Kevin Davis: 0:00

Lenders, one should be 100% replacement cost. So whatever happens, not just the roof, but everything that happens now, in order to find a carrier like that, because it's not a lot of carriers out there, because, again, the carriers are saying, wait a minute, because of inflation, because of climate change, because of the because of these nuclear verdicts out there, we are scared, you know. So the only thing you have, the only option you really have, is to say, Guess what? We are confident in our association, in our ability, our maintenance contract and our reserve study. We are more confident we are we're taking a more aggressive approach to our condominium complex. Therefore, as a insurance provider, we can go in there and go, I like this. I like this association where the one next door to it may never get the 100% replacement cost that it needs. It may never end up getting their loans funded at all.

Jennifer Johnson: 0:51

HOA Insights is brought to you by five companies that care about board members, association, insights and marketplace Association, reserves, community financials, Hoa invest and Kevin Davis Insurance Services, you'll find links to their websites and social media in the show notes.

Robert Nordlund: 1:07

Hi, I'm Robert Nordlund of association reserves, and I'm

Kevin Davis: 1:10

Kevin Davis of Kevin Davis Insurance Services. And this is HOA Insights, where we promote common sense

Robert Nordlund: 1:16

for common areas. Well, welcome to episode number 83 where we're again speaking with insurance expert and regular co host, Kevin Davis, about the push and pull between insurers and outside regulations. Now that may be state law or governing documents, or today, we're going to focus on lenders. Sometimes insurers lead the way, as they did with seat belt laws that followed insurance discounts for drivers who wore seat belts, that was a great thing and their current requirements, insurance requirements in many areas for condo associations to restrict barbecues on balconies, again preventing fires, and sometimes insurers are playing catch up, forced by new laws or governing documents, or now even lenders to provide specific coverage or levels of coverage to client associations, and that's a topic we're going to be addressing today. Well, this is a follow up to episode number 82 another one of our popular board hero episodes. In that episode, we hear Pam Holmes story, one of the 2 million board members across the country who've volunteered to carry their association and actually this entire industry forward on their shoulders. And if you missed that episode or any other prior episode, take a moment after today's program to listen from our podcast website, Hoa insights.org, or watch on our YouTube channel, and better yet, subscribe from any of the major podcast platforms so you don't miss any future episodes. Well, those of you watching on YouTube can see the HOA insights mug I have right here that I got from our merchandise store, which you can browse through from our HOA insights.org, website, or the link in the show notes, and you'll find that we have specialty items for sale, like this and free board member zoom backgrounds. So as a treat, go to the merch store, find the mug you'd like, and I'll have that mug shipped to you free of charge. To the 10th person, to email podcast@reserves.com with their name, address, mug request and mentioning, of course, Episode 83 mug giveaway. Well, we enjoy hearing from you so we can respond to the issues you're facing at your association. So if you have a hot topic, a crazy story, or a question you'd like us to address. You can contact us at 805-203-3130, or email us at podcast at reserve study.com on our episode number 74 live stream. We're at the end, a listener asked how to resolve the conflict between a lender's insurance requirements and what their insurance provider was able to provide? Well, we didn't have the time to answer that question during the program, so we gave it an episode all of its own. So Kevin, tell us more about this. And this interesting

Kevin Davis: 4:11

question, sure, it's this is, what are the tough areas now that we, who are involved in the community, association insurance industry face? And this is the issue. The lenders lend money to Union owners. And order to lend money to Union owners, the lenders say, You know what? We want to make sure that we're protected, that we you, if you, if you, lend you some money. We want to make sure that you have replacement costs, that full replacement costs, so that if something happens, if your building burns down, if you have a fire or flood, whatever happens out there, we want to make sure that we don't lose that money that your monthly mortgage payment. So that's what the lenders are looking for.

Robert Nordlund: 4:53

They basically don't want to put additional financial pressure on to this person that they just gave a loan to. So. Right by having them have to have the burden of a special assessment

Kevin Davis: 5:05

Exactly, exactly they know if they if that roof comes off, or they know that there's a issue there, there's a theft or whatever it is that now, so you have a special assessment and that finance that person who owns that unit can't afford it. They know they can they know exactly what they can afford when they can't they cannot afford a special assessment. Got it so the lenders do is say these are the requirements insurance providers in order for us to lend an individual any amount of money, we got to make sure you do these five things. Let's say five things or 10 things. Let's say you gotta do these five things, but you have to do all five of these things. You can't pick and choose. You can't and right now, they really don't have a lot of flexibility.

