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Jun 13, 2022

How Natural Disasters Affect Community Associations: Insurance Policies & Filing Claims

Sponsored Content provided by Mike Stonestreet - Founder, CAMS (Community Association Management Services)

Natural disasters can have a significant impact on community associations. One of the main issues that associations face after a natural disaster is knowing when and how to file insurance claims. In this article, we will discuss how storms affect community associations and the role of the different types of insurance coverage concerning filing claims, charging the deductible, having the right policy in place, wind and hail insurance, flood insurance, and more. We will also discuss property insurance policy riders and inclusions, coinsurance, and the excess market. So if you're a board member wondering what to do after a disaster strikes, keep reading!

Policy Inclusions Explained

Like any other organization, a community association must have the right insurance policy to protect its assets. This includes insurance to cover the cost of repairing or rebuilding community buildings and common areas in the event of damage. It is important to note that there are two coverage options here: replacement cost and actual cash value. Replacement costs cover repairing or replicating the property, while actual cash value accounts for depreciation. Therefore, replacement cost policies are typically more expensive than actual cash value policies. 

Replacement Costs

When it comes to community association insurance, one of the most important factors is understanding replacement costs. This is the estimated cost to repair or replace damaged property with new materials of like kind and quality, without deduction for depreciation. Board members are responsible for signing a statement of value attesting that replacement costs are correct and must determine the correct value of community assets. If assets are significant, it is a good idea to commission an insurance study to be conducted by a professional so that the basis for the valuation has been determined with help from a third-party expert.  

Replacement costs can be determined by obtaining an insurance appraisal from an insurance appraiser. Insurance agents may also provide clients with a replacement cost estimator. It is essential to have an accurate replacement cost estimate to ensure the community is adequately insured.

Another consideration is coinsurance, the percentage of the total property value covered by the policy. According to an example from NAIOP, say a company owns a building valued at $1 million, and the coinsurance clause has an agreement of 90 percent. This means the property must be insured to at least 90 percent — or $900,000 — of the replacement cost. In other words, board members need to understand the associations' insurance needs to protect the association adequately.

The Excess Market

The excess insurance market is the last resort for community associations that have been dropped by traditional carriers. In the excess market, policies are much more expensive and have higher deductibles. For this reason, most community associations try to avoid the excess market if possible. The main reasons why community associations may have to go to the excess market are due to too many claims or poor maintenance. 

For example, a policy with a premium of $1,000 in the traditional market may cost $2,500 in the excess market. In addition, deductibles in the excess market are typically much higher. For instance, a policy with a $500 deductible in the traditional market may have a $5,000 deductible in the excess market. This is why it is so important to ensure your community is well maintained so you can avoid making excessive claims. If you can do this, you'll be able to stay in the traditional insurance market and save money on premiums and deductibles.

Wind, Hail, & Flood Insurance

Property insurance policies typically cover wind damage, but some important exceptions should be considered. First, most policies exclude coverage for wind-driven rain, defined as rain that enters the home without causing any exterior damage. In order to be covered, the policyholder must purchase a separate wind-driven rain insurance policy. 

Secondly, many policies have a separate deductible for wind and hail damage, which means that the policyholder will have to pay a certain amount out of pocket before the insurance company will provide coverage. 

Finally, flood insurance is not typically included in homeowners insurance policies, so it is important to purchase a separate policy if you live within a flood zone. While these caveats may seem like a lot to keep track of, it's important to remember that wind damage can be very costly, so it's worth it to be prepared.

Working with Insurance Agents and Adjusters

When filing an insurance claim, the insurance agent is the first person you will talk to. They will help you gather the necessary details and paperwork to start the claims process. The insurance adjuster is the next person you will speak with, and they'll review your claim and the basis for determining how much money you should receive. The adjuster will also provide an estimate of the damage. If you agree with the adjuster's estimation, you will sign a release, and the insurance company will send the funds to you. If you disagree with the estimate, you have the option to hire a public insurance adjuster to evaluate the damage. 

The public insurance adjuster will charge a fee for their services, typically a percentage of the total claim amount. The public insurance adjuster will review the damage and provide an estimate. You can then decide whether to approve the public insurance adjuster's estimate or negotiate with the insurer for a higher amount. There are pros and cons to using a public insurance adjuster. The advantages include getting a second opinion on the damages and having someone on your side who is familiar with the claims process. The disadvantages involve paying a fee and not knowing if the public insurance adjuster's estimate is accurate. Ultimately, it is up to you to decide what's best for your community.

You can find more information on NC insurance adjusters here and SC insurance adjusters here.

Insurable Events vs. Maintenance Failures

An insurable event is a sudden, accidental, and unforeseen event that causes physical property damage. Examples of insurable events include fires, severe weather events, and vandalism. In contrast, a maintenance failure is any situation where property damage is caused by a failure to maintain ordinary wear-and-tear or blatant neglect. For example, a roof leaks because it wasn't correctly maintained would be considered a maintenance failure.

Insurance will cover damages caused by an insurable event but not those caused by a maintenance failure. This is because insurance protects against sudden and accidental events, not gradual deterioration. However, even in cases where an insurance claim is filed for an insurable event, it's not always clear who is at fault. For example, if a tree falls on a building during a storm, it may be challenging to determine whether the damage was storm-related or because the tree was dead and hadn't been removed. In these cases, claims are usually settled on a case-by-case basis
It's essential to note that filing an insurance claim does not always increase premiums. This is because insurers understand that accidents happen and that sometimes claims are unavoidable. Nevertheless, it's still important to file claims when needed, regardless of the possibility of increasing premiums.

For state-specific information, you can visit the NC Dept. of insurance here and the SC Dept. of insurance here.

As a board member, you are ultimately responsible for the community's well-being and must take all precautions to protect it, including understanding the association's insurance policies. Work with your insurance agent to find the best policies for your community and ensure you know how to file a claim in case of an emergency. By being proactive and knowledgeable about the association's insurance policies, board members can ensure that everything possible has been done to protect the community.
If you have questions about your community's current coverage, please get in touch with your insurance agent. And, of course, if you need assistance navigating this process, your CAMS community manager is here to help.

Is your community getting the Trusted Guidance it deserves? Reach out to CAMS at 888.798.2624 or visit our website to learn more about the extraordinary services we provide.

 Mike Stonestreet, CMCA, PCAM, AMS, is Founder/Co-Owner of CAMS (Community Association Management Services). CAMS began in 1991 with Stonestreet and a few employees in a small office in Wilmington but has since grown to over 300 employees serving eight regions across North and South Carolina.
His current role at CAMS focuses on mergers and acquisitions, culture alignment and high-level business relationships. Stonestreet is an active member of the NC Chapter of the Community Associations Institute (CAI) and has spent time on their board of directors, serving as the chapter President in 2019.

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