The new laws don’t apply to an attached dwelling project with CC&Rs recorded before January 1, 2012 if the CC&Rs require each lot owner to insure the lot owner’s dwelling (unless the association specifically amends their CC&Rs to subject the association to the new laws).  So, the new laws apply to our association.

Because the new laws apply, the association is required, regardless of what the CC&Rs say, to insure the individually-owned homes under a master policy, and if a home is damaged, the owner of the home (or the owner’s insurance) is responsible for paying the deductible and the association is responsible for repairing the damage within a reasonable amount of time.  If the damage isn’t likely to exceed the deductible amount, as determined by the board exercising their business judgment, the association doesn’t have to tender the claim to their insurer.

So, who pays what where three homes (and no common area) were damaged?

Assuming the association had already given notice to all owners of the amount of the association policy deductible, the law requires that if a lot (including the home) is damaged as part of a covered loss, the owner of the lot is responsible for “an amount calculated by applying the lot damage percentage for that lot to the amount of the deductible under the association’s property insurance policy.”  In other words, the deductible is divided between the affected owners according to the cost of repairing the damage to the respective lots.  So, if homeowner A’s lot received 20% of the damage, homeowner B received 30%, and C received 50%, then A is responsible for $1,800, B for $2,700 and C for $4,500.

Another hypothetical.

A board receives a letter from an attorney representing a homeowner who claims the board has improperly levied a special assessment against the homeowners.  The attorney asks the board to contact him to discuss the matter further.

Should the board provide notice of this to their insurance carrier?

Most boards are afraid that doing so will adversely affect their premiums, causing them to go up.  However, D&O insurance is very different from property insurance.  Claims on the property insurance coverage very well could increase your premiums, even if no money is paid out and they turn out to be a non-issue.  But that won’t happen with D&O coverage.  If the claim doesn’t go anywhere, it will not affect your premiums.  Underwriters do not use that information when they underwrite D&O coverage.

Additionally, D&O is “claims made” insurance, which means that as soon as you have notice of something that could be a claim, you should notify your carrier as soon as possible or you risk losing coverage for part or all of the claim.

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4 Responses to Who Pays the Association’s Insurance Deductible in This Hypothetical?

  1. Joseph Whetham says:

    I own a townhouse and belong to an HOA in Holladay. I pay about $35 a month for a Condominium Unitowners insurance plan through State Farm. I was told during our annual HOA meeting six weeks ago that I could lower my premium amount by notifying my insurance agency about this new HOA insurance law (I was told my HOA amended its CC&R to subject the association to the new laws). Is it true I could pay less each month for home insurance because of this 2011 law?

    • Curtis G. Kimble says:

      Yes, that has been many people’s experience because the new law requires the association to insure the fixtures, betterments and improvements to a condo unit or attached dwelling and the association’s insurance is required to be primary and the homeowner’s to be secondary in the event of a loss. Before the new law, in non-condo attached dwellings in particular, the homeowner’s policy would have been the primary coverage for such fixtures, betterments and improvements.

      Depending on what your current insurance coverage is, this could result in some savings on your premiums.

  2. daniel says:

    Here’s a scenario. There is a row of 14 town houses, with CC&Rs post the new law. Each town house connects to one sewer line that then connects to the main city line in the street. People flush wipes and tampons and heaven knows what else, and a clog forms right where the town house line connects to the city line. The HOA used to hire a guy to bust this up regularly, but hasn’t bothered in three years. The clog gets bigger and the townhouse closest to the street floods with sewage. It receives 100% of the damage. Can the HOA then make them pay 100% of the deductible?

    • The law regarding insurance in HOAs applies regardless of who is at fault. As mentioned above, the law requires that if a lot (including the home) is damaged as part of a covered loss, the owner of the lot is responsible for “an amount calculated by applying the lot damage percentage for that lot to the amount of the deductible under the association’s property insurance policy,” in this scenario, 100%.

      But, the law does not prevent a person from going after the person/entity at fault for a loss (Utah Code 57-8a-405(16)(a)). (Except the HOA’s insurer may not subrogate against a lot owner) Utah Code 57-8a-404(3). So, if I have to pay 100% of the association’s deductible for damage to my unit that was caused by someone else’s negligence, I may pursue that someone else to try to recover what I had to pay.
      Note, I am not stating the HOA was or wasn’t negligent in this scenario. Such a determination is far beyond the scope of this reply and this blog.

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