Robert Nordlund: 5:50

okay, so let's say I fall in love with unit number three at this nice Association. I want to buy it, and we're getting the kids moved, we can register for new schools, all this kind of stuff. We're all psyched, and all of a sudden the loan falls through because the association doesn't have enough coverage. So that's what we're talking about here.

Kevin Davis: 6:16

It can be even the right coverage they can have, and that's the issue, and the issue is stronger today than ever before, because what insurance providers has done is say, Guess what, unit number three and unit number five and unit up to 210 Okay, whatever many units you have in there, we want you to participate in the loss. We want you to have some skin in the game. So if there's a loss in your unit. Let's say you turn the water on and you overflow the bath, whatever. Okay, now of a sudden, we're gonna have a deductible in there. So your deductible per unit is $10,000 okay, so now if you have 200 units, and now each unit may have a $10,000 deductible. Now all of a sudden the lending requirement says, Oh, guess what that 10,000 deductible is, supersedes is more than the 5% allowable by our guidelines. So now all of a sudden, that person can't get that loan,

Robert Nordlund: 7:16

so it falls out. Okay, so I'm the prospective buyer, and I'm screaming at the seller, and the seller then is screaming out the board, the board screaming at management, and management is screaming, calling the insurance agent and saying, hey, hey, units are now not able to sell, and we have a problem on our hands. So, so that's the that's a chain of events here,

Kevin Davis: 7:42

and it's a big chain of events. And the key one is that you are unit number three, you want to get how many other units in that association want to have a loan? And three months earlier, guess what? Loans were going left and right? Now, all of a sudden, today, there's a problem with that loan, and it's a problem that loan with maybe eight other units in that association. So

Robert Nordlund: 8:02

all of a sudden, the loans got turned off. So sales got turned off. Yeah, and what? 10% of units in an association don't sell, so that's 20 some sales in that 200 unit Association are going to go dark. That's not good. That's bad for home values, and that's bad for everybody. Yes, so can't blame the lenders. They're giving their good money to you or me to buy a home, and so they want to make sure that my financial situation is not upset or destabilized. Can't blame them. So the board goes to the insurance agent and says, Hey, we need, in your situation, a lower deductible. Or in other cases, maybe they're, they don't have enough replacement, average, something like that. Exactly, yes, that's gonna mean it's gonna cost more money. I would expect set well, okay,

Kevin Davis: 8:58

this is, this is the issue now, so you nailed it, right? We said, Okay, you can't blame the lender or the unit owner or the manager, because they are saying, we want to protect the money of the lender. So we are all the lender side. We want to, we want the loan. We think we can. We can afford it. We can do the things right. And Association has a problem. Associations is not providing the right type of insurance. And this is the issue, when it comes into play, is that you have people out there, you have Association out there who do not go to the right insurance professional to get the courage that they need. That's problem number one on the insurance side, because as far as the insurance carrier is saying, insurance carrier is saying, we don't want to look we're tired of losing money. You know, we have all these natural disasters out there. We have inflation, we have nuclear verdicts where they you know? We know, you see the verdicts out there. So insurers are saying, guess what? We have a problem right now. And we are saying no to these things. We're not going to participate 100% anymore. Yes, we want you, union owner, to participate in loss. So now that's where the conflict comes into play. So the number one thing to really understand is that you have to have a community association insurance specialist that can help you solve your problem,

Robert Nordlund: 10:17

someone who understands governing documents, understands, yes, what's going on walls?

Kevin Davis: 10:21

Yes, that's number one.

Robert Nordlund: 10:23

You got me thinking here. The reason we have this problem is coming together in my brain, because Kevin, you're the insurance expert, and so you're leading me in this conversation, as well as all our audience. My understanding is that community association insurance has gotten much more expensive lately, and you mentioned it more natural disasters, the verdicts are getting more expensive, and then there's general inflation. Okay, so the cost of insurance is going up, and so board members have this voice in the back of their head saying that's going to be hard to afford. So let's find a way to lower our premium costs to keep our regular budgeted assessments low. And when I hear that, I hear a problem, because that's never a board member's job is to keep assessments low. Board members job is to provide for the needs of the association. And a lot of things in life are getting more expensive at this time, and so I think there's this board dynamic, and that's maybe that's our value to our audience today, is say, hey, things are getting more expensive. Remember the needs of the association. When you take care of the needs of this, the association, the other things will come together perfect.

