Even Associations who are fully funded seldom have the funds needed when Mother Nature sends a hurricane our way (or flood, or fire). Look at Hurricane Irma, who caused more than $50 billion in damage, and now ranks as the 5th costliest hurricane in history. Florida was lucky – Irma did not hit us as hard as originally predicted, but still resulted in over $10 billion of damage in Florida alone, and that figure doesn’t include flood damage!
You’re covered by insurance, though, right? Yes, and no! This is where your insurance deductible kicks in. Most associations are carrying deductibles between 3-5% of the appraised value. What does that mean to you? Even a moderately sized association could have a deductible of over $1 million, equating to thousands of dollars per unit, and most do not have savings or reserves to cover the deductible. They need to raise that cash somehow. And do you have insurance to cover your own unit? It’s contents? The majority of Florida unit owners do not.
Of course, the Association always has the option of levying a special assessment or attempting to obtain a bank loan to cover that deductible. Do you have the funds in your checking account to pay for a $4,000 special assessment, just to cover the deductible? You probably have your own damage too, to your private property, and may even need to cover living expenses elsewhere if your unit is uninhabitable. And a loan? The banks would be flooded with requests, making it more difficult and time consuming to get a loan, assuming your association even qualifies.
What can you do proactively? The association can reduce the need for or the amount of special assessments or loans by having some type of contingency funds, whether it be a “reserve” for insurance deductibles, or a rainy-day savings account. If you proactively budget for Mother Nature and her resulting emergencies, and none arise during the year, it may result in a surplus. The Board has the legal obligation to properly disclose those funds in the annual financial reports. If the funds were budgeted as an operating line item (an expense), the funds may continue to accrue as operating savings, be rolled into reserves, spent on other projects, or refunded to members, depending on the needs of the community.
My recommendation: roll the funds into a reserve for insurance deductible or emergencies. Call it what you will but keep those funds for next year. Irma may not have hit us in 2017, but what’s going to happen in 2019? The risk has not magically gone away because we’ve moved into a new year.