“What goes up, comes down” – unless you’re talking about insurance premiums to which that law of physics doesn’t seem to apply. There may be some exceptions, but you are unlikely to find many condo association boards popping champagne corks after opening their premium renewal notices. Increases are averaging from 12 percent to 60 percent nationally. Even properties with pristine claims histories are feeling the pain.

Simple math explains the double whammy driving this trend. Climate change is increasing the number and intensity of weather-related natural disasters, resulting in more insurance claims for the property damage they cause (whammy one). The rising cost of just about everything (whammy two) is dramatically increasing repair and replacement costs. It’s costing insurers a lot more to provide property insurance and they are responding by increasing what they charge for it.

Boards don’t have many options for dealing with a painful premium increase and none are particularly desirable and often the choices include:

Reduce the insurance coverage
Increase the deductible
Find a different insurer
Bite the bullet and pay the bill

Let’s start with the first option – reducing the coverage amount – and eliminate it. Reducing the coverage will lower your premium, but it may also leave you without the insurance the association needs to cover a large claim. That creates an outsized – and unacceptable - financial risk for the association, and a huge potential liability risk for individual board members, who have a fiduciary obligation to adequately insure the community. A premium increase may be painful, but a coverage gap could be catastrophic.

This is a much better idea. True, it will force the association (for damage to common areas) to self-insure for smaller claims, but that’s not entirely a bad thing. Those small claims can trigger future premium increases and may make it more difficult for the association to find coverage. Increasing the deductible and moving to a per unit deductible can minimize the number of claims the association files and make it a more appealing insurance prospect both to its current insurer and to others, if the board wants to find another carrier.

The board has to be concerned not only about the association’s ability to cover larger master policy deductibles but also about the ability of individual owners to cover their share of the deductible costs. For that reason, we advise boards either to adopt a resolution requiring owners to obtain a unit owner’s HO-6 policy, which provides deductible coverage, or to seek owner approval of an amendment to the governing documents imposing that requirement.

Boards that increase the master policy deductible should notify owners of that increase so they can increase the deductible overage in their HO-6 policy as well.

This is the knee-jerk reaction to a huge premium increase. It is understandable, but it may not be practical. The forces driving premiums up are affecting all insurance carriers – not just yours. So, you are unlikely to find insurers offering deeply discounted premiums to undercut their competitors. Insurers are less interested in attracting new clients than in shedding the high-risk (or potentially high risk) clients they have.

Could you find a lower premium? Perhaps – though probably not much lower. Would it be worthwhile to switch? Not necessarily. In a “hard” insurance market, and the current one certainly qualifies – there may be advantages to sticking with a carrier with which you have an existing – positive – relationship. That relationship, and the insurer’s desire to preserve it, may be more valuable to you in the future than any small premium advantage a new carrier may be willing to offer you today.

If you decide to shop your policy, you should work with an experienced and trusted insurance adviser who knows your association, knows the insurance industry, and can “pitch” your association as a good risk to other carriers.

No one likes the taste of a large increase in association expenses. But insurance isn’t optional; one way or another, the association is going to have to find a way to pay for it. Again, the board will be choosing from a list of unappealing options.

Reduce other expenses to increase the funds available for insurance. This is a fine idea in theory, but only if there are expenses you can cut without negatively affecting the management and governance of the association. If you are going to “borrow from Peter to pay Paul”, be selective about the Peter you select.

Borrow from the association’s reserves. Your reserves are intended to finance long-term capital repair and replacement expenses that you can anticipate and for which you should plan. Borrowing from this long-term fund to pay for short-term operating expenses is like using a credit card to pay for groceries because you are short of cash. You shouldn’t skip or reduce the annual contribution to the reserve fund for the same reason. What happens if the insurance premium increases again next year? You haven’t found a way to pay for it and you’re depleting the funds you will need to finance future replacement and repair costs.

Levy a supplemental assessment or obtain a bank loan. Neither is ideal but one or the other may be necessary and both would be preferable to borrowing from the reserves.

Increase monthly association fees. A fee increase won’t be the first choice on anyone’s list -- probably closer to last. But it is the only way most associations can increase their revenue stream, which is how they should finance increases in their operating costs.

Be proactive. If you haven’t received notice of a premium increase, assume you will and plan for it. Consider establishing an insurance “reserve fund” to cover this year’s increase and likely increases in the future. Work with your insurance adviser to identify coverage alternatives. Adopt a comprehensive maintenance program (see related article in this issue) and take other steps to improve your risk profile. You can’t avoid insurance premium increases, but you can take steps to mitigate their impact on the association and its residents.

If you have any questions concerning your association’s insurance, please contact Mark Einhorn.

MANAGING HIGHER CONDO INSURANCE PREMIUMS:THE NOT SO GOOD, BAD AND VERY BAD OPTIONS ASSOCIATIONS HAVE

BEFORE YOU SUE CITY HALL