There are many details that an HOA board must consider when purchasing HOA property insurance. One of the most important details is the amount of insurance carried on the buildings and common areas. If the coverage limit is too low, the association may discover at claim time that the insurance company will not pay the full amount of a covered loss.
This problem is often connected to a coinsurance clause. Coinsurance is a property insurance provision that encourages policyholders to carry a reasonable amount of insurance. If the insured does not maintain the amount required by the policy, the insured may have to share a larger part of the loss.
Here are the basic things an HOA board should understand about coinsurance penalties and underinsurance.
What Is Coinsurance in HOA Property Insurance?
Coinsurance in property insurance is different from health insurance coinsurance. In HOA property insurance, coinsurance usually means that the association must insure the property to a certain percentage of its value. This percentage is often 80%, 90%, or 100%, depending on the policy.
For example, if a building has a replacement cost value of $5,000,000 and the policy has a 90% coinsurance requirement, the HOA may need to carry at least $4,500,000 in building coverage to avoid a penalty.
Why Coinsurance Matters for an HOA
HOA property insurance, often called an HOA master policy, is designed to help cover buildings and common areas that the association is responsible for. This may include roofs, hallways, lobbies, pools, fences, clubhouses, and other shared areas, depending on the HOA’s governing documents.
If the association underinsures these buildings or common areas, a partial claim may not be paid in full. This can create a budget problem for the HOA and may lead to a special assessment for homeowners.
Replacement Cost Value
The replacement cost value is the estimated cost to rebuild or repair the insured property with materials of like kind and quality. This is not always the same as the market value, purchase price, or tax value.
For an HOA, replacement cost may include the cost of labor, materials, debris removal, construction demand, code upgrades, and other rebuilding expenses. Construction costs can change over time, so a limit that looked correct several years ago may no longer be enough today.
Coinsurance Requirement
The coinsurance requirement is the percentage listed in the policy. Common examples include 80%, 90%, or 100%.
The basic formula is:
Property value × coinsurance percentage = minimum insurance limit required
For example:
Property replacement value: $10,000,000
Coinsurance requirement: 90%
Minimum required insurance limit: $9,000,000
If the HOA carries less than the required amount, the claim payment may be reduced. Travelers explains this same basic calculation as property value multiplied by the coinsurance percentage to determine the minimum insurance amount required.
How a Coinsurance Penalty Can Reduce a Claim
A coinsurance penalty usually applies when the insured limit is lower than the amount required by the coinsurance clause. The insurance company may compare the amount of insurance carried to the amount that should have been carried.
Here is a simple example:
Replacement cost value of the building: $10,000,000
Coinsurance requirement: 90%
Required insurance limit: $9,000,000
Actual insurance limit carried: $7,200,000
Covered damage: $1,000,000
The HOA carried $7,200,000, but it should have carried $9,000,000. That means the HOA carried 80% of the required amount.
The insurance company may pay only 80% of the covered loss before applying the deductible.
Covered damage: $1,000,000
Estimated claim payment before deductible: $800,000
Potential shortfall before deductible: $200,000
Even though the HOA had a $7,200,000 policy limit and the damage was only $1,000,000, the claim may still be reduced because the building was underinsured.
Partial Losses Are Often Where the Problem Appears
Many people assume coinsurance only matters after a total loss. In reality, coinsurance penalties often affect partial losses.
For example, a roof, clubhouse, hallway, or exterior wall system may suffer major damage without the entire property being destroyed. If the policy limit is too low compared with the required insured value, the HOA may receive less than expected for that partial claim.
Bare Walls, Walls-In, and All-In Coverage
Not all HOA master policies cover the same parts of a building. Some policies are written on a bare walls basis, while others may be walls-in or all-in/single entity policies. StarNet explains that bare walls coverage typically stops at the bare structure, while single entity or all-in coverage may extend further into the unit to include original fixtures or finishes.
This matters because the correct insurance limit depends on what the HOA is responsible for insuring. If the association is responsible for more parts of the building than expected, the replacement cost value may be higher.
Ordinance or Law Coverage
After a major covered loss, the HOA may have to rebuild according to current building codes. Ordinance or law coverage can help address added costs related to code-required upgrades after a covered loss.
This is important because the cost to rebuild an older building may be higher than the cost to repair it exactly as it was before. If ordinance or law coverage is missing or too low, the HOA may have another gap to fund.
Deductibles and Wind, Hail, or Flood Exposures
Coinsurance is not the only issue that can reduce the amount the HOA receives after a loss. The deductible also matters. Some HOA property policies may have separate deductibles for wind, hail, named storm, or other catastrophe events.
Flood may also require separate or specialized coverage, depending on the location of the property. StarNet notes that HOAs may need separate or specialized coverage for flood and higher-wind exposures based on geography and budget.
Loss Assessment Concerns
When a master policy has a large deductible, low limit, uncovered exposure, or coinsurance penalty, the HOA may look to the homeowners for a special assessment. This can be frustrating for owners who assumed the master policy would fully protect the community.
Many unit-owner policies offer loss assessment coverage, but that coverage may have its own limits and conditions. This is why the HOA master policy and the unit-owner policies should be reviewed together when possible.
Previous Property Valuations
An older insurance valuation may no longer reflect the true replacement cost of the buildings. Inflation, labor shortages, material costs, roofing costs, and local construction demand can all affect the amount needed to rebuild.
HOA boards should be careful about renewing the same limit year after year without reviewing whether that limit is still accurate.
Appraisals and Replacement Cost Estimates
One way to reduce the risk of underinsurance is to obtain a current replacement cost estimate or insurance appraisal. This can help the board select a more accurate property limit and better understand whether the policy meets the coinsurance requirement.
The board should also review the association’s governing documents to confirm what the HOA is responsible for insuring.
Policy Limits
The policy limit is the maximum amount available for covered property damage, subject to the terms, conditions, exclusions, deductibles, and endorsements of the policy. If the limit is too low, the HOA may have a problem even before a coinsurance penalty is applied.
For this reason, the board should not only ask, “How much will the premium be?” The better question is, “Will this limit be enough at claim time?”
How to Avoid Coinsurance Penalties
An HOA can reduce the risk of a coinsurance penalty by reviewing the property values before renewal, understanding the policy’s coinsurance percentage, confirming what property the HOA must insure, considering ordinance or law coverage, and updating limits when construction costs change.
The association should also work with an insurance professional who understands HOA property insurance, master policies, common areas, and the relationship between the HOA’s policy and the unit owners’ policies.
Why a Lower Premium Can Cost More Later
Choosing a lower property limit may reduce the premium in the short term. However, if the HOA is underinsured, the association may face a larger financial problem after a covered loss.
A reduced claim payment can affect reserves, delay repairs, increase special assessments, and create tension between the board and homeowners.
Review Your HOA Property Insurance Before a Claim Happens
Coinsurance penalties are often discovered too late. Once a loss happens, the policy limit and coinsurance requirement are already in place.
At StarNet Insurance Group, we're here to help you navigate the complexities of insurance. Please feel free to contact us with any questions you may have.
