Most insurance policies contain a deductible. Small deductibles usually mean higher premiums. High deductibles, which means the association is sharing the risk with the insurance company, usually means lower premiums.
Paying the Deductible. When a loss occurs (property damage or injury) or the association is sued, the first question asked by boards is "Who Pays the Deductible?" If the association is obligated to pay and if the deductible is small, associations will cover it from their operations account. When the deductible is large, boards must impose a special assessment on the membership to cover the amount, or borrow from reserves and raise dues (or impose a special assessment) to repay the reserves.
Saving for the Deductible. To avoid special assessments to pay large insurance deductibles, some associations will set aside funds to pay the deductible in the event a loss occurs. The question is where to put the money.
1. Operations. Insurance deductibles do not fit into operations because they're not an annual expense. The payout of a deductible depends on the filing of insurance claims and associations can go for years without a claim. I don't like putting it in the budget because it means the deductible must be fully funded in the 12-month budget cycle, which may put a strain on some budgets. It also creates a surplus at the end of the year, assuming no claims are made. Nonprofit corporations are supposed to break even, not run planned surpluses.
2. Reserve Account. Because deductible payouts are periodic, they seem to fit into reserves. However, they don't meet the definition of a reserve component. Their life-cycle is not predictable and may not involve repair or replacement of a major common area component. Even so, the reserve fund appears to be the better place for insurance deductibles--it allows funding over 2 or 3 years and avoids annual budget surpluses.
3. Deductible Fund. The best way to handle the issue is to create a separate fund, but keep the monies in the same account as the reserves. Associations can a line item in their budgets for "Insurance Deductible Fund" and contribute to the fund over 2 or 3 years. If the insurance deductible is $10,000, boards could budget a modest $278 per month to the fund. At the end of three years, the insurance deductible would be fully funded. At that point, the contribution could be discontinued until an insurance claim is made, at which point the deductible would be replenished with new contributions.
In the alternative, the contribution could be permanent so as to avoid ups and downs in the budget. At the end of the three years, and thereafter, any excess funds in the deductible fund could flow into the reserves. This provides for a smoother budget and has the added benefit of building the reserves.
When Deductible Starts. The deductible obligation does not begin when the association starts incurring expenses. It starts when the board tenders the claim to the carrier. That means the board cannot apply pre-tender expenses against the deductible. This situation occurs most often when the board involves corporate counsel and incurs significant legal fees before finally tendering the claim. If the board immediately tenders the claim and then occurs significant legal expenses, those expenses can be credited against theif deductible obligations.
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