Associations need to consider various consequences when choosing their deductible amount. In particular, the deductible of your condominium association’s property policy affects both the individual unit owner and the collective association. You may know that higher deductibles ($25,000, $50,000, or higher) for community associations have become commonplace, but what are the pros and cons of a high deductible?
Pros
High deductibles keep small claims from piling up on the association’s loss history, keeping premiums lower for everyone.
- Claims-free associations have access to more competitive insurance carriers, whose coverage is more comprehensive, and premiums are more affordable. The cost to mitigate and repair damage from one small water damage incident can cost tens of thousands of dollars. Lower deductibles like $5,000 or even $10,000 often mean that small claims must be filed on the association’s policy. This also makes it easier for a higher number of claims to stack up on an association’s loss history. One large claim can put an association into the high-risk market, and a higher frequency of small claims can do the same.
The association and individual unit owners are incentivized to mitigate risk by keeping up on maintenance.
- To avoid paying a high deductible, unit owners and boards may feel motivated to take preventative measures to avoid property damage. Examples include keeping up on property and appliance maintenance or investing in a leak detection system.
Cons
The association must be prepared to pay the deductible in the event of damage to common elements.
- If common elements are damaged in a covered loss, the association will be expected to meet the association’s deductible before the policy provides coverage. If units are damaged in the same incident, the association may only pay a portion of the deductible and unit owners would be responsible for their portion. However, if only common areas sustain damage, the association must cover the deductible out of association funds. This means it is crucial to fund the full amount of the deductible in reserve, so the association is prepared in the event of a loss.
Unit owners may be underinsured for damage inside their unit if they do not carefully review coverage needs with their personal insurance agent.
- A higher deductible means unit owners must carry a higher corresponding building limit on their HO6 policy. Unit owners need to know the association’s deductible and build their personal policy to complement it.
Your board should carefully consider the pros and cons of a high deductible. A high deductible can be an excellent strategy for avoiding disruptive property damage claims, as well as keeping premiums lower. Although there are drawbacks to consider, the cons may be easily addressed with communication and planning.
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