Insurance Rates for Homeowner Groups Soaring

Associations of home and condominium owners throughout Southern California are feeling the bite of higher premiums for liability insurance, with some groups facing increases of as much as 400% and the prospect of higher member fees to cover the cost.

Many of these groups of property owners, who pay dues to cover the operation of common facilities and the maintenance of parklands, have found that some insurance firms have stopped writing liability policies altogether.

An increase in the number of claims filed against associations and an increase in court decisions awarding large monetary judgments to successful plaintiffs account for part of the premium increase, industry spokesmen say. They also say that premium rates were artificially low between 1979 and 1984, and current increases represent a natural adjustment in the market price.

Regardless of the reasons, the trend has hit some homeowners hard:

- Insurance premiums for the 154-unit Woodland Village condominium complex in Woodland Hills jumped to $22,000 from $8,000 this year.

- In Malibu, insurance for a town house complex managed by Custom Services of Calabasas cost 370% more than last year, said Ken Reda, property manager for that company.

- The Lake Forest Masters II Homeowners Assn. in El Toro closed its clubhouse and recreational facilities for 12 days while scrambling to find a new policy that turned out to be triple the old cost. The new policy did not cover the development’s lake, forcing a 500-member association of lake-front residents to padlock its tennis court while searching for coverage.

- Victim of a liability claim, the Terrace Community Assn. in Irvine has been told that its policy will not be renewed, and manager Pat White anticipates a jump of up to $18 in monthly dues next year.

- Dues for the homeowners association in Woodbridge Village in Irvine, with a population of 25,000, will probably be increased in 1986, said Bob Figeira, the association’s executive director. The association’s insurer, announcing that it wants to get out of the business, said the policy would not be renewed in January. “If we’re lucky, our insurance will only increase 100% to 150%,” said Figeira, who has yet to find another firm willing to write a policy.

- Although most policies are being renewed in San Diego County, “the premiums are being increased by 300% to 1,000%,” said R. E. (Tank) Kobarg, vice president of Property Management Consultants, which works with 140 condominium and homeowner associations. “I have one association without claims (against it) that had a policy for $2,200. It was recently renewed for $16,470.” That renewal, Kobarg added, did not involve blanket coverage as in the past.

These problems with insurance coverage have prompted a group of 20 Orange County homeowners associations, including Lake Forest II and Woodbridge Village, to discuss banding together to push for new state laws that will give associations greater immunity from lawsuits.

“Most insurance companies just don’t know how to handle us,” said Bob Jordan, general manager of the Lake Forest II association.

‘Where Do We Fit?’

“Homeowners associations are like small cities. We’re spread out geographically with a blend of private and public streets. We have common areas that are comparable to city parks. We touch on eight or nine insurance categories, but where do we fit?”

Jordan said he had to make between 35 and 40 calls and also enlist the aid of an insurance broker before securing a new policy from Transamerica Insurance. The Lake Forest group’s old policy cost $38,000; its new premium, which is more comprehensive, costs $126,000.

Other homeowners associations--particularly those with lakes, equestrian trails or beaches--are having similar troubles.

Glen Robinson, an Orange County insurance broker specializing in community associations, says that “beaches, equestrian trails and beaches provide what carriers call ‘absolute’ liability. If there is a claim or a loss, it isn’t a question of whether the insurance company will have to pay, it’s a question of how much.”

Residents of the 19-unit Tierra Verde 7 condominium development south of Sherman Oaks suffered a 400% increase because they live in the Santa Monica Mountains brush fire area. “There have been a lot of cancellations in the Valley,” says Evan Anker, property manager for Tierra Verde.

“Agents used to knock down your door when you were canceled,” he said, “but now lots of them are getting out of condominiums altogether. Now, when you’re canceled, you’re held hostage.” Anker’s firm represents some 90 homeowners associations in the Valley and Ventura County areas.

Robinson said he knows of several homeowners groups that are operating with no insurance at all.