Kevin Davis: 11:39

This is why it's so perfect. What you're saying as a unit owner or even as a board member, when you get these requirements, insurance requirements, you don't know if you're meeting requirements or not. You're making an assumption that you meet the requirements, because your insurance professional said, Guess what? Here is your insurance coverage that you need. Okay, so here's your A, B and

Robert Nordlund: 12:00

C, and you exact A, B and C are all different flavors of okay, yeah, okay,

Kevin Davis: 12:06

so that, but what happened is, the Board of Directors, what they'll do is say, wait a minute, you got a, b and c, c is a lot cheaper than a and b, and then, well, we'll go with the one in the middle. We'll go with B, A, it's too expensive and C's too cheap, so we go with beef. Now, does B meet the guidelines of the lenders? And that's a question that nobody ever asks, okay,

Robert Nordlund: 12:30

does it meet the guidelines of the lenders? And again, you got my brain spinning here. Guidelines are the lenders. Guidelines are the governing documents, guidelines of the state, exactly. Okay, yes, so more and more reason to use a an insurance agent that knows what they're doing with community associations. Okay, wow, this could be multiple episodes, tools at their disposal, concerns, I would imagine that lenders have almost magic big data tools to try to figure out what the property is worth, and they can find out about how the property is insured, and you're going to come up with a check mark in the bad column for something or other, okay, you need to be working with an agent who can respond, who's aware of those kinds of things, who's aware of the trends and how they can pivot the association, maybe not from a B or C, but to a minus or a B plus.

Kevin Davis: 13:31

That's it. Yes, okay, okay, yeah, what you're saying is this, too many boards of directors go and look at price number one, because, and for we understand why the rates have gone up. You know, you paid$1,000 or $10,000.05 years ago. Now, 60 or $70,000 okay? And we talked about the reasons why. We said inflation and all these different things happening climate change. But what happens is, it says, instead of being proactive, we take a step back and go, Well, give me something cheaper. I can't afford it, and cheaper means not meeting the requirements of lenders. And it's really important to meet the requirements of lenders more than anybody else right now, because the lender is saying that we want to protect you more than your insurance person want to protect you if you have all five of these things, I'm happy as a lender, because, guess what, you have what's called replacement costs. So you're not having things based on actual cash value, which is one of the problems right now, is that you know the sometimes we have situations where if you have roof issue with your roof, you have replacement costs as long as less than 15 years. Okay, so it's over 15 years. Actual Cash Value, as you think about your car, is actual cash value. Getting a total accident, if you have replacement costs, you'd be the happiest guy in the world, yeah. Well, that's

Robert Nordlund: 14:55

not going to happen, because if I get an accident, I'm thinking, Okay, I know how. Much I spent for that car eight years ago. Yeah, and that's a magic number in my brain, but I also know that I've put 80,000 miles on it, and it has a few road dings, and when we had that minor accident, that it's not worth that original number. It's worth five or eight grand right now it's, it's a used car, and that's all the insurance company is going to pay me. But you're talking about an older roof that is only worth a fraction of what it was initially, what it would cost to replace it, okay? And that's where the reserve fund and where maintenance comes in, exactly,

Kevin Davis: 15:39

yes, interesting. And now it goes back to one of our answers we're going to talk about, is that okay? So what happens now, if the lender says, Guess what? You have a roof that's over 15 years old, and we like we I can't accept your actual cash value. I need replacement costs. You got to change you have to change your insurance provider in order to get a loan from that building. If you have maybe 3010, whatever number of people in there, they're saying right now, your require insuring the requirements does not meet our standards, you have to change it. So that means you gotta get rid of the 15 year and have a 100% replacement costs across the board. Now who's gonna do that? The person's gonna do that is somebody who's listening and saying, guess what? Like you just said, we have a reserve study, we have a maintenance we have a maintenance policy, so we know what we're doing. We know so now all of a sudden, if you go to that individual who give you option A, B and C, Option A may give you full replacement costs, or what's called guaranteed replacement costs, but I guarantee you it's gonna cost a lot more money than B and C. Yeah.

