Community associations, including townhomes, condos, HOAs, high-rise towers, and commercial associations, engage in meticulous financial planning to ensure the well-being of their properties and residents. One, often overlooked, aspect of this planning is reserving for insurance deductibles, which plays a pivotal role in risk management and cost mitigation.
Understanding the Gap: Reserve Studies and Insurance Deductibles
Reserve studies are the foundation of financial planning for community associations. They offer a comprehensive snapshot of the expected expenses for the repair, replacement, and maintenance of physical components within the community. However, by definition, reserve studies are limited to items that can be visually assessed during a non-invasive inspection. This means that intangible items, like insurance deductibles, are typically not included in these assessments.
Why Reserving for Insurance Deductibles Matters
Reserving for insurance deductibles is a proactive financial strategy for community associations. In the unfortunate event of a catastrophe or significant insurable incident, the association may be liable for paying the insurance deductible. These deductibles can amount to a substantial financial burden, and without a reserve in place, associations might be forced to dip into their operational funds or, in some cases, impose emergency assessments on residents. This unplanned financial strain can disrupt financial planning and potentially alienate homeowners.
Additional Benefits of Reserving for Insurance Deductible
- Premium Reduction Potential: Another vital reason for considering a deductible reserve is that it can lead to significant savings on insurance premiums. The higher the deductible the association can reasonably afford, the lower the insurance premiums the insurer may offer. While building a deductible reserve may not be the sole driver of lower premiums, it can make a substantial difference, especially in the long term.
- Demonstrating Financial Responsibility: Insurance providers tend to view associations favorably when they demonstrate financial responsibility. A deductible reserve showcases an association’s preparedness for unforeseen events and a commitment to sharing the financial burden, making it a more attractive client for insurance companies.
Consulting with Experts: A Wise Move
Reserving for insurance deductibles is a sound financial strategy, but it’s not a one-size-fits-all solution. Community associations should consult with qualified insurance and risk mitigation professionals to determine the appropriate amount to reserve and assess the potential benefits of higher deductibles on premiums. By customizing their strategy, associations can ensure that they are well-prepared for insurable events and can potentially enjoy cost savings on insurance premiums over the long term.
In conclusion, for community associations, the importance of reserving for insurance deductibles cannot be overstated. This strategic reserve enhances financial stability, safeguards against unexpected financial burdens, and offers the potential for long-term savings. It’s a proactive step toward securing the financial future of the association and its residents.
