Growing up in Louisville, Colorado, I like many others, could have never imagined the scene that unfolded on December 30, 2021. Early in the day a staff member mentioned a small brushfire had started in Boulder. Miles away we went on with our day only to see what looked like dust in the air around 11am. By 1pm the fire was roaring, coming up the hill towards Superior. As the winds shifted, the devastation that unfolded was nothing short of unimaginable. What seemed like only a matter of minutes, more than 1,000 structures were lost along with decades of memories and only charred remains littering the landscape.
This is what insurance is designed to do. To help when the unthinkable happens. To come to the rescue on the brink of financial ruin. With this fire just behind us and years of rebuilding still to come, what can we learn and do to help if the unthinkable happens again?
The biggest asset for most associations are the building themselves. Many people found during the fires that they were significantly underinsured. It is critical that associations review their current building coverage amount and work with their agent in determining a value that the association is comfortable with. The agent should be able to help provide input and explain how they arrived at the suggested limit. With the ever changing cost and rising inflation this is not a perfect science. If an association is underinsured at the time of the loss, they have a few options to cover the shortfall such as using reserve funds, taking out loans or assessing owners. This is never ideal and hopefully by reviewing the limit you can reduce this exposure from happening to your association.
When looking at building coverages it is common to see policies come in three main coverage options.
1) Guaranteed Replacement Cost which pays the full cost to replace the property even if it exceeds the policy limits. An important caveat typically applies to this provision that requires the association to insure to replacement cost (and update the amount when any improvements are completed) for the coverage to be triggered at the time of loss.
2) Extended Replacement Cost extends the limit in the event of a total loss to provide additional coverage by a set percentage. This generally follows the same requirements as Guaranteed.
3) Agreed Value which gets rid of any coinsurance provision by the company and the insured agreeing to the maximum limit for a schedule of property values. Since each item has a specified limit, it becomes more important to review since there is less margin for error. An option is Blanket coverage, which would allow the total limit to be used for any building that suffered damage. However this is becoming increasingly difficult to secure on Agreed policies and often is not available regardless of price.
One item of note is coinsurance, and not to be confused with the same word used in health insurance, as property coinsurance works a little differently. Coinsurance is a provision that penalizes the insured if the limit of insurance is not equal to or greater than the specified percentage. The higher the percentage the more likely a penalty will happen from a loss. A quick example is the coinsurance percentage is 90%. A building replacement value is $1,000,000 and the client only carriers $800,000. A fire does $300,000 of damage. Since the insured was under the required coinsurance $800,000 vs. the $900,000 required (90% of $1m), the insurer will add a penalty ($800,000/$900,000=.889). Even though the associations loss was $300,000, the insurer will only pay $266,700 minus their deductible ($300,000 x .889).
Reserve studies can also help the association and their agent account for items that are owned by the association and give some ideas on their replacement cost. This helps provide a greater roadmap for coverage requirements but should not be the only thing utilized. Many items may fall outside a traditional reserve study such as trees, plants and shrubs, roadways, etc.
After a loss, monthly assessments may need to stay the same or close to since often times most of the cost associated with the association do not go away. Owners should purchase loss of use coverage that would keep their total cost before the fire the same after the fire. Business income or loss of dues may be added to policies to help collect for uncollectable assessments or loss of income if parts are rented to others.
Knowing who is responsible for what prior to a loss will help alleviate conflict at the time of a loss. Having a maintenance and insurance chart that clearly defines responsibilities should help accomplish this.
Lastly, ever policy is different and insurance is no where near perfect. Many policies today exclude or limit coverage for foundation, underground pipes, roadways, outdoor property and others. Be sure to spend the time with an educated, experienced agent that can uncover the pitfalls and recommend coverage options.
-Devon Schad
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