Robert Nordlund: 16:48

Okay. How much I got this burning question? How much let's say, let's use some numbers here. Let's say your roof is gonna cost 100,000 to replace. Okay? And let's say it's old, 1718, years old, so it's almost at its 20 year life expectancy. Okay, so your reserve fund should be 90,000 plus dollars that you have ready to pay for the roof. So you're ready if you don't get a hailstorm, if you don't get a windstorm, if you don't get a hurricane, you're on the way to being ready to pay for your roof. Is that going to help you get more cost effective or and if you're taking good care of it, if you can say that it's a 20 year roof, and actually, we got a roofing report that says we have five more years left, are those going to help you get more cost effective insurance?

Kevin Davis: 17:43

And that's the key. Because what we're talking about here is the lenders say you must have these requirements, okay? And right now you have a lot of them saying anything over 15 years, we don't, we got exclusion in the policy. However, if you, if you do think community association specialists, insurance specialists, what they will do is go back to the insurance carrier, or find an insurance carrier says, Guess what? We need guaranteed replacement costs across the board. No, 30 years doesn't matter, and the only way I can get that is by one way is going to make sure a you have reserve study, and your reserve study, you know, it's funded, and they actually using the money. You know, you actually are, you know, you have a reserve, not putting the reserves aside, never using it. That we actually see that things are getting done. So I make my job is to prove to the insurance carrier out there to say, Guess what? We need a guaranteed replacement cost to be fully funded under this association. Got

Robert Nordlund: 18:41

it. And so you may have that full replacement value policy that you had to get from a different carrier, but that different carrier isn't going to be too scared, because they know that you're ready to replace your roof and you're financially ready, your maintenance ready, and they're not going to be an account inclined to be a little funny about a mild rainstorm that they're going to call a hurricane, and want to make a claim exactly they're ready?

Kevin Davis: 19:13

Yeah, yeah. Okay. And again, if you look at the insurance overall, you look at what lenders want. Lenders want to be 100% replacement cost. So whatever happens, not just the roof, but everything that happens now, in order to find a carrier like that, because it's not a lot of carriers out there, because, again, the carriers are saying, wait a minute, because of inflation, because of climate change, because of the because of these nuclear verdicts out there, we are scared, you know. So the only thing you have, the only option you really have is to say, Guess what? We are confident in our association and our ability, our maintenance contract and our reserve study. We are more confident we're taking we're taking a more aggressive approach to our condominium complex. Therefore, as a insurance provider, we can go in there and go, guess what? You. I like this. I like this association where the one next door to it may never get the 100% replacement cost that it needs. It may never end up getting their loans funded at all. That's

Robert Nordlund: 20:10

trouble. Well, Kevin, let's take a quick break at this point in time to hear from one of our generous sponsors, and then we'll be right back to continue on with this conversation. Numbers

Paige Daniels: 20:21

matter, and we mean numbers like game scores and bank balances to let us know where we stand. The same is true for your association is yours, thriving or struggling. Let me introduce you to the FiPhO health score, like your own personal FICO credit score. Now in one simple number, owners and boards can learn the combined financial, physical and operational health of their association. The good news, it's free at ourFiPhO.com that's our f, i, p, H, o.com Learn how your association measures up.

Robert Nordlund: 20:52

And we're back. We spoke about the challenges facing associations, but one thing I liked right at the end there, before we took the sponsor break, is understanding that associations do have some I call it agency. They have some involvement. If they are prepared, they can present themselves as a lower risk to the insurance companies and stack the odds in their favor of finding that rare policy, because there are some challenges. And then Kevin, we can go further. What about state law requirements, governing document requirements? Are they the same kind of things that you're going to need someone who understands a situation? Yeah, and

