Rate shock: Skyrocketing insurance premiums straining community associations

by Hazel Siff | Mar 20, 2023 | Community Associations

Community associations in California are staring at skyrocketing insurance premiums. Some are facing increases of as much as hundreds of thousands of dollars per year. Community finances are being strained and, in some cases, it’s become impossible for new buyers to secure mortgage lending.

“When a $40,000 premium for an annual policy becomes $455,000 the next year, with no indication of whether it will stay there, or even increase the subsequent year, the association’s response is usually, ‘We can’t afford that.’ Given the alternatives, these associations cannot afford NOT to,” says Kimberly Lilley, CMCA, CIRMS, director of business development at Berg Insurance Agency in Lake Forest, Calif.

Foregoing insurance puts a community association in violation of its governing documents and opens up the board to a directors and officers liability claim, explains Lilley. Additionally, Fannie Mae and Freddie Mac will not back mortgage loans when an association is in violation of its governing documents, particularly the insurance provisions. That means that if an owner can no longer afford to live in their community because of the increased costs of insurance, they might not be able to find anyone to buy the home, Lilley says. “(This could create) a different kind of financial crisis for the community.”

According to a recent article in The Orange County Register, Fannie Mae halted financing for 6,102 condominiums and single-family homes in Third Laguna Hills Mutual, a 55-and-over community in Laguna Woods Village, Calif., due to a nearly $1 billion insurance coverage gap; the community is carrying $675 million of insurance, and Fannie Mae requires $1.6 billion in replacement insurance coverage. This has left many homeowners unable to sell their properties and has created a ripple effect throughout the community.

Fannie Mae and Freddie Mac secure low-cost, conventional loans for mortgages issued by credit unions, banks, and other financial institutions. Without backing from the Federal Housing Finance Agency government-sponsored enterprises, homebuyers and refinancers are left with Veterans Administration-approved loans, cash offers, or significantly more expensive nonconforming mortgages.

California lawmakers have urged the state to help a growing number of community associations hit by soaring insurance costs. As reported in The San Diego Union-Tribune, a coalition of lawmakers recently sent a letter to California Insurance Commissioner Ricardo Lara asking him to take action to stabilize the insurance market. They also called for more transparency in the insurance industry and greater regulation to prevent excessive rate hikes.

CAI and its members have been advocating for relief too. “We’re working with the state Department of Insurance. We’re working with the California FAIR Plan, and we’re working with the governor’s office to design solutions that can be implemented quickly,” says Michael Berg, CMCA, CIRMS, owner of Berg Insurance Agency.

Without a solution, California communities experiencing soaring insurance premiums or dropped coverage face increases in regular assessments, special assessments, and removal from Fannie Mae’s and Freddie Mac’s mortgage eligibility list.