The Escalating Insurance Crisis for Condo and Homeowner Associations

Across South Florida, condo associations and homeowner associations (HOAs) are grappling with a mounting insurance crisis fueled by years of mismanagement, litigation, and claims. As new boards work to rectify past misdeeds and restore order, they are confronted with a harsh reality: insurers are increasingly reluctant to provide coverage or are demanding exorbitant premiums and deductibles.

This predicament is unfolding against the backdrop of Florida’s already strained insurance market. In the wake of the tragic 2021 collapse of Champlain Towers South in Surfside, premiums have surged, and some carriers have ceased insuring properties in the state altogether. The exposure to hurricanes and storm surges has further compounded the challenges, leaving associations scrambling to secure adequate coverage.

### The Ripple Effect of Mismanagement

The issues faced by associations with a history of mismanagement and litigation are particularly pronounced. Take, for instance, the Heron Pond condo complex in Pembroke Pines. In April, the property insurer halted coverage, citing the city’s declaration that 122 of the 304 condos were structurally unsafe, leading to the evacuation of residents last summer. The general liability carrier has also warned that it won’t renew its policy when it expires in June.

Near North Miami Beach, the Star Lakes condo complex’s board president, John Baptiste, expects this year’s insurance premiums to be about 45 percent higher than what the association paid in prior years. This spike is a direct consequence of the previous board’s alleged neglect, which led to years of unaddressed structural issues and $3 million in special assessments without visible improvements.

At the Hammocks in West Kendall, one of Florida’s largest HOAs, the association’s general liability and umbrella insurers refused to renew policies this year, and few new carriers offered new policies. This follows the arrest of a former board president, her husband, and three ex-board members in 2022 on charges of running a massive fraud scheme involving bogus contractors and misappropriated funds.

### The Vicious Cycle of Litigation and Claims

Tamara Reyes, founder of South Florida Property Management Solutions, which assists homeowners who suspect association mismanagement, explains the vicious cycle at play: “Imagine if they oust the corrupt board, and someone had filed a lawsuit, and the insurance is going to pay. When it’s time to renew, there are significant increases.”

The problem, Reyes notes, is that associations with a litigious history or structural safety citations due to alleged mismanagement are left with limited options. “You have to either go into the secondary market, which means the premiums are going to go up, or not be insured. It’s becoming a big issue.”

### Understanding Association Insurance

Under Florida law, condo associations and HOAs must secure various types of insurance policies, including property insurance, which is typically the costliest. Association flood insurance is also required by mortgage lenders for homebuyers, as it’s usually too expensive for unit owners to obtain individually.

Additionally, association governing documents and contracts with property management firms often mandate other policies, such as directors and officers (D&O) coverage, which protects board members if they or the association is sued over their decisions. General liability (GL) and umbrella policies provide excess coverage for D&O and GL policies, while crime insurance covers financial fraud and theft.

Insurers consider an association’s five-year claims history and any civil litigation when evaluating risk, as D&O and GL policies include a duty to defend the association and its board members. John Lee, vice president of FirstService Financial in Florida, explains, “That’s going to affect many things with your ability to get insurance. [In Florida,] there’s not a lot of carriers, there’s not a lot of capacity, and there’s not a lot of appetite. So the carriers that are writing insurance, they want the clean stuff that doesn’t have any claims history or anything attached to it that’s not squeaky-clean.”

### The Cost of Negligence

The consequences of past negligence and mismanagement can be staggering. At Heron Pond, where nine unit owners have sued the association alleging disrepair due to former board members’ neglect, the receiver overseeing the complex has expressed grave concerns about securing property and GL policies.

In the case of Star Lakes, Baptiste laments, “It’s just a tremendous amount of negligence that is costing us.” While the new board works to resolve past litigation and close structural citations, preliminary estimates suggest new policies could cost $600,000 to $700,000 in annual premiums, a significant increase from the $350,000 to $415,000 paid in prior years.

### Exploring Alternative Solutions

As associations grapple with these challenges, some are exploring alternative solutions, such as self-insurance. However, experts caution that this path is often impractical due to the stringent requirements and logistics involved.

The Hammocks, however, may be a trailblazer in this regard. Given its large size, budget, and skyrocketing insurance costs due to its history, the HOA is considering self-insurance after securing a GL policy for a $735,525 annual premium and an umbrella policy for $414,370.

“The excessive insurance costs that are now a reality for the association (and will be a reality for the next five years) … necessitate exploring the self-insurance route,” wrote receiver David Gersten in a court filing.

### A Pervasive Problem

While the examples highlighted represent extreme cases, Reyes emphasizes that the insurance woes extend far beyond these associations. “We are discussing it in every single case,” she says, underscoring the pervasive nature of the problem.

As new boards strive to rectify past misdeeds and restore order, they are confronted with a harsh reality: the path to securing affordable insurance coverage is fraught with obstacles. Insurers, wary of associations with a history of claims and litigation, are either unwilling to provide coverage or demanding exorbitant premiums and deductibles.

This predicament not only threatens the financial stability of these communities but also raises concerns about the long-term viability of condo and homeowner associations in South Florida. Without access to affordable insurance, the ability to maintain and protect these properties becomes increasingly challenging, potentially leading to further deterioration and safety concerns.

### A Call for Reform and Accountability

As the insurance crisis deepens, calls for reform and increased accountability within the condo and HOA governance structures are growing louder. Experts and industry professionals emphasize the need for stricter oversight, transparency, and accountability measures to prevent mismanagement and ensure the responsible stewardship of these communities.

Additionally, there is a growing recognition that the insurance industry must adapt and develop more nuanced risk assessment models that take into account the efforts of new boards to address past issues and implement corrective measures.

Ultimately, the resolution of this crisis will require a collaborative effort involving associations, insurers, regulators, and policymakers. By addressing the root causes of mismanagement and implementing robust governance frameworks, the hope is that these communities can regain the trust of insurers and secure affordable coverage, ensuring the long-term sustainability and safety of condo and homeowner associations across South Florida.