Kevin Davis: 21:32

that's, again, the state laws. A lot of states have insurance requirements. In the California have the Davis Sterling Act, which says you you should have a liability policy. They should tell they tell you also you have a crime insurance policy, what they call fidelity insurance, where it protects just in case the association, unit owner, a board member, or somebody that embezzles money, the property manager embezzles money. A lot of states says that this is what is a requirement. Now, the problem is, is that if you don't understand community associations, if you understand that requirements in the David Sterling Act, or any act in you have to talk about the United States. How can you comply? How do you know if you comply or not? Most of them don't, because, if you talk about like a crime insurance endorsement, you have to have the management company, or also, because the management company is the one that have access to the funds. They're the ones can walk up with the money. So a lot of state laws said if you you must have an a crime insurance policy, and you must add the management company to the policy. Okay, makes sense, right? I mean, that makes sense. Totally makes handle the money. They don't handle millions of dollars through a lot of associations. And again, they have lot they don't have the inexperience. A lot of them are small, but they handling out of funds. So states mandate they have that in there. However, a lot of insurers say we don't want to do that, because they do have that much exposure. Okay,

Robert Nordlund: 22:55

so you have to go to a specialty Community Association carrier.

Kevin Davis: 22:59

It goes again, you go to your specialty insurance broker agent and say, Guess what? Are you complying with the lenders? Are you complying with state law? Because, again, as a board member of Community Association, I don't I could care less about the Davis Sterling act in California. I don't care what's going on in any of these state laws. I'm

Robert Nordlund: 23:18

a volunteer stuff. Yeah,

Kevin Davis: 23:21

I want to hire somebody who understands it. So I hired a property manager who may understand it, but a property manager has to go to that board of director. Board has to go to the insurance professional. Again, insurance professional says, Guess what? I give you option A, B and C. A complies with your state law. It complies with the governing documents. It complies with lending requirement. B does not and C does not at all. The C is the cheapest one you can get, and it does not. At the end of the day, that looks juicy. The problem is, yes,

Robert Nordlund: 23:52

yeah, looks juicy, but it's not a good, good plan. Okay, we spoke earlier about lenders Can't. Can't blame the lenders. They are in business and they want to protect their loans. Can't blame legislators, well intended legislators who, in some states, are requiring certain policies. Are there some crazy requirements that you can ignore, or do you still have to comply with all the requirements wherever you wherever they come up from.

Kevin Davis: 24:22

This is the issue. What happens when you don't comply with requirements? What happens when you don't comply with the state laws or the governing documents or the lenders? Well, the lenders is easy. You have to comply with the lenders because that loan is important. That individual, if you

Robert Nordlund: 24:36

don't, you end up one. Yes, you want to keep all home values high

Kevin Davis: 24:40

exactly, and you want to make sure that people they are happy, because when they want to sell and they want to be able to sell, so the lender requirements are number one. Now, what happens if you don't governing? Documents tell you what kind of insurance you should have, and state laws, outlines on insurance. What happens if you don't have it? Well, the number one thing that happened you don't have it, and that. Sin occurs, something happens, and then all of a sudden, you fail to abide by the governing documents, and you fail to abide by state law, and as a result, your association lost hundreds of 1000s of dollars. Okay, lost 10s of$1,000 and that's the issue. As you lose funds, then all of a sudden, how you're going to make up for the difference. And that's the key. That's the problem right now. That's the reason why the lenders estate, they tell you they set these things apart for one particular reason, because they seen these claims. The board members have never seen these claims before. They don't understand them. They don't know the happiness, not so the state say you must have these things in order to protect the assets of the corporation, lenders, you must do these things to protect the assets of the corporation.

Robert Nordlund: 25:45

Got it okay? So all these requirements came in place for one good reason or another. So again, another reason to if you're a new board member and you say, well, this association down the street, or where I used to live in another state, it was half the cost of what we're paying for here. So I'm going to run on the premise, on the platform of Lower, lower assessments, because there got to be cheaper insurance we can get. And then you find out that, oh, gee, our governing documents, our state laws, whatever it is at our association, it's just the definition of it's going to be more expensive to insure this place.

