Why Tracking Homeowner Insurance Is Good Risk Management

Insurance is one of those things nobody particularly wants to think about until something goes wrong.

A pipe bursts in one unit. Water damages the unit below. Common elements are affected. Suddenly the association's master policy, its deductible, the homeowner's policy and responsibility for the loss all become very relevant.

That is why tracking homeowner insurance can be a sensible risk-management practice for condominium and community associations.

Losses do not respect unit boundaries

In a condominium, a problem that begins inside one unit can quickly become an association problem.

The association may handle the part of the restoration it is responsible for, but that does not necessarily finish the unit. Flooring, cabinets, doors, appliances and other owner-responsibility items may still need to be rebuilt.

A restoration professional we spoke with described a very practical consequence: when an owner has allowed coverage to lapse or does not have enough coverage to complete their portion of the work, the association's repairs can leave the unit effectively at a “vanilla box” stage. If the remaining work cannot be funded, the unit may not be complete enough to pass occupancy inspection.

At that point, what looked like the owner's insurance problem can become an ongoing restoration, management and association problem too.

Depending on the loss and the building, incomplete restoration can complicate inspections and occupancy for a larger affected area — potentially other units, a floor or a wing.

The practical point is simple: when a loss crosses unit boundaries, it is useful to know what insurance exists before the loss occurs.

The deductible can become very real, very quickly

There is another reason associations may want visibility: the master-policy deductible.

In Illinois, Section 12 of the Condominium Property Act gives condominium boards several options for addressing the association's deductible after a loss, depending on the circumstances and the governing documents. In some situations, some or all of that deductible may ultimately be assessed back to a unit owner.

Other states address these questions differently, so associations should confirm the applicable rules with their own attorney and insurance professional.

But the practical question travels well beyond Illinois: if a meaningful deductible or uninsured portion of a loss reaches an owner, can the association simply assume that owner has the coverage or financial ability to pay it?

With insurance costs rising and household circumstances changing, that is not always a comfortable assumption.

A requirement only helps if somebody knows whether it is being followed

An association may require an HO-6 policy or other homeowner coverage. Owners provide documents. Then policies renew at different times, carriers change, policies are cancelled and records go out of date.

Gradually, the association moves from knowing to assuming.

A rule on paper is not the same as an operating control. Somebody still has to know who has provided current evidence, which policies have expired, which records are missing and which exceptions were approved.

None of those jobs is particularly difficult. The difficulty is doing them consistently across hundreds or thousands of homes.

This is really a property-management problem

Insurance compliance is similar to a lot of property-management work. One document takes two minutes. One reminder takes thirty seconds. One homeowner call takes five minutes.

Individually, none of it looks important enough to redesign a process around. Multiply those tiny tasks across hundreds of owners, different renewal dates, emails, mailed documents, incoming scanning, corrections and follow-ups, and they become a permanent background workload.

The expensive part is rarely the task itself. It is the repetition and interruption.

The risk-management idea is not especially controversial

Illinois community-association law firm Kovitz Shifrin Nesbit has made a similar practical point. In an article about managing catastrophic losses, KSN noted that owner insurance is often overlooked and recommended that boards pay attention to whether owners have appropriate coverage. The article is older and should not be read as current legal advice, but the operational idea remains useful: knowing what coverage exists before a loss is easier than discovering it afterward.

Read KSN's discussion of owner insurance and association risk →

What if the association does not currently require it?

That does not necessarily mean the association has to begin with enforcement.

An association may decide it wants better visibility and ask homeowners to provide current evidence of insurance as part of its risk-management process. If there is no enforceable requirement, however, a homeowner who does not provide a document should not automatically be treated as violating the association's rules.

The record can simply show: No current insurance record provided.

That still gives the board useful information. If the board later wants insurance to become a formal requirement that can be enforced, it should work with association counsel and its insurance professional on the appropriate rule or governing-document process.

Community Cover does not decide what an association should require. It helps the association reliably administer the approach it chooses.

Good risk management should be boring

The ideal result is not dramatic. Documents arrive. Policies renew. Missing records are followed up. Exceptions are documented. The board receives a clear report.

Then, if something does happen, the conversation does not begin with: “Does anyone know whether that owner has insurance?”

The answer is already in the record.