An HOA board of directors exists for more than just making and enforcing the rules of the association. They're the ones that need to handle complaints and maintenance requests. They also need to think about the most optimal way to spend HOA dues.

Community homeowners association insurance is another area in which they need to put some great consideration. This kind of insurance is on the commercial side of the fence and provides coverage in instances where there may be physical damage to common spaces and structures that may be managed by the association. There's also a measure of liability expenses provided.

Today, we look at this kind of insurance to help you understand how it works, as well as other types that may complement it.

How a Standard HOA Insurance Policy Works

You may find that this kind of insurance policy is also often called an HOA master policy. Since the insurance covers the cost of certain damages and elements of liability, the association doesn't need to worry about the need to pay these out of pocket.

In a neighborhood HOA, the master insurance policy will cover shared amenities and neighborhood assets that fall under the governing umbrella of the association. Therefore, it will factor in areas such as parks, pools, gyms, gardens, and more that community members share.

Condo Insurance Breakdown

There are effectively two forms that a condo insurance policy can take, which are as follows:

  1. All in coverage - This is the more comprehensive of the two, which will take care of the physical building's exterior walls, as well as some of the internal structure such as wiring and plumbing. Additionally, there may be appliances and other specific internal elements that are covered. Of course, personal belongings such as clothes and furniture are excluded.
  2. Bare walls coverage - As the name implies, nothing is covered but the bare structure of the building. There will be nothing internal that is covered in this case, though there are some cases in which such a policy will make allowances for plumbing and internal wiring.

Do Homeowner Associations Need Insurance?

This will depend on governing documentation and state law. In Arizona, for example, there is a requirement that mandates HOA insurance cover at least 80% of the property's value. Additionally, general liability insurance is required, but the amount is up to the discretion of the board.

Even where there are no state law requirements, bylaws of most HOAs will require that they have some kind of insurance.

Barring these two mandates, there is no formal requirement for HOA insurance coverage. Be that as it may, not having any in place would not be a wise decision. Bear in mind that HOA insurance offers a measure of financial protection to community property and shared resources. This can be extremely useful in cases such as those where there may be vandalism or hurricanes that yield destruction.

Without the insurance to cover the cost of such damages, it is the members of the HOA who would find themselves personally liable for these damages. Of course, some states make provisions to ensure limited liability for members, but this also usually hinges on the fact that an acceptable level of insurance is present.

Make Sure the Type of Policy Chosen Is Adequate

HOA insurance coverage helps in some very sticky situations but that doesn't mean that having a policy means that all will be well. There's also the important matter of ensuring that the coverage present is adequate. What happens when the policy is lacking in crucial areas and now it doesn't help much or at all when there is damage to a shared area?

It's very easy for HOAs to get into a sense of complacency, adopting a mindset that whatever liability insurance is at play will cover all that will ever be needed. Sadly, many times no one finds out about the shortfall of their policies until they need them in a bind.

Insurance providers will do policy reviews annually, but members of the board are advised to do their own review, which will help with understanding what kinds of situations are covered and where there may be areas of exposure. If there are any grey areas, seek clarification from the provider or a legal professional.

On that note, having a good relationship with the insurance broker is mandatory. After all, this is who you will be contacting when there is a claim to be made or if there are any queries or concerns. Additionally, the representative can make requirements clearer when needed.

What Will HOA Insurance Take Care of?

As indicated before the policy will cover any physical damage to shared spaces as well as any liability expenses that are related to such places.

General Liability

This is where the legal expenses associated with defending the HOA are taken care of where there may be judgments or settlements arising from someone being injured in one of the common areas. Without insurance to cover this kind of thing, homeowners association fees would probably have to be through the roof.

Physical Damage

The physical damage element of coverage is where the cost of replacement or repair is covered in areas such as parks and playgrounds. Additionally, where these shared spaces have physical infrastructure, damage to the exterior will be covered as well. An example of this is lost roof shingles. Some internal areas such as basements and stairwells will also be covered.

In most cases, the policy covers damage that may be caused by vandalism, natural disasters, fires, and the like.

What's Outside the Scope of HOA Insurance?

As you can imagine, your HOA insurance policy will not cover everything. While the assumption can be made that nothing along the lines of what was mentioned above is covered, it does help to get specific about the elements that your coverage doesn't account for. These are as follows:

  1. Physical damage to the houses of homeowners
  2. Personal property that may be damaged or stolen
  3. Claims that will go beyond the allowance of the policy limits
  4. Any physical damage to shared spaces that may have been caused by an earthquake
  5. Expenses falling under the umbrella of liability people are responsible for such as damage caused by a child or animal
  6. Physical damage to the inside of a condo

It's also good to mention that personal property theft will still not be covered even if it should happen in one of the common areas of the community.

This applies to things you may not even consider such as car theft. Even if a car is stolen in a common area, that's something to be taken up with auto insurance. Similarly, there are other insurance types that the HOA and community members can consider to ensure they have the full scope of coverage needed.

A Quick Comparison of HOA Vs Condo or Homeowners Insurance Policy

This distinction is important to make as many erroneously believe that the scope of homeowners insurance and HOA insurance are the same. As explained above, there's a lot that an HOA policy will not cover, which means the onus is on condo owners to ensure that they are covered as needed.

