Who Pays the Insurance Deductible?

HELLO all board members, homeowners, and those interested in HOA law.  As part of a regular feature on the blog, I will be posting a recap of an important (and hopefully interesting) issue that has been recently addressed by our office.  Since we find that the same issues tend to repeat themselves often, it is likely that you will read something your association has faced in the past.  I hope you find this feature both informational and entertaining.

This weeks topic: Who pays the deductible on the Association’s insurance policy?

A few weeks ago this question was posed to us by a mid-size condominium association following a water leak within a Member’s Unit.  Apparently the Member’s hot water heater burst, causing significant damage to the Unit’s drywall and flooring.  Shortly after the accident, the Member contacted the Association seeking to make a claim on its hazard insurance policy.  Since the Association’s policy covered the interior of the Member’s Unit, and the damages exceeded the policy's $1,000 deductible, the Association agreed to file a claim with its insurer.  However, the Association did not know who should pay the deductible amount.

As a general matter, an association should answer this question by first reviewing its governing documents.  If an association’s articles of incorporation, declaration, bylaws, or rules do not directly address this issue, then the association should adopt a policy designating responsibility.  Importantly, this policy should be followed every time a claim is followed, so as to prevent any complaints that the board of directors is acting in an arbitrary and capricious manner.

As to whom the policy can designate as responsible for the deductible, there are three possible choices.  First, an association can agree to always pay the deductible whenever a claim is filed.  The positive of this approach is that it spreads the risk of being hit with a large deductible payment, as the entire association will share in the cost.  The negative aspect of this approach is that a majority of the members will be paying for deductibles on claims that do not involve them.  If this is a concern of the members, an association can require that only the member(s) asserting or benefiting from the claim pay the deductible.  As a third alternative, an association can require that the member responsible for the claim being filed is also responsible for the deductible.  Of course, this requires that the board of directors determine who was responsible or where the peril originated (not an easy task!).  In any event, it is the board of directors’ ultimate business discretion as to which policy it chooses to adopt.

Here, after determining the Association’s governing documents did not address the issue, the Association’s Board of Directors choose to adopt a written policy stating that the member asserting the claim is responsible for the deductible on that claim.  To protect the Association from a Member’s failure to make this payment, the policy further stated that the Association could pay the insurance deductible on behalf of the Member, which would then be charged to the Member’s account as an assessment.

Please contact us if you need help with deciphering your association’s governing documents or drafting an insurance deductible policy.  Our knowledgeable attorneys are always available to assist you.

DID YOU KNOW?  Colorado Senate Bill 089 requires that by January 1, 2007 associations adopt a policy addressing the procedures for resolving community disputes. Feel free to contact us if your association has not complied with this statutory requirement.