HOA, NFIP, RCBAP, GP

Author: David Thompson

If a homeowners association (HOA) is not established as a condominium, the Residential Condominium Building Association Policy (RCBAP) can’t be used. This can create several problems, particularly if someone tries to use the RCBAP anyway.

As the title of this article reeks of “alphabet soup,” allow me to translate. Often a homeowners’ association (HOA) may have bylaws stipulating that flood coverage under the National Flood Insurance Program (NFIP) for the individually owned homes will be purchased by the HOA in its own name. Since the HOA is not established as a condominium, the Residential Condominium Building Association Policy (RCBAP) can’t be used. Furthermore, since the homes in the HOA are owned individually by the residents, the General Property (GP) form isn’t appropriate and the HOA can’t buy flood coverage on the homes. Each individual should purchase his/her own flood policy under NFIP via the Dwelling Form, with maximum limits available of $250,000 for building coverage and $100,000 of contents. The only time the GP form is appropriate for the HOA is when there are commonly owned buildings, such as a clubhouse, owned by the HOA.

It’s important to remember that the NFIP is a federal insurance program and is not subject to state laws or HOA bylaws. While it’s true that many times the HOA wants to control all the property insurance coverage (both flood and what some refer to as “hazard” insurance), NFIP rules don’t allow the HOA to insure a building unless that building is owned by the HOA, despite what the bylaws may state. Many property insurance companies will structure the “hazard” coverage in the name of the HOA, so it’s important to understand how the NFIP views this situation.

The NFIP Flood Insurance Manual is silent about the issue of whether the policies are written in the name of the association or the individuals. The NFIP Mandatory Purchase of Flood Insurance Guidelines publication (September, 2007, edition) states the following, starting on page 50:

4. Homeowners' Associations
Individually titled town homes and single family buildings, whose owners belong to a non-condominium homeowners' association, can be insured by the individual owners under the Dwelling Form and not by the homeowners' association. The homeowners' association may purchase coverage for a building it may own, such as a clubhouse, under the General Property Form.

How does it work if the HOA buys the policy for a structure owned by one of the individuals in the HOA? Via an example, suppose that the HOA was composed of one building in which there were six individually owned townhouses, each meeting the NFIP “single building” definition. Only one NFIP policy, in the amount of $250,000 for building coverage, is written and the named insured is (incorrectly) the HOA. The replacement cost of the entire structure is $1.8 million. A major flood loss takes place and the HOA opts for policy reformation. (If they don't, the policy is null and void.) The one policy is cancelled and six separate policies are issued, each with only approximately $41,000 of building coverage ($250,000 divided by the six owners). Each owner has 30 days to pay the premium notice for the limited coverage to apply. Of course, coverage is inadequate, the policy will not provide replacement cost loss settlement coverage for the building (only ACV) and there will be no contents coverage available. Had this been written correctly, six policies (one for each owner) at limits of $250,000 building and $100,000 contents would have been available. In effect, this example illustrates a $1.25 million gap in coverage.

Despite what the HOA board may tell the agency, the individual owners are the ones to buy the NFIP coverage. Officials at NFIP have gone on record as stating that the named insured may be both the individual and the HOA “as their interests may appear” (ATIMA), but the named insured may not solely be the HOA. Where cases exist with the HOA being incorrectly the named insured, the problem should be resolved before the loss. If it’s not corrected before the loss, it will be a bigger problem at the time of the loss.

Agencies should verify (via reading the bylaws) whether the organization is a condominium association or HOA. In the case of an HOA, coverage should be structured as outlined above.