There's a specific kind of financial shock that community associations experience, and it almost always follows the same pattern: a significant loss occurs, the board files a claim expecting the insurance to cover it, and then discovers that the payout will cover only a fraction of the actual repair cost.
The building was underinsured. And nobody flagged it — not the agent, not the management company, not the board.
Being underinsured is one of the most common and most expensive problems in community association insurance. It's also one of the most preventable.
What "Underinsured" Actually Means
An association is underinsured when its insurance coverage limits are lower than its actual financial exposure. This can happen in several ways:
Property underinsurance: Your building's insured value is lower than its actual replacement cost. If your master policy lists an insured value of $30 million but it would cost $45 million to rebuild the building at current construction costs, you have $15 million in uninsured exposure.
Liability underinsurance: Your general liability or umbrella limits are lower than what your governing documents require — or lower than what a reasonable risk assessment would suggest. A single catastrophic injury in a common area can generate a claim that exceeds inadequate liability limits.
Missing coverage types: Your insurance program doesn't include coverage types that your association actually needs. The most common gaps: no flood coverage outside of mandatory zones, no ordinance or law coverage, insufficient fidelity bond limits, or no umbrella policy despite your declaration requiring one.
Deductible exposure: Your named storm deductible is $2 million, but your reserves contain $200,000. The deductible itself becomes an uninsured exposure if the association can't fund it.
How Associations Become Underinsured
Underinsurance rarely happens overnight. It's usually the result of gradual drift — small decisions and oversights that compound over time.
Construction Costs Outpace Insured Values
This is the most common driver of property underinsurance. Construction costs have increased significantly in recent years — materials, labor, and supply chain constraints have all pushed replacement costs higher. But many associations haven't updated their insured property values to keep pace.
If your building was appraised for insurance purposes five years ago at $40 million, and construction costs in your area have increased 30% since then, your actual replacement cost may be $52 million today. If your coverage limit is still $40 million, you're underinsured by $12 million.
Some carriers apply an inflation guard endorsement that automatically increases the insured value each year by a fixed percentage. But these adjustments are typically 2–4% annually — which may not keep pace with actual construction cost increases in your market.
The Coinsurance Penalty
Most association property policies include a coinsurance clause — typically requiring the association to insure the building to 80%, 90%, or 100% of its replacement cost value.
If you fail to meet the coinsurance requirement, the carrier can reduce your claim payment proportionally. This is the coinsurance penalty, and it applies even to partial losses.
Example: Your building has a replacement cost of $50 million. Your policy has a 90% coinsurance clause, which means you need to carry at least $45 million in coverage. But your policy limit is only $35 million.
A covered loss causes $5 million in damage. Instead of paying the full $5 million (minus deductible), the carrier applies the coinsurance penalty:
($35M carried / $45M required) × $5M loss = $3.89 million
Your association receives $3.89 million instead of $5 million — a $1.11 million shortfall that the association must cover out of pocket. And this is on a partial loss. A total loss would be devastating.
Nobody Reads the Governing Documents
Your declaration, bylaws, or condominium documents almost certainly specify minimum insurance requirements. These might include:
- Minimum property coverage at full replacement cost
- Minimum liability limits (often $1 million or higher per occurrence)
- Umbrella coverage above a specified threshold
- Fidelity bond coverage at a minimum amount
- Specific coverage types (flood, D&O, workers' compensation)
If nobody compares the current insurance program against these requirements at each renewal, gaps accumulate. We've seen associations with governing documents requiring $10 million in liability coverage while carrying only $3 million. The board had no idea — because nobody checked.
Relying on a Generalist Agent
An agent who handles your association's insurance alongside auto, home, and commercial policies may not have the specialized knowledge to identify association-specific coverage gaps. They may not read your governing documents. They may not understand how coinsurance works in the context of a large condominium building. They may not know to ask about ordinance or law coverage, flood zone reclassifications, or the interaction between your master policy and unit owner HO-6 policies.
This isn't necessarily negligence — it's a function of trying to be a generalist in a specialist's world.
The Real-World Consequences
When an underinsured association experiences a significant loss, the consequences ripple through the entire community:
Special Assessments
The most immediate impact. If insurance doesn't cover the full cost of repairs, the association must find the money elsewhere. That usually means a special assessment — sometimes a devastating one.
On a 200-unit building with a $2 million insurance shortfall, that's $10,000 per unit that owners need to come up with. For many owners — particularly retirees on fixed incomes — an unexpected five-figure assessment creates genuine financial hardship.
Deferred Repairs
If the association can't fund the shortfall through assessments, repairs may be deferred or scaled back. A building that should have had its envelope fully restored instead gets a partial repair. Deferred structural repairs compound over time, creating larger problems and larger costs down the road.
Property Value Impacts
Unrepaired damage, special assessments, and insurance program deficiencies all affect property values. Prospective buyers and their lenders review the association's insurance program during due diligence. A building with known coverage gaps or a history of underinsurance is a red flag that can depress sale prices and complicate financing.
Legal Exposure for Board Members
Board members have a fiduciary duty to maintain adequate insurance. If an association is underinsured and a loss occurs, individual board members may face claims alleging breach of fiduciary duty — particularly if they failed to review the insurance program, ignored professional recommendations, or didn't ensure compliance with governing document requirements.
This is precisely why Directors & Officers insurance exists. But if the board also skimped on D&O coverage, the individual board members may have personal exposure.
How to Prevent Underinsurance
Get a Current Property Appraisal
The most direct way to ensure your property is adequately insured is to have a professional insurance appraisal performed. This is different from a real estate appraisal — an insurance appraisal estimates the cost to rebuild the building at current construction costs, including all common elements, building systems, and (depending on your coverage type) unit interiors.
Most experts recommend updating your insurance appraisal every three to five years, and sooner if there has been significant construction cost inflation in your market.
Review Governing Documents Annually
Assign someone — ideally your agent or a board committee — to compare your current insurance program against your governing document requirements at every renewal. Document the review and any identified gaps.
Audit Your Coverage Types
Don't just check limits — check what types of coverage you carry. Confirm that your program includes all of the following, or that your board has made a documented decision about why a particular coverage type was excluded:
- Master property (at replacement cost)
- General liability
- Directors & Officers
- Umbrella / excess liability
- Flood insurance (even if not in a mandatory flood zone)
- Fidelity bond / crime coverage
- Workers' compensation (if the association has employees)
- Ordinance or law coverage
Budget for Deductibles
Your insurance program has built-in gaps by design — those are your deductibles. Make sure your reserves or a line of credit can cover the named storm deductible, the all-other-perils deductible, and any applicable flood deductible.
Work With a Specialist
An agent who focuses on community association insurance will know where the common gaps are, how to read your governing documents for insurance requirements, and how to structure a program that actually protects your association. A generalist may miss what a specialist would catch.
The Takeaway
Underinsurance isn't a rare or exotic problem. It's common, it's predictable, and it's preventable. The associations that avoid it are the ones with boards that treat insurance as a governance responsibility — not an administrative task to be rubber-stamped at a single meeting each year.
Your insurance program is a financial safety net for every owner in your community. Make sure it's actually big enough to catch what falls.
This content is provided for educational purposes only and does not constitute insurance advice. Coverage terms, conditions, and availability vary by carrier and state. Consult with a licensed insurance professional for guidance specific to your association.
About the Author
Harry Schoeller is a founding member of Common Elements Insurance, a specialty insurance practice focused on community associations across the Gulf Coast. The CEI team holds Florida 2-20 General Lines licensing and brings Licensed Community Association Manager (LCAM) credentials to the table.
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