What Boards Need to Know
Over the past several years, community associations across the country have faced a perfect storm of economic pressures: material shortages, labor constraints, inflation, and increasingly strict building codes. Together, these forces have pushed construction and repair costs to historic heights.
While most boards expect these increases to affect capital projects and maintenance budgets, many are surprised to discover just how significantly they affect the association’s property insurance program—and ultimately, the community’s financial health.
If your association hasn’t recently reviewed its insurance limits or updated its replacement cost valuations, now is the time. Here’s what boards, managers, and owners need to understand.
- Replacement Cost Requirements Are Rising—Fast
Insurance policies for community associations are written on a replacement cost basis, meaning the carrier agrees to pay what it costs to rebuild a damaged structure with materials of like kind and quality. When construction costs rise, the amount needed to rebuild rises too.
Common drivers of today’s costs include:
- Labor shortages in skilled trades
- Material price volatility, especially lumber, steel, and concrete
- Higher transportation and fuel costs
- Stricter local building codes and permit requirements
- Longer project timelines, which increase total project expenses
As a result, many buildings are now significantly undervalued on their insurance policies—sometimes by 20–40% or more.
An outdated valuation may not seem urgent, but after a catastrophic loss, it can be devastating.
- Underinsurance Can Lead to Higher Out-of-Pocket Costs
If a property is underinsured, the association may face:
- Insufficient policy limits to fully rebuild after a fire, hurricane, or major water loss
- Coinsurance penalties that reduce the claim payment
- Special assessments charged to unit owners to cover cost gaps
- Delays in reconstruction if additional funding must be secured
For example:
If your building should be insured for $20 million but is listed at $14 million on your policy, the association may be responsible for the $6 million shortfall—plus penalties.
- Rising Costs Affect Insurance Premiums—and Carrier Expectations
Carriers are experiencing the same cost pressures as contractors and associations. As replacement costs increase, insurance premiums naturally rise, even if the community has a clean loss record.
Additionally, carriers now place greater emphasis on:
- Accurate building valuations
- Current reserve studies that reflect today’s construction pricing
- Adequate funding of reserves
- Regular updates to appraisal reports
- Proactive maintenance and risk-control efforts
Communities that do not keep accurate, updated information may face higher premiums, coverage limitations, or even non-renewal.
- Appraisals and Valuations Are More Important Than Ever
To keep coverage aligned with real-world costs, most associations should:
✓ Obtain a professional appraisal every 3–5 years.
This is critical for communities with older buildings, unique construction, or coastal exposures. Some appraisal experts will offer a discount if you are referred by the insurance carrier or broker.
✓ Review and adjust values annually
Even with a recent appraisal, inflationary adjustments may be needed year-to-year.
✓ Coordinate with your insurance broker and property manager
They should help analyze valuation trends and recommend updates before renewal.
✓ Communicate changes to the membership
Boards that explain “why premiums are rising” avoid surprises and build trust.
- Budgeting for Insurance in a High-Cost Environment
Insurance is often a community association’s second-largest budget item and rising construction costs compound the challenge. Consider:
- Building annual insurance inflation factors into your budget
- Ensuring reserves accurately reflect increased project costs
- Exploring higher deductibles or specialty coverage options to manage long-term premiums
- Reviewing property maintenance and risk-mitigation to reduce claim frequency
Thoughtful planning can help the community absorb increased costs without sudden spikes or assessments.
- The Bottom Line: Rising Construction Costs Demand Proactive Insurance Planning
Community associations operate in a rapidly changing construction and insurance environment. What was adequate coverage 2–3 years ago may be dangerously insufficient today. A proactive approach—rooted in updated valuations, transparent budgeting, and strong risk-management—helps protect both the property and the financial stability of the entire community.
If your board hasn’t evaluated its current insurance limits recently, now is the ideal time to schedule a review. Our team is here to help you analyze your exposures, update your valuations, and ensure your community is prepared for whatever comes next.