For example, homeowners insurance covers any damage to a residence itself and the belongings that may be inside. Additionally, if the homeowner is responsible for an accident for which they are being sued, condo insurance covers legal expenses that may come up too.

Once a loss is covered, the policyholder can look to the insurance company to step in where repairs and replacement may be needed.

Just to bring it all together, imagine that a disaster such as a tornado rips through the community causing all manner of damage. The HOA insurance policy would cover the shared areas such as damage done to the gym. However, it would be individual homeowner insurance policies that would cover their house structures and personal property.

Is HOA Insurance Mandatory?

HOA insurance will never be mandatory unless the bylaws or state law requires it. If there is any confusion about whether the coverage is needed, it's a good idea to check with a legal practitioner. As stated before however, it's recommended that the association take out an HOA insurance policy considering the possibilities and the fact that the coverage will be necessary to avoid personal liability expenses.

Can HOAs Require a Homeowners Insurance Policy?

Can an HOA require homeowners insurance? After all, it has no concern with what happens within the walls of the building from an insurance perspective. Legally, there is nothing that stops an HOA from requiring that its members have their own insurance policies.

In fact, you'll find that some HOAs will require it based on certain circumstances. For example, there may be a situation where the neighborhood pool allows visitors, which can give rise to a host of unfortunate circumstances.

Note, however, that many homeowners will already meet that requirement whether the HOA requires it or not. That's because many of these people will be using a mortgage to pay for their homes. Remember that mortgage lenders for the most part will require that insurance is in place before the loan is approved.

What Will an Insurance Policy for a Homeowners Association Cost?

There is no set cost for what an HOA insurance policy will cover. Be that as it may, there are factors that will go into what the figure will be. These include the location, the size and type of common areas, the number of homes in the community, and the extent of the coverage that is being sought.

On average, smaller associations will find that they will pay somewhere between $55 and $80 per month for a general liability policy that covers up to $2,000,000.

It's always a good idea to get quotes from multiple insurance providers before settling on one to see what the cost landscape is.

How Do Homeowners Associations Pay for Insurance?

As the policyholder, it's obviously the HOA that will be covering the cost of the insurance policy. Where does that money come from though? It's the same place that HOAs will primarily get their funding from, which is the monthly dues that homeowners will pay.

Considering that everyone who is a part of the community has an equal share of access to the shared areas, it stands to reason that the charges will be equally divided among them.

This is a good time to mention that this applies to board members too. They may be a part of the community's executive committee, but that doesn't mean that they are exempt from the requirement of paying monthly dues.

Remember that the board of directors is simply a group consisting of homeowners in the community who render their services.

Valuable Additions to the HOA Master Insurance Policy

HOA insurance covers quite a bit when you consider the areas that the association is responsible for. Be that as it may, it's recommended to get a few additional areas of coverage, which are outlined below.

Property Value and Replacement

Governing documents tend to require a minimum value where insurance is concerned. This will often be whatever it would cost to wholly replace the property. Building ordinance coverages here are a good idea and come in three forms:

  1. There's demolition, which, as the name suggests, will cover whatever it costs to demolish the property
  2. Next is the increased cost of construction, which will take care of building code upgrades or increases in construction costs.
  3. Finally, there is contingent liability, which will take care of the undamaged portions of the property, so if a building portion gets damaged, its replacement will be taken care of.

Property and Casualty Insurance

Many types of insurance fall under this umbrella term. This simply takes care of cases where an injured party may choose to sue a building owner or other cases in which there may have been negligence on the part of the owner that has resulted in an accident that hurt another party.

Workers' Comp Insurance

This is a common type of policy that is meant to provide medical benefits and wage replacement to employees who may get injured while they are on the job. There is a caveat here since the worker in question will waive any right to sue the employer.

If it is that the HOA employs personnel, it may be a good idea to get this in place since you never know when someone can get hurt just doing their job.

D&O Insurance

Homeowners can become disgruntled and seek to take legal action against the HOA. This kind of insurance will cover the board as a whole and even individually named members who may be a part of the proceedings.

Situational Coverages

There are other miscellaneous coverages such as floods, bodily injuries, party property damage, and more that should be considered based on the unique circumstances of the HOA.

Have You Considered HOA Management Software?

Insurance is just one consideration of HOA management. To keep some of the most important elements under control, DoorLoop has an amazing management solution that offers the following:

  1. Automated payment of rent, dues, maintenance, amenities, etc.
  2. Free per property or community website with a tenant portal
  3. Shareable AR/AP reports
  4. Full accounting suite
  5. QuickBooks and bank account sync
  6. Communication via email, text, portal message, or phone
  7. Unlimited management users
  8. Management of ARC and maintenance requests.

The Bottom Line

HOA insurance can come in handy in a pinch considering the different accidents and other scenarios that can come out of nowhere. Even if it's not required, ensure your HOA has a master policy and any other situational coverage that's applicable.

Don't forget to schedule a free demo of our HOA management software solution to see how it can ease your burden!

David is the co-founder & CMO of DoorLoop, a best-selling author, legal CLE speaker, and real estate investor. When he's not hanging with his three children, he's writing articles here!