Condominium Associations Need to Consider an Insurance Deductible Reserve
Glenn Tyndall, CPA
Few condominium associations have established an insurance deductible reserve for the master association policy’s deductible. One reason for this is that the condo association’s insurance deductible reserve is not included in the reserve study and is not considered a liability that’s included in the condominium’s financial statements. While an unfunded insurance deductible is not a liability according the accounting rules, it is a real and potential liability that an association faces. However, the condo association and owners must come up with the cash to make that deductible payment to pay for repairs and damages when a natural disaster strikes.
Unit owners and board members may not be thinking about a large unfunded insurance deductible. But establishing an insurance reserve is fiscally responsible because the association would assure that it would have the cash on hand to pay the deductible without having to subject owners to a special assessment. However, the insurance deductible reserve also serves a few other purposes.
Property and casualty insurers change the deductibles they offer condominium associations as a way to mitigate their own risk and exposure. In one case, a Florida condominium association saw its insurance deductible rise from $500 to $500,000. That kind of change exposes the condo owners to a lot of risk if a natural disaster were to strike. Establishing an insurance deductible reserve will mitigate an increase in deductible that may come from the insurer. Unlike the previous example, a condominium association may choose to raise its deductible to lower its premium payments after its stowed away cash in the insurance reserve account.
The condo association’s board of directors should weigh the association’s options when it comes to the issues of if and when to have an insurance deductible reserve. Many financial and insurance professionals can assist the board in helping them make their decision, of course. However, a condo board needs to consider the potential (and real) liability that owners face if there’s no cash on hand to pay a large insurance deductible in the event the association gets hit with a natural disaster.
State laws governing condo associations vary and some states may prohibit an association from establishing an insurance reserve. Therefore, it’s important to consult with the association’s attorney before establishing the insurance reserve. Even if boards cannot legally establish an insurance fund, board members can still make residents aware of the unfunded insurance deductible reserve. This disclosure give's residents the chance to put some money aside in the event the association has to make a special assessment because of a natural disaster.