Allocation of Insurance Deductibles

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In our recent article titled “Water Damage: Who’s Responsible?”, we discuss the issues involved in determining responsibility when water damage occurs in a unit within a homeowners association. Another consideration when dealing with water damage in an HOA is who is responsible for the insurance deductible. Generally, if damage to an insured property is less than the amount of the insurance deductible, then the insured would likely not file a claim, as there would be no insurance payout. However, for many associations, the cost of water damage frequently exceeds the amount of the insured’s deductible. When that occurs, the parties involved need to know who will be responsible for paying the deductible. 

Contrary to common belief, the party responsible for the water damage may not necessarily also be the party responsible for payment of the insurance deductible. First, let's talk about an association’s right to allocate the responsibility for payment of insurance deductibles. 

Section 38-33.3-313(6) of the Colorado Common Interest Ownership Act explicitly states that:

The association may adopt and establish written nondiscriminatory policies and procedures relating to the submittal of claims, responsibility for deductibles, and any other matters of claims adjustment. To the extent the association settles claims for damages to real property, it shall have the authority to assess negligent unit owners causing such loss or benefiting from such repair or restoration all deductibles paid by the association. In the event that more than one unit is damaged by a loss, the association in its reasonable discretion may assess each unit owner a pro rata share of any deductible paid by the association.

Since associations may make their own rules regarding insurance deductibles, generally speaking, when responsibility for an insurance deductible must be determined, an association should first look to its governing documents. But what if the governing documents are silent on the issue of deductible responsibility? According to the community association law firm Winzenburg, Leff, Purvis & Payne, LLP in their article Who Pays the Insurance Deductible?, if an association’s articles of incorporation, declaration, bylaws, or rules do not directly address this issue, then the association should adopt a policy designating responsibility, and follow it every time a claim is followed. Not following the prescribed policy may result in allegations that the board is acting in an arbitrary and capricious manner.
In their article on the issue, Winzenburg, Leff, Puris & Payne, LLP also state that there are several ways to allocate responsibility for insurance deductibles in HOAs. “First, an association can agree to always pay the deductible whenever a claim is filed.  The positive of this approach is that it spreads the risk of being hit with a large deductible payment, as the entire association will share in the cost.  The negative aspect of this approach is that a majority of the members will be paying for deductibles on claims that do not involve them. If this is a concern of the members, an association can require that only the member(s) asserting or benefiting from the claim pay the deductible.  As a third alternative, an association can require that the member responsible for the claim being filed is also responsible for the deductible.”

For more information on what the Colorado Common Interest Ownership Act says about insurance and maintenance, please see section 38-33.3-313 (Insurance) and section 38-33.3-307 (Upkeep of the common interest community).