Insurance Crisis for Florida Condos

Section 718.111(11), Florida Statutes, provides that a condominium association shall use its best efforts to obtain and maintain adequate insurance to protect the association, the property, the common elements, and the remaining property required to be insured by the association under this Statute. Additionally, the Statute provides that an association or group of associations may self insure against claims against the association, the association property, and the condominium property required to be insured by the association, upon compliance with Sections 624.460 through 624.488, Florida Statutes.

The Details about Self Insurance under Chapter 624, Florida Statutes

Under Chapter 624, Florida Statutes, a commercial self insurance fund may be established by a not-for-profit group comprised of no less than ten (10) condominium associations, as defined in Section 718.103(2), Florida Statutes, which is incorporated under the laws of Florida and which restricts its membership to condominium associations. Such corporations must be organized and maintained in good faith for a continuous period of one (1) year for purposes other than that of obtaining or providing insurance. In order to legally self insure, the association is required to set up a self insurance fund consistent with the statutory requirements and maintain membership in the Florida Self-Insurance Fund Guaranty Association. The Association must also apply for and receive a Certificate of Authority from the Department of Insurance. The application requirements include:

  1. Proof of competent and trustworthy administrators to service the self-insurance fund in the area of claims adjusting, underwriting, risk management and loss control;
  2. Current financial statements showing aggregate net worth of at least $500,000, with a ratio of assets to liabilities of at least one to one;
  3. Combined working capital in an amount establishing financial strength and liquidity to promptly provide for payment of the normal property of casualty claims proposed to be self insured;
  4. An initial deposit of $100,000 or a surety bond in that amount;
  5. Proof of excess insurance from insurance companies authorized or approved to transact insurance in Florida, which provides specific and aggregate limits and retention levels satisfactory to the Department of Insurance in accordance with sound actuarial principals;
  6. A deposit of at least $50,000 or 10% percent of the estimated annual premium, whichever is greater, to be paid into a common claims fund;
  7. A fidelity bond for at least 10% percent of the total funds handled each year by the administrator, up to a maximum of $500,000; and
  8. An operating plan, which includes a statement prepared by an actuary who is a member of the American Academy of Actuaries or the Casualty Actuarial Society establishing that the fund for self-insurance has a plan of operation based on sound actuarial principals.

The association is also required to maintain the forgoing records current, file an annual report, report all activity from the fund, and pay an annual license fee.

Liabilities and Pitfalls Associated with Self-Insurance

There are considerable pitfalls and potential liabilities that are associated with self-insurance. Insurance is intended to protect the interests of both owners and the mortgage holders. Therefore, even if the association is able to pursue the option of self-insurance, if a catastrophic storm hits and members choose not to rebuild the condominium, the individual board members may have liability to the mortgage holders to the extent the failure of the Board to maintain adequate insurance is deemed to be a breach of the association’s statutory obligations and a breach of fiduciary duties of the individual Board members.

Conclusion

Given the financial constraints and the risks involved, many communities which have considered self-insuring have determined to go another route, such as funding a reserve for the deductible portion of the windstorm policy. The larger the reserve becomes, the higher the deductible can be and, therefore, presumably, the premium would be lower.

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