7 minute read
Hard Choices in a Hard Insurance Market
By Brian Kalmenson
“Change is the only constant in life.”
These are the words of the Greek philosopher Heraclitus, and while spoken thousands of years ago, they remain as appropriate today as they were then. For California community associations, the volatility of the insurance market may represent the greatest constant of all in recent years.
The tumult in the California insurance market is well-known, particularly with decisions made by some of the state’s largest insurers to stop writing new business in California. To put it mildly, it is concerning when insurance carriers like Allstate, State Farm, and others decide they are better off by not writing new policies in California. As conditions continue to worsen, many associations are asking themselves an important question, “what can we do to protect ourselves?”
There is no magic wand, and every community has an entirely different risk profile in the eyes of insurance carriers. Although a significant point of frustration for boards of directors is how much is outside of their control, some actions can maximize insurability or minimize the impact on an association’s insurance program. This is especially so for communities plagued by wildfire scoring, claims issues, or both.
Modeled Wildfire Exposure
The fact that there have been numerous stories in the media shining a light on wildfire-exposed communities speaks to the gravity of what many are facing. Skyrocketing premiums, a dearth of insurance carriers willing to offer coverage, and sometimes even coverage at less than the total replacement cost of the community’s buildings. Notably, insuring at less than full value violates federal lending guidelines and almost always runs contrary to the requirements of the
While we still need definitive data on what communities can do to change their modeled wildfire scoring, below are approaches that some associations have employed to manage their insurance coverage in this tumultuous market.
• They are shopping the fire maps.
Most, but not all, insurance carriers in the community association industry use the same third-party wildfire modeling tool. The various wildfire models usually show similar scoring for the same location, but there are times when one model shows less exposure than others. When this happens, it can allow the carrier using that model to provide a surprisingly reasonable quote. Admittedly, this does not happen often, but it speaks to the value of working with a community association insurance specialist to ensure the appropriate carriers are approached to identify outlier fire scores.
• They are going “Bare Walls.”
Most CC&Rs require condominium associations to insure the unit interior finishes as the developer originally built them. When a wildfire-exposed community sees its rate (cost-per-million dollars of coverage) increase substantially, any change to the coverage limit will be meaningful to the policy cost. If the CC&Rs allow for flexibility, the board may opt to remove unit interior finishes from its property policy and cover only the units’ unfinished walls, floors, and ceilings. Essentially, the association and owners each insure what they respectively own, maintain, and otherwise repair.
To paint the picture, say a community with those interior insurance obligations is insured for $55 million at an annual premium of $38,500. Due to wildfire exposure, their policy was canceled, and the replacement property policy will now cost $360,000. If the association’s CC&Rs allow for “Bare Walls” coverage, they may only need about $44 million in coverage instead of $55 million. With $11 million less coverage needed, the renewal premium could be approximately $70,000 less than it otherwise would have been.
Many communities have gone this route, either with flexibility in their current CC&Rs or via amending their CC&Rs. Importantly, for any community that shifts from unit-inclusive to “Bare Walls,” it is crucial to notify owners accordingly so that, if any changes are needed to their policies, they can be made to eliminate any potential gaps in coverage.
• They stay on top of updates to fire modeling.
Fortunately, change remains constant in the fire modeling, as the models are periodically updated. In some cases, especially in active construction areas, communities have benefitted from favorable fire modeling changes.
A recent win! In one such recent case, a higher wildfire score led to an association’s policy being non-renewed, with a subsequent jump in their premiums. Due to a change in the modeling during the year, the community was able to secure coverage from a preferred insurance carrier, allowing for better coverage, a premium reduction of nearly 60%, and a lower property deductible, to boot!
Does this mean every community should ask its broker to obtain updated fire modeling every other week?
No, but as the models change from time to time, it is worth checking every few months in case there is a favorable development.
Unfavorable Claim History
The wildfire issue is undoubtedly the headline-making challenge facing community associations, but it is far from the only challenge. In this tighter insurance market, insurance carriers have been much faster to take significant rate or non-renewal action for communities with claim issues. Bear in mind that insurance underwriters look at claims through the lens of frequency and severity. Put another way, how often claims occur and how bad they are when they do.
Below are a few things community associations have been doing to keep a more favorable loss history.
• Increased deductibles.
Everything costs more now than it did 2-3 years ago, which has directly impacted the frequency with which insurance claims are made. For a community with a $5,000 deductible, it is far easier for damage to exceed this amount now than it was just a few short years ago. Increased deductibles help to keep claim frequency down, and for the condominium communities that are not “Bare Walls,” it may also help put more of an onus on the owners’ insurance policies to address interior damages before they reach out to the association to open a claim on its policy.
This increased deductible strategy can also work on other policies, most notably, the Directors & Officers (D&O) Liability coverage. Recently, a community’s D&O coverage was non-renewed due to claims, and the premium subsequently jumped from $600 to over $40,000. By adjusting the policy’s deductible/ retention upward to $35,000, the cost was reduced by over 60%. Though still an increase, it was far more manageable to the association with the adjusted deductible/retention.
• Self-insuring smaller claims.
We often see loss history reports with a smattering of claims barely above the deductible. Five years ago, this was not such an issue, as it was a softer market where more carriers were competing for business and willing to overlook the more minor claims. The days of loose underwriting are over, and the underwriters from various insurance companies now look at several smaller claims as being indicative of a high probability of more significant claims down the road.
In some cases, claims can be submitted to the insurance carrier with the notation that the association would like to have the ability to self-insure if the covered damages are more minorly above the deductible. This approach allows communities to only pay for what their insurance policy would have covered on the claim without the carrier incurring a minor paid loss on the loss history.
When it comes to claims, it is worth speaking with your insurance broker or agent on best practices, as minor claims now can lead to major issues later.
The insurance industry is not known for changing quickly, but the breakneck pace over the last few years has been felt throughout the community association industry. Boards and managers alike have had to adapt to the new normal, and while the insurance market goes through ‘soft’ and ‘hard’ market cycles, some of the adjustments in underwriting are likely here to stay. Maintaining a close relationship with the association’s insurance broker remains crucial to navigate the murky waters we find ourselves in currently.
While 15 minutes may no longer save you 15% or more on your insurance, a quarterly phone call to your insurance broker could save you 15 or more preventable headaches.