Kevin Davis: 26:27

I think the key thing here you have option A, option B, Option C. Most people go to option B because they feel comfortable. We all, you know, we go to a restaurant. I go to buy car wash, right? They give you three options. They give you the 999, we go for the middle right

Robert Nordlund: 26:44

when I wash my car, they always try to sell me the Presidential with Armor All on my wheels and everything. No, yeah, car, but not that

Kevin Davis: 26:53

much, yeah. And that's, and that's our mentality, and that's where we fall down, because the key thing for us is saying, and we do that. We all do that. We go for that middle because we know this is too much money, that one is too low. They try and rip us off. Everything you just said is how we feel. The difference is this, if you ask, we're concerned about our lending requirements. We're concerned about our governing documents, you know, we're concerned about protecting the assets of the corporation. Which one is doing that, you know, because you can comply with all the documents, and you can comply with all state laws. And guess what, if you don't talk to an insurance specialist, a condo insurance specialist, they won't mention the fact that, do you have cyber insurance? Because we're concerned about cyber because relationship you have the manager. So these are the things that will come up only if you're dealing with Community Association specialists. That's if we're talking about something that's important today. It's that because the boards will never understand the lending requirements, and they don't, they shouldn't have to. They should go to the professional and say, I want to make sure I'm compliant with lending requirements, because I know people want to sell their unit, and I want to make sure that they can sell their unit without creating a headache for everybody.

Robert Nordlund: 28:06

Yeah, I like that. And Kevin, I almost want to say in summation that getting the right insurance is going to be expensive. That's hard to swallow when insurance is getting more and more expensive. But I'm thinking in my world reserve state world I see some of my clients that are in alpine environments, and they see how expensive it's going to be for a roof that can handle the snow loads, that can handle ice, that can handle just the extreme weather. And they are so tempted to get a less expensive roof. And when they do, you know, it only lasts for 10 years. It is money poorly spent. So whether it's your roof, whether it's your siding that is going to get exposed to moisture or hard evening sun, whatever it is, some associations just are more expensive than others, and you have to appreciate that there's expenses at your association, and that's what one of your fundamental board member duties is to provide for the needs of your association, and not always try hope it's some different Association down the street or across a state line that is less expensive. That's it. The lenders

Kevin Davis: 29:18

are saying the same thing, seeing the same thing you just said they're seeing that you're going for maybe a less expensive roof. And so the lenders are saying, well, guess what? If you get less expensive roof and it collapsed, we want to make sure you have insurance to provide it. And insurers are saying, wait a minute, we know you're getting less expensive roof, so we're not going to provide the insurance for it. So you have this thing right now where it creates a problem, and associations won't change that. The only Association, the only thing they really can do is say, get me 100% replacement costs, if you can. Now, if you're out, you're right. If you are in certain parts of California where there's fire, you may not ever get it, you know, and certain parts in Florida, we have the wind, and you may ever get it. But if you focus. In on and say, you start there and go, Okay, it's expensive, but we have to get we have to have it for to protect the assets of our association. That's the key.

Robert Nordlund: 30:08

That's okay. Well, thank you, Kevin, it's always great talking with you. I came into this discussion today expecting to do a lot of learning, and that's exactly what has happened. Any more closing thoughts you can add at this time,

Kevin Davis: 30:22

I would say this is that there are a lot of specialists out there who specialize in Community Association. Go to Community Association Institute. They have a local chapters. They can help you find somebody who specialized in that area. Start with them. They will go and go to bat for you. You can always make up your mind later and say, You know what, we can't afford full replacement costs right now. We're going to do X as this you got to make but please understand that if you go to that place first, you go to making sure your lenders are okay and happy, make sure your association documents and make sure you meet the state law requirements. I think you will be in a lot better shape in long term. That

Robert Nordlund: 31:03

that's a sweet spot. Well, we hope you learned some HOA insights from our discussion today that helps you bring common sense to your common areas. We look forward to having you join us for another great episode next week.

Jennifer Johnson: 31:18

You've been listening to Hoa insights, common sense for comment areas. If you like the show and want to support the work that we do, you can do so in a number of ways. The most important thing that you can do is engage in the conversation, leave a question in the comments section on our YouTube videos. You can also email your questions or voice memos to podcast@reservestudy.com or leave us a voicemail at 805-203-3130. If you gain any insights from the show, please do us a HUGE favor by sharing the show with other board members that you know. You can also support us by supporting the brands that sponsor this program. Please remember that the views and opinions expressed in this program are those of the hosts and guests, with the goal of providing general education about the community, association industry. You want to consult licensed professionals before making any important decisions. Finally, this podcast was expertly mixed and mastered by stoke light video and marketing. With stoke light on your team, you'll reach more customers with marketing expertise that inspires action. See the show notes to connect with stoke light.