Rising HOA insurance prices prevent some associations from securing the coverage they need. Even worse, many homeowners are increasing dues to cover the additional costs. Board members must understand the reasons behind these increases and how to deal with them effectively.
What is the Cause of Rising HOA Insurance?
For many homeowners associations, insurance is a major expense. In addition to the master policy, HOAs need to acquire various coverage types, including D&O insurance, workers’ compensation insurance, liability insurance, and fidelity bonds.
In recent years, insurance premiums have been on the rise. While some HOAs choose to forgo insurance, that is not always an option for others. Many state laws and governing documents require HOAs to obtain insurance. Illinois covers this under 765 ILCS 605/12 and 765 ILCS 160/1-55.
Even without such a requirement, HOAs should still purchase insurance. Proper coverage is integral to any community’s long-term financial stability.
Today, the question is why insurance rates are increasing. Several factors affect HOA insurance costs.
1. Increased Natural Disasters and Climate Change
As of late, there have been more frequent and severe natural disasters like storms, floods, and wildfires. To compensate for the higher risk that insurance providers take, they charge higher premiums.
2. Rising Construction and Repair Costs
Inflation has made materials and labor more expensive. Because of these, insurance companies are increasing rates to cover the additional costs.
3. Lawsuits and Liability Claims
Homeowners associations have been seeing an increase in lawsuits and liability claims. Common ones include slip-and-fall, structural damage, and discrimination lawsuits. More litigation against HOAs means more liability, which increases liability insurance costs.
4. Insurance Market Trends
Some areas are more high-risk than others. Because of this, providers are pulling out of these areas, limiting the options available for HOAs. Reinsurance costs, which are insurance for insurance companies, are also increasing.
5. Fraud and Mismanagement
While not all homeowners associations suffer from them, fraud and mismanagement are still major problems. These two things are driving up costs for everyone else.
How Rising HOA Insurance Rates Affect HOA Fees
High insurance premiums profoundly impact an association’s finances. Rising costs tend to trickle down, forcing HOA boards to adjust their budgets and collect more money from homeowners.
Here are the ways HOA insurance increases affect HOA fees.
1. Higher Monthly Dues for Homeowners
The most obvious impact of rising HOA insurance is higher monthly homeowner dues. Since homeowners share the association’s expenses, a higher insurance rate also translates to higher HOA fees.
2. Special Assessments for Unexpected Increases
An HOA has to cope with higher insurance premiums somehow. It will likely charge special assessments if it does not raise monthly dues.
These are one-time fees designed to meet immediate financial needs, which can include insurance hikes.
As with increased regular fees, special assessments also tend to create financial strain for homeowners. They can be even worse because they tend to be higher and paid in a lump sum.
3. Reduced Reserve Funds
Homeowners associations may dip into their reserve funds to cover rising insurance premiums. However, state laws and governing documents do not always permit this. When HOAs do this, they risk liability and jeopardize long-term maintenance projects that the reserves were intended to cover.
4. Cutbacks on HOA Services and Amenities
Higher insurance rates may force HOAs to cut back on other expenses to cover the additional costs. One way HOAs do this is by reducing services and de-prioritizing amenities. This snowball effect leads to fewer community events, subpar landscaping, and delayed repairs.
How to Deal With Rising Insurance Costs for HOAs
Homeowners associations must not balk at the first sign of distress. Rising HOA insurance can be a problem, but there are ways an association can deal with it.
1. Implementing Risk Reduction Strategies
Because insurance providers assess risk levels when setting premiums, an HOA can lower its liability risks by improving safety within the community. Actionable items include installing security cameras, improving lighting in dark areas, upgrading fire systems, and enforcing strict maintenance policies.
2. Exploring Alternative Insurance Options
HOAs are not limited to a single insurance provider. Boards should explore different options and structure policies wisely, which can help reduce overall costs.
Some HOAs opt to join self-insurance pools when multiple associations contribute to a shared fund instead of paying traditional insurance premiums.
Alternatively, an HOA can choose a higher deductible to lower premium payments. This option is only good if the association already has a substantial reserve fund.
3. Budgeting for Long-Term Stability
A well-planned budget helps prevent sudden fee hikes. Associations should maintain strong reserve funds to handle unexpected increases in insurance premiums. Annual insurance reviews can also allow HOAs to adjust coverage and compare rates, helping ensure policies remain comprehensive and affordable.
4. Negotiating With Insurance Providers
Board members shouldn’t be afraid to negotiate. Actively seeking competitive rates is much better than automatically renewing policies.
Additionally, an HOA can opt for a multi-year policy, which can lock in lower rates for longer.
5. Working With a Proactive HOA Manager
A good HOA manager can make all the difference, especially in cities like Chicago, where rising costs are constantly challenging. This manager can help HOAs find creative solutions to keep fees manageable and negotiate with insurance providers on behalf of the board.
How Homeowners Can Manage Rising HOA Insurance Premiums
High insurance rates, which can lead to high HOA fees, also affect homeowners. Homeowners must make an effort to understand their HOA’s budget and review financial statements, which will help them understand where their fees go.
Additionally, homeowners should encourage their board to look for competitive rates. The HOA should be open to changing providers and obtaining multiple quotes to secure the best deal. Sticking to the same provider out of habit or familiarity is unwise, especially if the provider can’t meet the HOA’s budgetary needs.
Furthermore, homeowners should encourage their board to mitigate risks where possible. This includes implementing better safety measures and systems. Insurance providers feel more comfortable charging lower premiums when risk levels are low.
Homeowners always have a voice in their community. They should actively participate in their HOA and attend meetings as often as possible. This way, they can stay up-to-date on community affairs and help ensure the HOA’s best interests come first.
Don’t Be Passive
Rising HOA insurance costs may continue, so HOAs should take proactive measures. While some increases are unavoidable due to inflation and market trends, an HOA can implement several strategies to reduce risk and secure better rates.
Hillcrest offers financial management services to HOAs in Chicago. Call us today at 630-627-3303 or contact us online to request a proposal!
