Co-Insurance 101 for Homeowner Associations – Article by Patrick Prendiville

Article by Patrick Prendiville

What You Should Know

What is Co-insurance?:

Co-Insurance is the requirement imposed on the HOA for the proper valuation of property and when the HOA agrees to be a partner with the insurance company to payout any claims. In effect, the insured is “self insuring”. There are
basically three ways to insure a property: Fully Insure (most common for HOA’s), Self Insure (Very Large Corporations do this) and Co-Insure (HOA agrees to co-insure and become a partner With the insurance company for claims).

Co-Insurance is Problematic:

The valuation requirement is difficult to understand. If the requirement is violated, then there is a penalty at the time of loss. Insurance Agents often times do not disclose the Co-Insurance requirement on their proposals and it is only discovered within the policy after a claim is filed. 90% Co-Insurance means that the property needs to be insured to at least 90% of its value at the time of loss, or penalties will apply to any claims. The same applies to 80%. It must meet 80% of its value or Co-Insurance penalties will apply at the time of a paying out on a claim.

100% Co-Insurance-Misconception:

Most people assume that 100% Co-Insurance is better than 80%. Nothing could be further from the truth. This would mean at the time of binding coverage, the insured must select a value on the property-for the entire term of the policy-that would be 100% or more of its value at the time of any loss. This is very difficult to determine in this volatile market. Bottom line, Co Insurance never results in a larger payout on claims; it only reduces the settlement or has no impact at all.

Here is an example: ABC HOA purchases a policy with a 100% Co-Insurance requirement. Unfortunately, the HOA accidentally or purposely insured their building for $9 million in coverage and it now costs $10 million to rebuild-which means they are now 10% underinsured. Assume the HOA has a $500,000 fire loss. Since they have insured for only 90% of the buildings value, they are assessed a 10% penalty or $50,000 for this loss. This is in addition to their property insurance deductible.

Additional examples:

80% Co-Insurance Example:

Step 1- $2,000,000 X 80% = $1,600,000

(Value determined at time of loss X co-insurance required= should have insured)

Step 2- $1,500,000 “”” $1,600,000 = 93.8%

(Did insure 7- should have insured= % of carrier’s payout on claim)

Step 3- $200,000 x 93.8% = $187,600

(Loss X carrier’s %payout = $ amount carrier pays out on $2001000 claim)

Step 4- $12,400 + $5,000 = $17,400

(Balance owing on loss + Deductible =$ Insured pays/penalty)

100% Co-Insurance Example:

Step 1- $2,000,000 X 100% = $2,000,000

(Value determined at time of loss X co-insurance required= Should have insured)

Step 2- $1,500,000 “”” $2,000,000 = 75%

(Did insure 7- should have insured= % of carrier’s payout on claim)

Step 3- $200,000 x .75% = $150,000

(Loss X carrier’s % payout = $ amount carrier pays out on $2001 000 claim)

Step 4- $50,000 + $5,000 = $55,000

(Balance owing on loss + Deductible =$ Insured pays/penalty)


What Should a Community Manager Do?:

Avoid insurance companies that have Co-Insurance in their policies. Often times the insurance company will drop the premium amount on 90% and 100% Co-Insurance to make the risk of coinsuring attractive. Check out the insurance section of the Association’s CC&Rs. Often times CC&Rs prohibit Co-Insurance on the policies.

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