Insurance Revolt

Looking for other HOAs to form a committee to explore alternatives to current insurance offerings. We are getting killed down here in Florida. We went from $150k to nearly $300k this year and next doesn't look much better. This is not sustainable and at some point it becomes more economic to self insure so we are looking to form a committee to investigate our options.

Some observations about what Florida statutes say about "self-insurance" for HOAs and condo associations:

FS 718.111 (11) speaks at length to associations joining together to self-insure. Notably: "FS 718.111 (11) (a) 1. An association or group of associations may provide adequate property insurance through a self-insurance fund that complies with the requirements of ss. 624.460-624.488."

FS 720.308 (1) (c) "Assessments or contingent assessments may be levied by the board of directors of the association to secure the obligation of the homeowners’ association for insurance acquired from a self-insurance fund authorized and operating pursuant to s. 624.462."

I figure it will be easy for a Florida HOA or condo board to get lost in the trees here (missing the forest). Florida volunteer directors cannot go on forever operating in this morass, with heavy demands on their times and the need to constantly be on the phone to attorneys and insurance companies, and expect to be effective. I think Florida Boards of Directors need to try to have wisdom and long-term vision about the sustainability of their respective associations.

Let's continue with this hypothetical for a bit. A HOA has several roofs to maintain. It costs $200k to replace them. The HOA has $200k in its roof reserve account. A hurricane hits in August 2023, and the roofs require full replacement. No problem. New roofs are in place by February, 2024. The roof reserve account is empty. Normal reserve planning requires that the costs to replenish the roof reserve account be spread evenly over say 20 years and all owners. So the roof reserve account will not hold $200k again for many years.

Fast forward to September, 2025. Another hurricane hits. Again the roof is destroyed. Now the roof reserve account has no where near enough to replace the roof. What should the association do? What is it legally required to do? To the extent statutes and covenants allow, the HOA can:

-- Take out a loan. Given conditions today that directly affect collateral and the ability of owners to pay back the HOA loan, I expect banks will hesitate more and more to offer such loans.

-- Special Assess all owners. Bear in mind that these owners may already be paying an arm and a leg for continuing damage to the interiors of their homes and units.

-- Raise the normal assessment by a lot.

"Reserve planning" will either take on a whole new meaning, or on the reserve study, the expected life of roofs will be greatly reduced due to the reality or hurricanes. In my opinion Florida HOA boards need to speak with multiple, bona fide independent experts (perhaps not from Florida) about how often they can expect to replace the roof, given today's conditions, then go from there. If meetings with these experts are not of the "Come to Jesus" tone, then I doubt the experts are being honest.

The reason I suggest getting expert opinions from those outside Florida is because the rats are, predicably, now scrambling to get off the apparent sinking ship known as Florida, and with as much cash as possible. Florida insurers, attorneys, contractors and others have less motivation to be candid, all so they can maintain their Florida way of life.

I think what SheliaH describes is what is most likely to happen.

Talking to other HOAs is going to end up pooling mental resources. This is a good thing. In the coming years, homeowner and condo associations should be ready for all manner of solutions to be tried. The resulting, collective experience will eventually root out the best possible solution.

I believe pain is often the only way to cause societal shifts in thinking. I expect much pain will be involved.

You want to get insurance for your reserves being wiped out? Sure, this is one option. I personally see this as mere léger de main and probably delaying the inevitable.

I am not sure I understand what you mean when you say the reserve system is being "abused." The reserve system itself seems fine to me. The problem is the "useful lives" of reserve components (which is critical to effective reserve planning) are changing drastically. People do not know how to account for this. Or they do know how to account for it but are in denial about how much this will increase costs to HOA and condo members.

Do you agree that Florida statutes offer HOAs and condo associations the chance to self-insure? So in fact, your HOA can opt out.

The legislators who approved these statutes knew about the problems with storms. They knew what they were doing when they voted for these bills to become law. And this law was enacted quite awhile ago.

To self-insure, I think this is worth skimming:

http://www.leg.state.fl.us/statutes/index.cfm?App_mode=Display_Statute&Search_String=&URL=0600-0699/0624/Sections/0624.462.html

Insurance doesn't just pay for roofs that get blown away in a hurricane. It also insures your financial assets (fidelity or employee dishonesty insurance), protects you if someone gets injured on the property and sues you, covers volunteer workers who are injured or who damage property (workers comp or equivalent), and indemnifies the board members and officers (directors and officers insurance). ** Your CC&Rs probably spell out what kinds of insurance you must carry and even minimum amounts in the case of fidelity insurance. It's probably not optional. ** If your CC&Rs are ambiguous, it may be a good idea to run the question past the HOA attorney to see if self-insurance satisfies your requirements.

Self insuring is not a magic bullet, although if may feel like one when you see those nice, lower premiums. The chickens come home to roost when you have an insurable event and have to fork out thousands of dollars or more on short notice. I personally self-insure to a large extent by carrying high deductible policies, but I always wince when it's time to write a check. It has been a good financial decision so far, but there is always a chance that I'll be hit with an unusual spell of bad luck that will leave me in worse shape than I would have been in if I'd bitten the bullet and paid the higher premiums.

One of the drivers of higher insurance costs is the string of extreme weather events we've been having, and it doesn't look like it's stopping any time soon. This is the unusual spell of bad luck, only on a large scale - ask the folks in California. I expect that some communities that are self insured are discovering that they actually self-uninsured. It's easy to under-estimate the amount of money you need to have set aside to be adequately "self-insured", and given how things are going you'll need to err on the side of pessimism.

It's good to look at all options, but the bottom line is that homeowners are going to have to pay their housing expenses one way or the other. It's just which bucket the dollars will come out of and what the label on the bucket will say. I think many HOAs and condo associations have run with inadequate budgets for years and have kicked the can down the road until there is no more road. But the buck stops with the homeowners - there is no source of funding for their homes other than them.

Finally, one thing we've talked about here when it comes to money matters: it doesn't matter how savvy the board is if homeowners can override their decisions or replace them with directors who will do the homeowners' bidding. ** This is your real problem, and it's a significant one. ** Self-insurance requires discipline. If your homeowners balk at assessment increases if there are fat reserve accounts sitting there, they will almost certainly balk if you have a huge pot of money to insure you against a hurricane beating the pulp out of your community. If your community can't see a pot of money without wanting to spend it, you may not be the types who can self-insure successfully.

KenS14, you can always shop around.

I would keep in mind that many Florida homeowners cannot get insurance, period. One leg anchored in reality is a must here, no?

Post-o. I should have said:

"Many Florida homeowners cannot get insurance without paying tens of thousands of dollars for upgrades (such as new and higher grade roofing, new A/C, et cetera)."

Ken, I'd say that, just like everyone else who needs home insurance, HOAs are at the mercy of insurers. HOAs will have to raise the assessment. Floridians need to get used to this. HOAs cannot just keep rebuilding, only to see another hurricane within a few years take out say the clubhouse roof again, and expect no consequences. At Board meetings and the annual meeting, I think Florida HOA Boards need to pound on this. The price of living in Florida is high and climbing.

As always the operation of the markets, with some government participation here and there, will settle this. But it will not be pretty and may take years.

Note that the number of Floridians participating in the Florida public insurance option ("Citizens") has exploded in recent years. Supposedly it is only the insured who pay for this state-funded, non-profit insurance program.