Confusion over reserve funds and insurance deductibles

07/19/2014 12:00 AM

09/12/2014 4:02 PM

Q: Our condominium has a line item in the budget for an insurance deductible of $5,000. Our actual deductible is $112,000 per building, and we have three buildings. Each year the amount is rolled over to the general fund as surplus because it has not been needed for several years.

I am a director and at a recent directors seminar the speaker said that this line item could not be placed in regular reserves but if I understood him correctly a special reserve fund could be established. Would you comment on this please?

M.C., Naples

A: A couple of decades back, deductibles were almost nonexistent. Since Hurricane Andrew and the four hurricanes in 2004, insurance companies have steadily increased the deductibles. All boards should review their insurance coverage and their growing deductibles.

A short lesson in budgets: The board must create three distinct budgets: the income budget, the operational budget, and the reserve budget. The income budget equals the sum of the reserve budget and the operational budget. The operational budget is the sum of all known and estimated expenses for the coming 12 months. To help boards to correctly calculate the reserve budget, the state has published a book:

It can be downloaded in a PDF file or you can call 850-488-1122 and ask for the Budget and Reserve Handbook.

As to the recommendations that you received at the seminar: I believe he was referring to a line item in the reserve budget. This would mean that each year your total collected would be placed in a separate account to be used in the event of a disaster.

Using the figures in your question, you should establish a reserve account to cover deductibles of approximately $336,000. Your $5,000 a year is totally inadequate. At only $5,000 a year, it would take more than 67 years to cover $336,000. Your owners need to be aware that in the event of an emergency, a special assessment would be needed to cover expenses.

I would further suggest that you engage professionals to assist you with budgets and that you acquire a reserve study from a professional.

Q: I am requesting information on common areas in a homeowners association. Since every member is insured, is it necessary to have additional insurance? I am a newly elected director and treasurer and do not want to overpay.

L.T., Stuart

A: When owners buy insurance, it covers only their property, not common areas. If the board does not purchase adequate insurance, there are gaps in your coverage. At a minimum, your association’s common areas include roads, an entrance, and maybe sidewalks. You need to insure against accidents and liability claims.

While it may not appear that such common areas could be damaged, a natural or man-made disaster could rip holes in your roads and sidewalks or cause injury. If trees are planted in the common areas, they could be blown over and fall down. A wall or signage at your entrance could be damaged by a vehicle. The homeowners association needs to ensure the common areas. Obviously if your association has buildings, swimming pools, or recreation facilities, it’s even more critical to have insurance coverage.

For questions about insurance coverage, the board should seek advice from your attorney and insurance agent.

Q: We have owners who are in arrears and the board has chosen to accept partial payments in the belief that at least the owners are paying “something.” This condition has existed for three or more years.

I suspect you will say that the board may need to be voted out; I fully agree. The most qualified owner to run the operation does not wish to do so. Question: what is the Florida statute that covers this issue?

G.F., Orlando

A: You will not find instructions in the statutes about partial payments. The statute does say the board does not have a right to accept less than full payment of the fees (FS 718.112 & FS 718.115). If the board has followed collection procedures as outlined in the statutes, sometimes a payment system may be established. But, this should be under the guidance of an attorney who has filed proper liens and foreclosures against a delinquent owner. It should not be a board’s decision without legal guidance to accept a payment system.

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