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Loss assessment coverage reduces risk of insurance shortfalls
By Bill Mercer

September 24, 2005

Consider this scenario: One sunny day you discover that your homeowners association has incurred a financial liability in excess of its ability to pay, and that its insurance policy either covers substantially less of the amount owed or does not cover it at all.

In such a case, the total dollars in the HOAís operations account and reserves either do not add up to the amount that has to be paid or payment would deplete the associationís financial resources. The only solution is a special assessment.

This can easily occur in developments that are not in good financial condition or that have not taken steps to make sure that they are well insured.

A number of reasons exist for this, including some legitimate ones. In general, however, the problem can be laid on the doorstep of poor management in combination with the failure of the associationís board of directors to ensure the associationís financial solvency or carry a sufficient amount of insurance to cover such unexpected events. 

In some cases, even with good planning, events may occur that no one could predict.

The bottom line is simply this: Liability awards must be paid; otherwise the impact on the association and your property would be unacceptable.

Obviously, if the association is efficiently operated, with close attention to risk management, the likelihood of a large liability claims are somewhat remote. A major effort in risk management should entail adequate common-area lightning, well maintained walkways and stairwells, regular attention to pool gates and proper care of landscaping to minimize the likelihood of personal injury.

However, it our very litigious society, there are no iron-clad guarantees.

If the association does not have the funds or sufficient insurance to pay the damages, then you as a member are the next candidate for the money in the form of a special assessment. 

For your protection there are individual policies available called Loss Assessment Coverage that cover certain types of special assessment. Some homeowner policies include LAC in their basic coverage while others require an additional endorsement at a modest price. 

Your agent should advise you of what is covered, what itís covered for, what is its value and what are the conditions for payment. Most have a $1,000 deductible. 

The overall size of your association is the major factor in deciding how much coverage is needed.  Due to its modest premium you should always plan for the worst case.

I highly recommend that you contact your insurance agent to ensure that you do have LAC coverage and in an adequate amount.

Bill Mercer is a Kyrene Corridor resident and former president of the Phoenix chapter of the Community Associations Institute.

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