Should You Consider Buying HOA Loss Assessment Coverage?

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It is becoming more common for Texas property owners to be subject to a homeowners association (“HOA”).   While HOAs have long been associated with condominium ownership, more single-family subdivisions now have them. HOAs have definite benefits for property owners. They allow owners to jointly cover common expenses and add amenities for the common use of the HOA members at a much lower cost than if each member purchased the amenity or covered the expense individually.

 

While the benefits of HOAs are evident, one of the risks isn’t: the loss assessment risk. Within the HOA agreement, the HOA very likely has the right to levy a “loss assessment” against all HOA members as a result of a covered loss that is not fully covered by the HOA’s insurance and funds on hand.

 

As an example, say an accident occurs at the HOA-owned swimming pool and a judgment is entered against the HOA for $1,500,000. Assume the HOA’s liability coverage is $1,000,000 and there are no HOA operating funds available to pay the loss. Further assume there are ten members in the HOA.  How will the remaining $500,000 be paid to satisfy the judgment? The HOA will assess each member $50,000 (their share of the loss).  Loss assessment coverage would pay the assessment up to the policy limit.  Therefore, if your loss assessment coverage limit is $50,000, the coverage would pay the assessment and the HOA member would not owe any additional funds.

 

When considering this coverage, be aware that it has limitations. Most loss assessment coverage is triggered only when the loss would have been covered by the HOA policy’s terms and conditions but there were insufficient policy limits. The loss assessment coverage will not provide any benefit if the loss is not covered or is excluded under the HOA’s policy, the HOA policy provided only defense costs but no indemnity coverage, or if the HOA’s policy has lapsed.

 

What should the prudent HOA member do?  First, make sure you understand the risk exposure you have as a member of the HOA.   To do this, talk with your HOA board, review your HOA documents, and determine the amount and status of the HOA’s insurance coverage.  If changes should be made, suggest them to the HOA board.  Second, if you perceive that you still have some risk of a loss assessment, talk with an insurance professional about the appropriate amount of loss assessment coverage you should have.   Remember, this coverage is very inexpensive and can protect you from a large financial loss when you perhaps could least afford it. 

 

Do you have questions? We would love to help. Please send me an email (dnardecchia@opic.texas.gov) or give me a call (512-322-4143).

 

David Nardecchia

 

In 1980, I went to work at the Texas Department of Insurance (TDI). Early in my career I found a passion for property and casualty insurance. To broaden the scope of my knowledge, I took numerous property and casualty insurance classes and achieved the Chartered Property and Casualty Underwriters (CPCU) designation in 1995. I retired from TDI in 2010 as the Deputy Commissioner of Personal and Commercial Lines of Insurance. I have always enjoyed helping others, including assisting with their insurance-related issues. In 2012, I had the opportunity to come to the Office of Public Insurance Counsel (OPIC). Today, I share my knowledge and experience to help empower insurance consumers.