Mandating Homeowner's Insurance: A Strategic Way to Reduce Risk and Safeguard Finances

Controlling rising insurance costs is challenging, but requiring homeowner insurance helps.

An essential strategy for mitigating risk and protecting the financial health of your community is to require — and verify — homeowner’s insurance. While this sounds simple enough, it is actually fraught with complexities and administrative hurdles. In order to be successful you’ll need to understand how to implement this requirement, what the key components of an insurance policy should be required and how to track compliance.

What’s In Homeowner’s Insurance

For most ordinary apartment owners, insurance is a confusing thing to buy. It’s hard to understand exactly what it covers and when it pays off. Kara Ryan, director of compliance at Mackoul Risk Solutions Insurance, points to several essential components of an individual policy.

• Liability Coverage: Protects the resident in case someone is injured in their apartment. 
• Personal Contents: Covers personal belongings within the unit.
• Loss of Use: Provides for additional living expenses if the unit becomes uninhabitable.
• Loss Assessment: Covers the resident's share of any assessment levied by the association due to insufficient coverage for a covered loss.

While requiring residents to carry homeowners' insurance does not directly reduce the co-op corporation's insurance costs, it offers several indirect benefits. "It helps to keep the peace and prevents an uninsured owner from suing the association or another unit owner," Ryan points out. 

How to Mandate It

For a board to enforce insurance requirements effectively, Ryan says, the requirements must be embedded in the governing documents of the building, such as the bylaws or house rules. "The majority of the time, there are insurance requirements in the bylaws or house rules, which is what the boards can request proof of insurance off of," Ryan explains. However, the specificity of these requirements can vary significantly from building to building. Some documents may simply state the need for a policy, while others might detail the types of coverage and limits required. To implement or enforce insurance requirements, Ryan offers straightforward advice: "Review your bylaws and enforce them." Ensuring that the governing documents are clear and specific about insurance requirements is the first step.

Compliance Tracking

Once insurance requirements are in place, a huge challenge is tracking compliance. Not only do you want to make sure minimum requirements are met, but you also want to ensure renewals take place. One way of doing this is to track the data. 

"The main challenge is the process of making sure everybody has insurance," she notes. “We developed a solution.” It’s computer and email-based and begins with requesting proof of insurance from each owner, she says. “Then we review each policy based on the requirements in the bylaws and house rules, which takes about 30 days. After the review we send a report to both the management company and the board notifying them which owners have insurance, who doesn’t, and what policies don’t comply with the requirements. Once we have proof of adequate insurance, we begin monitoring the renewal. Apartment owners will start getting email notifications reminding them when the policy needs to be renewed, and the system tracks compliance,” she says.

Why Do It

The name of the game with insurance is to transfer risk. If homeowners are required to carry personal insurance, Ryan says, and amounts are mandated, some of that risk for the association gets transferred. This means that the association can raise its property deductible, resulting in premium savings. A higher deductible typically leads to fewer or less severe claims, which in turn improves the building's loss history and can lead to better premiums in the future.