Insurance—What Is Going On Right Now?!?
If you haven’t looked at your insurance in the past year, you may be saying what?!? when you do. While it has always been a necessary evil, it is something that both individuals and associations alike must obtain, and never before has it been so expensive or near impossible to secure. Insurance provides protection for all of those “what if” scenarios which could devastate an individual or association. However, in today’s insurance market, it is neither a given that insurance is obtainable, nor is it a given that, if insurance is obtainable, it is affordable. So, where does that leave an association?
If your association is seeing a premium/rate hike above and beyond the normal inflation rates seen over the last few years, the increases are likely being driven by several factors:
- Wildfire. Insurance carriers who underwrite coverage for associations in Colorado are taking a close look at wildfire exposure, triggered in part by the increase in wildfires across the Western United States and in part triggered by the Marshall Fire. Many insurance carriers will use companies such as Core Logic, RedZone or MapRisk to obtain brush score reports. These companies evaluate the wildfire risk of a property or community by providing an easy to understand score (each company uses a slightly different scoring system, so numbers are not comparable across companies). Wildfire scores are generally calculated by looking at a variety of factors which could include slope, aspect, vegetation/fuel, surface composition, windblown embers, or prior fire data for the area. These factors are all weighted differently and combine to form the fire risk score. As a general statement, these scores are increasing year over year, leading to continuing issues with respect to insurability. A high fire risk score will impact premiums and, potentially, the ability to even secure insurance.
- Reinsurance Markets. Reinsurance is insurance for insurance companies. Insurance companies use reinsurance as a method of transferring a portion of the insurers financial risk to another insurance company, i.e. the reinsurer. Given the number of catastrophic losses over the last few years, floods, hurricanes, fires, etc., the reinsurance market is contracting. These constrictions throughout the reinsurance market are leading to a situation where primary carriers are struggling to obtain additional reinsurance coverage from fewer reinsurers. This is leading to rate increases which further complicates an association’s ability to obtain full replacement cost coverage and worst-case scenario for an association, the inability to secure insurance.
- Building Costs. Generally, as a country, we are still suffering supply chain issues and high inflation. These factors, while impacting product availability in the general retail market and what these products cost, also has a direct impact on insurance and building material replacement costs. Replacement costs are one of the factors analyzed when property coverage decisions are made. Higher material costs and supply-chain issues are leading, in part, to higher insurance premiums. In addition, labor shortages lead to longer construction and claims-handling times and negatively impact the cost of claims, which could impact the cost of premiums.
- Miscellaneous Factors. In addition to the above, use of units as short-term vacation rentals, current claim history, and open claims are having major impacts on the availability of insurance, with some carriers even declining to look at the community due to these factors.
What can you do about it?
- Speak with the Association’s Broker. Be proactive. Reach out to the association’s insurance broker with ample time before the policy expiration to get an understanding of what renewals premiums look like and options for the association.
- Speak with Legal Counsel. There may be options for the association, depending on the age and type of community, such as transferring current association insurance obligations to individual owners, drafting maintenance and insurance charts, or insurance audits. This will be a fact specific analysis and qualified legal counsel should be able to provide guidance on this matter.
- Participate in Firewise, if applicable. Firewise USA is a national recognition program that provides instructional resources to inform people how to adapt to living with wildfire and encourages neighbors to work together and take action to reduce their wildfire risk. Participation and designation as a Firewise community, while beneficial to the general wellbeing of a community when dealing with fire risk mitigation, may also positively impact insurance coverage and rates. The State of Colorado provides an interactive website which pinpoints fire risk for individual communities.
- Manage Your Existing Policy. An association may want to self-insure on smaller claims to preserve the policy for large losses impacting multiple units.
What is the State doing about the insurance issue?
State lawmakers have Introduced HB23-1174, Homeowner’s Insurance Underinsurance. Among other things, the bill would create guaranteed replacement cost coverage in homeowner’s insurance. This means an insurer would be required to pay the full cost to repair or replace a damaged or destroyed structure, even if the amount exceeds the policy limits. The bill also specifies certain factors insurers must consider when determining the replacement costs of a dwelling. It further extends the termination notice period by an insurer from 30 days advance notice to 60 days advance notice. This bill is sponsored by Judy Amabile of Boulder, as introduced on February 6, 2023.
While insurance has always been a complicated issue, the current insurance landscape is beyond what many individuals and brokers have ever experienced, with many moving parts and many unknowns. Therefore, being aware and taking any proactive steps possible is recommended.
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For more information or if you have any questions, please contact one of our attorneys at 303.432.9999.
