Hamby & Aloisio
Choosing a Deductible for Your Condominium Association
This may seem like an easy task as a board member: just pick the lowest option. However, the proper deductible structure can mean the difference between an affordable insurance program or one that is doubling in cost.
Associations are typically presented two types of deductibles: flat and per unit. Both are per occurrence and there are advantages and disadvantages to both.
Flat deductibles are the most common. High rise condo associations commonly see separate water damage deductibles which are flat. $10,000 and $25,000 are typical.
These amounts are capped. Meaning once the deductible is met, the association’s policy begins contributing to the loss or claim.
Per Unit Deductible
Per unit deductibles are not capped because they apply to every unit involved in a loss. So they scale with the claim. As the water damages more units, the deductible is applied to each individual unit’s damage/loss.
However, a per unit deductible is typically cheaper for the unit owner to insure against. Instead of insuring for a flat $10,000 or $25,000 water damage deductible, they can insure against a $7,500 or $10,000 per unit water damage deductible.
$7,500 and $10,000 per unit deductibles are becoming more popular. Some high-rise condo associations are moving to $25,000 and $50,000 per unit water damage deductibles.
Let’s take a common loss scenario and leave out unit owner betterments: a ruptured water heater loss. The water damaged 3 units for a total of $21,000. Unit A sustained $5,000 in damage, unit B sustained $8,500 in damage and unit C $7,500.
The association’s policy has a flat $10,000 water damage deductible. Each unit will be responsible for a portion of the deductible. Each unit’s portion is based on a ratio of their damage over the total damage.
Unit A would be responsible for $5,000/$21,000 or 23.8%
Which comes to $2,380 of the $10,000 deductible
Unit B – $8,500/$21,000 = 40.48%
Unit C - $7,500/$21,000 = 35.71%
Once the unit owner deductibles are accounted for, the association’s policy would ultimately pay out $11,000 (Total damage - $21,000 less the association’s deductible - $10,000).
What if the condominium association had a $5,000 per unit water damage deductible?
Unit A - $5,000.
Would be responsible for their damage because their loss would not breach the deductible amount.
Unit B - $8,500.
Responsible for $5,000 and the association’s insurance provider would issue payment for the remaining $3,500.
Similarly, the remaining $2,500 ($7,500 less $5,000) for unit C would be covered by the association.
The total payout by the association’s policy is $6,000. Each unit owner’s policy would have paid $5,000.
It’s also critical that the unit owners know how to protect themselves and create their unit owner’s policy (H.O.-6) to work with the condo association’s policy.
An insurance agent skilled in this niche can help the board to build an effective program that will keep maintenance related losses at bay. Try to choose a deductible structure that will keep the association’s policy renewable, cost effective yet ready to respond in the event a large loss occurs. Appropriate deductibles can achieve this goal.
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