Insurance markets are broken up primarily into two categories: the preferred and the standard. Ideally each association would fall into the preferred category. However, under certain circumstances, an association may find they are high-risk and can only find insurance in the standard market. The standard market is also referred to as “high-risk insurance.” The primary differences between these two markets are the coverages and the premiums. The standard market has substantially higher premiums and often includes much less coverage with larger deductibles.
Associations may find themselves in the standard market for many reasons. The most common reasons include:
- Claims. A pattern of losses or one large loss can impact an association when shopping for insurance. Claims are within an associations control and each owner has a responsibility to prevent them.
- Brushfire exposure (wildfire). Associations are finding it harder to obtain competitive insurance for wildfire exposure. Currently, parts of Portland are being denied coverage for thick brush and greenery.
- Lack of updates in units. As buildings get older, so do their components. With water, gas, and sewage usage up drastically since COVID, these components need to be inspected and replaced sooner and more frequently. If your community does not have a plan to replace electrical, plumbing, and heating components, develop a plan. Ultimately these components are an owner’s responsibility, but it will become an association insurance issue if buildings are not updated. Currently, many preferred carriers want updates for buildings constructed before 1990.
- Building age. Some carriers are no longer willing to insure older and/or historical buildings.
- Lack of retrofits. In the 1980s contractors began building with seismic considerations in mind. Newly constructed buildings are now bolted to the foundations to help them stay in place in the event of an earthquake or other catastrophic event. Carriers may not insure properties built before 1980 unless they have been retrofitted.
- Lack of sprinkler systems. Large frame or concrete buildings with no sprinkler system are becoming nearly impossible to insure in the preferred market. Sprinkler system installation is a huge community project to undertake but it’s vital for an association long-term. If owners can’t exit the building during a fire, a building without a sprinkler system is a life safety issue.
- Other ineligibility. High neighborhood crime, commercial retail exposure, expensive or short-term rentals, horizontal railings, grilling on enclosed balconies, and other factors all contribute to coverage eligibility issues.
Premium differences between the preferred and standard market can be shocking to a community. No one plans for the increases faced in the high-risk market. For example, some communities have paid a $20,000 premium which soars to over $125,000 a year because they became ineligible in the preferred market and are forced into the high-risk market. The most common reasons associations face the high-risk option include claims and lack of updates to sprinklers, pipe, and electrical. This high-risk coverage comes with coverage sacrifices and often higher deductibles.
The insurance market is changing fast, and the critical items carriers look for will not change. Communities need to plan early and reduce risks within their control. With planning and proactive measures in place, most associations can avoid high-risk insurance.
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