A common question from clients is how to save money on condo association insurance. With insurance costs being the largest expense for most small self managed building this is not surprising. We always remind clients that there is no free lunch, the only easy way to save premium is to retain more risk – whether through higher deductibles or less coverage.
The list below highlights the common discussion points boards consider when exploring ways to lower costs. The two main constraints are state laws and condo board bylaws. Many states and some local municipalities require certain coverage levels. Also, modern bylaws often also contain requirements the board should be cognizant of.
Retentions – Many small buildings carry $500 or $1,000 property deductible, raising this can decrease the your annual premium. Most liability coverages for small buildings are written without deductibles and no savings can generally be had by adding one. The best way to look at this is to look at a scenario where moving from a $1,000 deductible to a $5,000 would save $400 in annual premium. The payback is $4,000/$400 or 10 years. The condo would have to be loss free for a decade years before they would really see a cost savings – as they should be banking the deductible savings for an eventual claim. A eight unit building with these numbers would be looking at a little over $4M per month per unit in savings.
Hired and Non-owned Auto – Many bylaws and state regulations do not require hired and non-owned auto, a small condo can save $100-150 annually by dropping. The risk of a resident getting in an accident is slim, but the potential outcome is catastrophic. Auto accidents are one of the highest severity claims an association can face.
Umbrella – Lowering or dropping umbrella coverage is a quick way to save money. However, when looking at larger limits many board members do not realize there are economies of scale in the pricing. Many small condos will pay $400-500 for the first $1M of umbrella coverage but $150-200 for each million after. Also, many carriers only offer round number umbrellas of $1M or $5M. Dropping an umbrella limit from several million dollars may not show the savings expected.
Directors and Officers – A bare bones association D&O policy can cost less than half of one with better coverage. However, after 7/1/15 it will be illegal to purchased scaled back coverage in Illinois. An association would also have no coverage for most suits from owners – including the common claim of a suit against an officer for not recognizing a minority interest when changing the bylaws to limit renters/investors/pets/other perceived nuisances or for costly allegations of discrimination. Directors and Officers can have personal liability and the legal bills that go along with an allegation of mismanagement, we strongly suggest purchasing the broadest Condo D&O insurance possible.
Better Claim Documentation – If your association has had a claim thoroughly documenting what happened and what was done to prevent a re-occurrence can go a long way in secure more competitive insurance proposals. Insurance underwriters are required to keep thorough notes of their thought process – by helping them document their files you make their job easier. Happy underwriters give lower pricing.
Work with an Expert – The more often a broker places insurance for a specific class the better they understand the market. Choosing an independent insurance intermediary can ensure the best condo association cost protection for years to come.
Lower Replacement Cost – A building insured for $2M will pay roughly half of what a similar $4M building will pay. Lowering the replacement cost of your building is the quickest and easiest way to lower cost. However, there are pitfalls. Many insurers utilize “coinsurance” to punish building owners who underinsure. Coinsurance allows the carrier to prorate any premiums for lower valued claims if they can prove the building is undervalued. In addition, insuring below full replacement cost is illegal in Illinois and outlawed in many condo bylaws.
To discuss options specific to your situation contact an expert broker for a free analysis.