A major incident can cause significant losses for a homeowners association, easily overwhelming the board and your HOA budget. Obtaining insurance for HOA communities provides your association with the necessary protections against any issues it may face.
What is Insurance for HOA?
HOA insurance is coverage that your association buys to protect itself, the property it owns, and its operations. This is different from the individual residents’ homeowner insurance. Instead, insurance for HOA communities is intended to protect the community from any risks that may affect shared areas and the community as a whole.
What Does HOA Insurance Cover?
HOA insurance coverage may vary from one HOA to another. It usually depends on your community’s needs. For many associations, you may need several types of core protections rather than a single universal policy.
Here are some of the things HOA insurance covers:
Property Insurance
This type of insurance protects association-owned amenities and common elements against qualified causes of loss. This may also cover the HOA’s equipment. For condominium communities, this coverage may also extend to shared elements such as roofs and hallways.
When selecting property insurance, the HOA board should decide whether the policy uses replacement cost or actual cash value. Replacement cost usually doesn’t decrease with depreciation, but actual cash value does. To prevent underinsurance, your HOA can get a professional appraisal.
General Liability Insurance
This type of insurance is triggered when someone alleges that the HOA caused bodily injury or property damage. It can help cover defense costs if a visitor gets injured in a common area.
When selecting a policy, your board of directors should review the limits carefully, especially if your community has high-risk amenities such as pools and playgrounds.
Directors and Officers Insurance
Also called D&O insurance, this type of coverage addresses claims connected to decisions made by board members. Some qualified claims may include issues like mismanagement or breach of duty. Some disputes and issues may also come from rule enforcement or failure to adhere to the governing documents.
D&O insurance is not the same as general liability. For example, general liability usually covers injury or property damage. Meanwhile, D&O covers wrongful acts that may have occurred in the HOA’s governance.
When getting this type of insurance, your HOA board needs to confirm whether, in addition to the board, committee members and volunteers also qualify for this protection. They should also check the coverage for HOA managers and former board members.
Fidelity and Crime Insurance
Fidelity or crime insurance protects an association’s funds against covered theft or embezzlement. In some cases, the policy also covers fraud, including forgery.
When obtaining this policy, your HOA board needs to verify that the limit reflects the funds at risk. The policy should also indicate whether dishonest actions made by management companies are covered.
Additional HOA Coverage to Consider
Core policies are essential for a homeowners association. However, those policies alone don’t address all exposures HOAs face.
Here are some additional HOA coverage you should consider.
Workers’ Compensation Insurance
If your association hires employees to oversee tasks, it may be a good idea to carry workers’ compensation insurance. HOAs without direct employees, however, should also check whether this policy applies to uninsured volunteers or contractors.
Umbrella or Excess Liability Insurance
An umbrella or excess liability policy provides additional limits above your underlying policies’ thresholds. Having this type of insurance provides another layer of protection for your association. This can come in handy when a large claim exceeds the HOA’s limits.
Do note that this type of excess coverage doesn’t automatically apply to all policies your HOA may have. So, when getting this, the board needs to identify and confirm which policies it applies to.
Cyber Insurance
Cyber insurance is another handy policy to have, especially if you’re handling key information digitally. This helps protect data privacy and cover costs if your association experiences a data breach or ransomware incident.
To avoid these scenarios, your HOA should restrict account access and use multi-factor authentication. You should also ensure you have security backups. For payments, your HOA needs to set up independent verification for any changes made.
Disaster and Equipment Coverage
Since most homeowners association insurance covers property damage, you may overlook protection specifically for specific protection against natural disasters. However, in disaster-prone communities, you may need additional flood and earthquake coverage.
You may also want equipment breakdown insurance. This policy helps address sudden equipment failures involving common elements, such as electrical systems or elevator breakdowns in condominiums.
What HOA Insurance Does Not Cover
Your HOA insurance doesn’t automatically pay for all repairs or disputes you may encounter. Here’s what they don’t cover.
- Standard property coverage:Â typically excludes ordinary wear and tear or expected deterioration of your property. It also excludes deferred maintenance and pest damage.
- D&O insurance: This policy doesn’t cover fraud or personal profit. If the insured has prior claims, it may fall outside this insurance’s protection. Additionally, late notice or failure to follow policy conditions may also make a claim unlikely to be approved.
HOA Master Policy vs Homeowners Insurance
The association’s master policy and an owner’s personal policy serve two different purposes.
On one hand, a master policy covers parts of the neighborhood your HOA is responsible for. These areas are common or shared amenities, like clubhouses, pools, roads, and landscaping. What this covers depends on your association’s policy and what’s stated in the governing documents.
Meanwhile, homeowners’ insurance protects the individual homeowner’s personal property. Depending on the type of property, the coverage may include anything from physical damage to personal liability. In condos, the equivalent of this is the HO-6 policy.
While they’re different, these two types of insurance policies are meant to work together. The HOA master policy protects the association’s properties and shared responsibilities. Meanwhile, the homeowner insurance protects an individual’s property and liability.
As a best practice, homeowners should review both types and understand where the association’s protection ends and where theirs begins.
Having the Right Coverage
Insurance for HOA communities is not a purchase boards can set and forget. A well-designed program protects shared assets and decision-makers while reducing the chance that owners will face a major special assessment after an uncovered loss.
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