Friday, August 7, 2009

Loss Assessment Coverage, Your Home, and the Property Value Argument

I was not aware of this particular coverage offered by many insurance companies, but I found it to be interesting. "Loss Assessment Coverage" is an insurance for special assessments placed on your property. This insurance differs from company to company, but it covers specific causes for a Homeowner's Association, or Condominium's Association assessment.

What exactly is covered?

According to State Farm's website, it covers the following:
  • Someone is seriously injured on common property (perhaps at a swimming pool)and the courts award a judgment that's higher than the amount of liability coverage provided by the condominium/association policy.
  • Major damage occurs to commonly owned buildings and it is not fully covered by insurance.
In an instance like what is listed above, if an injury or damaging event occurs on or to common property, and either the association's insurance does not fully cover the incident or the association does not have the money to cover the remainder. The association, having to make up the difference, would have to turn to the membership for the rest, and they would do so in the form of a "Special Assessment". Some policies are not limited to injury or damage, but can also cover problems that arise from a director's or officer's negligence.

Most homeowners are either not aware (due to their own apathy) or accept the amount of risk in not carrying such insurance. Considering 2004, when Hurricane Charley, Frances, Ivan, and Jeanne hit Florida, with damage totaling over $42 billion, the amount of damage that consisted of commonly held property in homeowners associations (club houses, golf courses, etc.), not having such insurance can be a tremendous gamble because the costs, even though evenly distributed throughout the neighborhood, can be costly, and this is just looking at figures for property damage. A lawsuit on a small neighborhood could be detrimental to everyone who does not carry such insurance. A hurricane is actually a perfect metaphor for special assessments. You see it coming, you hope for the best, but you can potentially get hit with staggering amounts of damage and cost.

A lawsuit such as the one in Sand Lake Hills in Orlando, Florida is already totaling over $100,000 (and this is only the plaintiff's costs), and the defendants list not only the HOA, but almost 100 homeowners. Assuming that the HOA's costs are similar, that would total $200,000, or $2000 per homeowner. Seemingly insignificant when considering the original costs, how many people in a middle class neighborhood have a few thousand dollars to spare, especially in a time of economic uncertainty? An article by Joel W. Meskin in the New Jersey Cooperator (a HOA, Condo, and Co-op Monthly) mentions an case with his own association where a judgment was reached in the amount of $1.5 million dollars against the association. The association had $1 million dollars in general liability insurance, leaving $500,000 to be levied through special assessments on the 10-person neighborhood, totaling a whopping $50,000 per homeowner. This is the kind of incident that can bankrupt an entire neighborhood.

Homeowners tend to forget that as a member of an association, they are members of a corporation, which makes them liable to the corporation, for instance, Florida Statute 617 states that "A member may become liable to the corporation for dues, assessments, or fees as provided by law". Considering the amended and restated covenants of Sand Lake Hills, assessments "can be increased or decreased from time to time pursuant to the terms of the Association’s Bylaws". Further look into the by-laws specify that assessments "can be increased or decreased from time to time pursuant to the approval of a majority of Directors of the Board of Directors." In layman's terms, the Board of Directors, not the membership, have the power to levy assessments whenever they choose. If the Board decides it wants to make a $2 million assessment, they can. This is basically a license to steal. The liability on your personal property can be potentially huge!

That leads me to my second point...

The biggest talking point for homeowners associations is that owning a home in such a community will increase your property value, and typically, these claims are in the tens of thousands range. This theory is a trickle down effect from lobbyist groups, such as the Community Associations Institute, that hits the volunteer army of many associations. Board Presidents and Treasurers tout their expertise in raising your property value by planting flowers by the entrance or installing irrigation in county-owned cul-de-sacs, but are their efforts really going to give you a significant boost in the real estate market?

In my opinion, watching your property value as if you were day trading only benefits the investment homeowners, who don't really plan on contributing to the fabric of the community, but instead want to maximize their profits when they bail. Homeowners who sit on boards for the purpose of protecting their investments may be doing so superficially, or at the least, ignorantly. If you live in a home for a long period of time, it would benefit you to maintain your property, but any significant increase in your property value would mean an increase in your property taxes.

Florida has the "Save Our Homes" amendment which caps the increase on property taxes to 3% or the Consumer Price Index, depending on which is less. Some properties, such as my own which was not protected by the homestead exemption at the time, had seen a 300% increase in taxes during the housing boom. For those homeowners who have no intention of leaving their home, not their investment, the raised property values and taxes have now become a liability. The only way you would benefit from increased property values would be if you decided to retire and buy a recreational vehicle and tour the United States, or you planned on dying and bequeathing a financial burden unto your children.

This is where the HOA argument gets interesting. You may not be interested in selling your property, but the Association needs to protect your neighbor, who is selling their property. Your shabby yard may be a turn off for prospective buyers. This argument is flawed. Why would the community be protecting the interests of those who wish to leave? Inflating property values would also harm those wanting to build a life within the walls of the HOA, giving them less for more. This benefits the "industry" more than the homeowner. The real estate agency, the property management, the lawyers, and the investor homeowners all come out ahead. The real way to win on investing in a property is to buy an inexpensive property, make as many aesthetic changes as possible (such as bathroom and kitchen upgrades on the cheap), and then flip it. The real investment suckers are the homeowners who invest a lifetime of living and thousands in maintenance, repairs, and taxes.

What does this all have to do with "Assessment Loss Coverage", the original subject of this article? Simply put, "Assessment Loss Coverage" is an insurance, and the purpose of insurance is to minimize risk, by paying a premium to help defray the eventual costs of such risk. In this instance, the risk is an association's special assessment, placing assessments alongside other insurance mainstays such as "fire" and "water".

What does this have to do with property values and homeowners associations? The HOA claims that they raise property values by enforcing strict covenants that tell you how to use your property, but they also add to your property increased liability because of either director negligence or chance of injury or damage to common property. Considering the article I mentioned above, how acceptable of a risk is it to live in a neighborhood that could potentially cost you thousands of dollars, and considering association living, this cost is on top of paying membership fees, so you are actually paying an association to tell you what to do with your property and add liability to your property. Before you had to worry about someone slipping on some grass cuttings on your driveway, but now you have to worry about someone slipping on the Association's grass cuttings.

To me, the trade off seems ridiculous. I do not feel my property should be encumbered by the interests of a long gone developer, whose ideas of a neighborhood (investment) means forcing the creation of a corporation with the sole purpose of infringing on my property rights and maximizing the investments of those who wish to jump ship. When will homeowners partake in a mutiny and take back their rights, but more importantly, when will America's elected officials step in on behalf of the electorate?

No comments:

Post a Comment

Please share your thoughts and experiences in relation to this post. Remember to be respectful in your posting. Comments that that are deemed inappropriate will be deleted.