As our listeners of the Condo Craze and H.O.A.’s radio show know, we’ve been spending some time recently telling them how they can make their property ready for a hurricane, so that if a storm hits, they can weather it. We’ve spoken about preparing your roof, electricity, plumbing, interior furnishings and more. There’s one more thing though that should be in order before a storm, and that’s your budget. Are you reserving funds that will be there after the storm in order to meet huge insurance deductibles and for other out of pocket expenses?
I first want to clear-up some confusion about how your windstorm insurance deductible works. The deductible is usually about 5% of the total value of the property being insured. So for example, if the property is insured for 10 million dollars, the deductible is $500,000.00. So the insurance company does not have to pay a nickel to the association unless the claim exceeds $500,000.00. The deductible is not 5% of the claim, again it’s 5% of the insurable value of the property.
I can’t tell you how many Board members are in shock when they actually learn this at one of our Board Certification seminars. So the question is…….is your association ready to meet its deductible should a storm hit? Many associations are not, because they are choosing to waive the funding of reserve accounts each year. As our readers know, the community can vote to waive the funding of reserve accounts by a majority vote of the owners at a meeting where a quorum is present. But is it the smart thing to do?
The Florida Legislature certainly does not think it’s a good idea to waive the funding of a reserve account. After storms ravaged Florida about a decade or so ago, owners across the state were amazed to learn that their associations needed to pass huge special assessments to cover their deductibles, and that if the special assessments were not paid, the association was allowed to foreclose on their homes. As a result, here is what the law now requires when unit owners are asked whether to waive the funding of a reserve account:
In a condominium:
Proxy questions relating to waiving or reducing the funding of reserves or using existing reserve funds for purposes other than purposes for which the reserves were intended shall contain the following statement in capitalized, bold letters in a font size larger than any other used on the face of the proxy ballot: WAIVING OF RESERVES, IN WHOLE OR IN PART, OR ALLOWING ALTERNATIVE USES OF EXISTING RESERVES MAY RESULT IN UNIT OWNER LIABILITY FOR PAYMENT OF UNANTICIPATED SPECIAL ASSESSMENTS REGARDING THOSE ITEMS.
In other words, from now on, if you’re going to waive the funding of your reserve account, the state is going to require that you acknowledge the risks.
In an H.O.A. if reserves are not being funded, the year end financial report must contain similar language that places owners on notice that special assessments may become necessary.
So what do our readers think? Is it a good idea to reserve funds just in case disaster strikes? Or is it worth the risk of saving money each month and praying that a potentially unaffordable special assessment does not become necessary?
P.S. Our Condo Craze and H.O.A.’s Board Certification Course has been approved by the Florida Department of Business and Professional Regulation and allows us to certify both condominium directors and H.O.A. directors in the same course. Come learn about budgets, reserves, operations, financial reporting, access to records, alternative dispute resolution, all the new association laws and A LOT MORE. The course is free and we have locations all across the state. To register, please go to: www.condocrazeandhoas.com.