Insurance industry spokesmen cite several reasons for increasing premiums. One factor, according to John McCann, regional vice president of the Insurance Information Institute, is the “great unpredictability” created by California court decisions that have expanded liability.

McCann noted that firms spread the risk on an insurance policy by having other insurance companies “reinsure” percentages of the policy so that losses are shared with the reinsuring companies. Premiums have increased, he added, because reinsurers are now more selective about who they reinsure.

“Reinsurers,” McCann says, “feel that, until some balance is established in the court system, it’s better to avoid the potential of big liability. Maybe only 10 claims go to a jury, but defenses still had to be mounted in 20 other cases. In court, if an insurance company wins, it loses. And if it loses, it loses big.”

Both Robinson and McCann said higher premiums also result from the industry setting excessively low rates between 1979 and 1984. Because of increased competition, companies cut premium costs in some categories of insurance and allowed premiums in other categories to fall below the inflation rate.

But with the high interest rates during that time, companies were able to recoup premium losses through increased yields on investment income. As interest rates fell in the early 1980s, investment income decreased. Combined with the low premium costs, the industry began experiencing losses.

In 1984, the insurance industry as a whole had its worst year in history, registering underwriting losses of $21.5 billion and earning only $17.6 billion in investment income. Even when the market was at its peak, Robinson estimates that only seven or eight companies wrote general policies for community associations. Robinson says several of those companies, including Security Insurance Group of Hartford, Conn., have stopped insuring such associations.

Security Insurance has placed a moratorium on renewing existing policies and writing new policies for associations in Los Angeles and Orange counties, where it considers premium rates too low and the level of claims too high.

Security Insurance spokesman Jeanne Hotchkiss says the moratorium stems mostly from a reduction in the company’s insuring capacity. In order to preserve its insuring capacity, the company eliminated its “least beneficial areas of business.”

State Farm Insurance, which covers 2,500 associations in the greater Southern California area, continues to write new policies but only for associations with property values under $2 million.

Another reason for the rise in insurance claims and the insurance industry’s uncertainty is the so-called doctrine of joint and several liability, McCann said.

Joint and several liability means that a person who wins a verdict is allowed to collect damages from any co-defendant who is able to pay. Community associations and their insurance carriers are usually in a better position to pay than individuals. Theoretically, a community association could be deemed only 1% negligent in a court action but still wind up paying 100% of the damages.

Although California municipalities are also experiencing insurance increases, governmental entities have some immunity from liability that homeowners associations do not share. Under the law, for example, members of a city council cannot be held liable for their decisions but members of a homeowners association board of directors can be.

Lack of Underwriting Capacity

Doug Kliene, director of research for Community Associations Institute in Alexandria, Va., says the liability insurance problem is neither limited to California nor community associations.

“There’s a shortage of underwriting capacity throughout the insurance industry,” he said. “General Motors and General Foods are facing the same problem, but they have more flexibility in dealing with it than community associations do.”

What can community associations do to combat rising insurance rates?

If an association can cover a relatively small claim against it, paying the claim might be more advisable than bringing it to the insurance carrier, Kliene says.

Additionally, groups can raise the policy deductible or lower the amount of insurance coverage, Kliene said. “Nationally, there are very few claims over $1 million against associations,” Kliene says.

Some associations, Kliene says, have incorporated as cities, and others could set up special use taxing districts to avoid high liability premiums. Such districts, which are used in 23 states including California, can be created by an association to take responsibility for the association’s high-risk amenities such as lakes or equestrian trails.

Once established by a vote of the homeowners, the district would--depending on state law--elect or appoint a board of commissioners. The money needed to carry out the special taxing district’s responsibilities would be added onto the tax burden of the affected homeowners.

Several bills designed to reduce the impact of joint and several liability claims against municipalities were introduced in the Legislature last year, but all failed to win passage. None of the bills dealt specifically with the problems of homeowners associations.

Times staff writers Bob Pool and Greg Johnson also contributed to this story.