Insurance coverage is one of the many important aspects of managing and protecting community assets that HOA boards of directors must keep in mind. If associations are faced with large deductibles, one option to consider is a buydown deductible policy. Buydown insurance policies can sometimes prove to be a great benefit to homeowner’s associations depending on their location, current coverage and financial situation.
What is a Buydown Insurance Deductible (or Policy)?
In a nutshell, it’s a policy separate from the master policy (or primary policy) that covers a portion of the master policy's deductible. A buydown policy is basically an additional policy that says, for example, we'll offer you insurance and we'll buy that $500,000 deductible down to $25,000-$50,000 for a certain amount of premium. This is typically an annual premium and can potentially save your association financially if disaster strikes.
When to Consider a Buydown Deductible Policy
When deductibles are very high, these policies can prove beneficial to associations. Lots of wind and hail policies (especially along the hurricane-vulnerable coast) have percentage deductibles, meaning the deductible owed will vary depending on the amount of coverage you have and, of course, the percentage stated in the policy. These percentages can be anywhere from 1-5% of the coverage. So, if you've got a $20 million condominium building and a 2% deductible, that amounts to a $400,000 deductible which is extremely high for a COA (condominium owners association).
Though these policies are most often considered alongside wind and hail policies, they can also be used for other losses. If a building has had continual damages from busted water lines, for example, the insurance company might significantly raise what was once a $10,000 deductible because of continued losses. If that deductible amount were to get raised to $100,000, then considering a buydown may be prudent for that association. However, in this situation, it may be more cost effective to shop for a better program with a lower deductible.
Potential Negatives Surrounding Buydown Policies
The downside to buydown deductibles is, of course, the extra cost. You're taking a little bit of risk in saying "We're going to pay this extra money in the event a disaster occurs", but if such an event doesn't occur, you don't get the money paid for the premium back. Also, when it comes time to make a claim, you'll be dealing with two insurance companies versus one if you've bought a buydown policy which can get complicated.
Another caveat is to be sure that you understand what is and isn't covered in a deductible buydown policy because they come in different forms. I can't overstate the necessity of making sure your board knows what is and isn't covered - carefully go over these policies and discuss them with your insurance agent before making a decision. The last scenario you want to end up in is one where you thought something was covered and then it turns out it isn't. You don't want to figure out something isn't covered after a loss occurs and think you have a $25,000 deductible only to find out it was an exclusion and the amount is really $400,000.
What Factors Should an Association Consider?
The thing boards should consider when looking at a buydown policy is how material it is to their annual budgets. It might not make much sense to buy down a $25,000 deductible to $10,000 because it may be immaterial to the budget. But, buying down a $100,000-$200,000 deductible to $25,000 could be in an association's best interest as long as its affordable.
Another thing to look at is if your association has reserves saved to cover the deductible on their master policy. Your association may have pre-saved money for a large deductible versus having allocated funds for an extra premium.
As you can see, there are many factors that should be brought under consideration before your board opts to purchase a buydown deductible policy. It can prove to be beneficial under certain circumstances depending on the current state of your association's finances and even where the property is physically located. Carefully looking at your association's financial state and other risk factors, along with consulting your policy and with your insurance agent, will help your board decide if a buydown policy might be right for your community.