Denise Iger, Esq. of Iger Wankel & Bonkowski, LLP
This article first appeared in the CAI OC View Magazine, September/October 2025 Issue.
In recent issues of the OC View you may have read articles describing California’s insurance crisis. Insurance carriers have incurred substantial losses, particularly from wildfire claims, over the last two decades. Carriers have left or ceased writing new policies in California and other high-risk states. Premiums have increased significantly for most homeowners associations, prompting board members to seek ways to reduce insurance costs.
Many boards have responded by limiting or eliminating coverage for certain perils, such as water or fire damage, eliminating coverage for interior fixtures (i.e., a bare walls policy), and/or dramatically increasing deductibles. For some associations, these changes were forced upon them because there were no other insurance options available. Some board members made changes to reduce premium increases and avoid large assessment increases. Others sought to decrease claims to create a better “loss history,” hoping that with time, more insurance options would be available to their community. Whatever the motivation, the advice remains the same – don’t keep these changes a secret from the homeowners.
When significant changes in coverage are made to the association’s master policy, homeowners need to know. In fact, they may need to hear about it, over and over again, until the message sinks in. Homeowners should discuss these changes with their own insurance agents to ensure they are not taking on more risk than they are willing to accept. The easiest way for a homeowner to have an informed conversation with their agent is for the association to provide letters to the homeowners describing the coverage limitations so that homeowners can present the letter to their agent and ask for guidance.
This insurance crisis has prompted me to think more about loss assessment coverage and its importance for associations with large insurance deductibles or underinsured common areas. Loss assessment coverage is an optional endorsement under a homeowner’s insurance policy. It is intended to help homeowners pay for special assessments needed to repair common areas, not covered or fully covered by the master policy. It can also help with special assessments levied to cover some premises liability claims (e.g., a trip and fall in a common area that is not fully covered by insurance). It does not cover perils that the master policy does not cover. For example, if the association does not have insurance for water losses, loss assessment coverage will not cover a special assessment to pay for repairs required because of water damage. A separate loss assessment endorsement is available to homeowners for earthquake losses in the policy offered by the California Earthquake Authority.
Loss assessment coverage is more likely to be triggered now that many associations are partially self-insuring because of limited coverage or high deductibles. By way of example, imagine a clubhouse burned down because of bad electrical wiring. If the association had opted for a $50,000 deductible, the association would need to come up with at least $50,000 to pay the contractors for the restoration. Insurance should cover the rest. One might think that the money should come out of the reserve fund, and that is a good plan because there are likely funds there for clubhouse maintenance that are not needed for many years when you have a newly restored clubhouse.
The reality, however, is that most reserve accounts are not fully funded. Despite recommendations from reserve analysts, most boards are comfortable with a number far below 100% funded. Many communities have not adjusted the reserve contributions to meet increased costs of goods and services, and the reserve account can only be characterized as grossly underfunded. A special assessment may make sense.
When levying a special assessment, an association must send the owners a notice at least thirty days before the assessment due date. This notice normally includes the amount of the assessment and why the special assessment is needed. This letter will be the first thing used by a carrier to determine if the special assessment is covered under the owner’s loss assessment endorsement. So, if the special assessment is needed to pay for repairs because of a high deductible, the notice should say so. The notice could also encourage homeowners to contact their agents about making a loss assessment claim.
In my experience, the homeowner’s insurance carriers want back-up for the loss assessment claim. They may need information about the claim tendered to the master policy, the coverage letter from the master policy, the invoices related to the casualty loss, or the minutes describing the imposition of the special assessment. Board members and community managers can save some time by providing these documents in a depository that the homeowners can access when making their claims. A link can be provided in the special assessment notice.
When drafting the special assessment notice, the author should not focus myopically on triggering loss assessment coverage. The priority is to make the notice clear so owners understand the amount of the assessment and the deadline. Consideration should be given to ensure that the letter is not misconstrued as a special assessment needed for deferred maintenance or “critical repairs.” To better appreciate the consequences of a poorly worded notice, please refer to my January/February 2025 OC View article about how special assessments may impact an underwriter’s decision to offer a mortgage, which can be found at www.caioc.org/chapter-magazine.
Loss assessment coverage is relatively cheap. However, homeowners are unlikely to purchase it if they don’t know what it is. A board can really help the homeowners by communicating the value of this additional insurance coverage and should be able to lean on the association’s insurance agent for help in making the message clear.