By: Shelby D. Bennett, Esq.
For the past several years, California community associations have faced a perfect storm of rising insurance premiums, escalating repair costs, deferred maintenance concerns, and increased regulatory scrutiny regarding reserve fundings. While the insurance market for common interest developments finally appears to be stabilizing after years of uncertainty and drastic increases, this may only bring minimal relief in planning next year’s budget. The financial pressures remain significant and proactive, long-term planning is crucial to ensuring stability going forward.
According to market forecasts many coverage areas including property insurance, general liability, directors and officers, flood, and earthquake insurance are generally expected to remain stable or improve for well-managed communities. However, umbrella and excessive liability coverage continue to present significant challenges, with projected premium increases ranging from 15% to 80% depending on an association’s risk profile. Associations in non-urban or high crime areas can anticipate increases on the lower end of this range while associations in urban or higher crime areas can anticipate increases on the higher end of this range. Insurers also continue to closely evaluate maintenance practices, reserve planning, wildfire mitigation efforts, and deferred maintenance.
Insurance Costs Are No Longer Just an Operating Expense Issue
Historically, insurance was largely viewed as an operating budget item. Today, however, insurance costs are increasingly intertwined with reserve funding and long-term planning.
Market forecasts note that insurers are considering and scrutinizing factors such roof condition, water intrusion history, deferred maintenance, fire protection systems, and overall building condition. Associations that can demonstrate proactive maintenance and strong reserve planning are often rewarded with more favorable insurance terms. Conversely, communities with aging infrastructure or significant deferred maintenance may face higher premiums, larger deductibles, or more restrictive coverage options.
For boards, this creates planning challenges. Under the Civil Code, directors have fiduciary obligations to maintain common area components and make prudent financial decisions. Delaying necessary reserve projects may provide temporary budget relief, but doing so can negatively affect insurability and ultimately result in greater costs for owners and potential need for special assessments.
Budgeting for Higher Deductibles and Coverage Gaps
Another emerging trend is the continued movement toward higher insurance deductibles. The forecast indicates that property insurers are increasingly encouraging higher deductibles for water damage and recurring loss claims, while wildfire deductibles remain elevated in many California communities.
Boards should evaluate whether the association’s operating and reserve funding structure adequately addresses these increased risk-retention obligations. In some cases, associations may need to adjust their budget to account for larger deductible exposures.
A deductible that increases from $25,000 to $100,000 is not merely an insurance issue. It becomes a financial planning issue that can directly impact assessment levels and the association’s ability to respond to emergencies.
Further, boards should review their governing documents to determine how deductibles are covered in the event of damage by an owner or to individual unit. In some circumstances, boards may consider amending the governing documents to limit the association’s exposure for large deductibles when a claim is filed for a single unit and/or due to an owner’s negligence or failure to properly perform their obligations.
Reserve Studies are Becoming More Important Than Ever
The insurance market’s growing focus on maintenance and infrastructure conditions reinforces the importance of regularly updating reserve studies and ensuring reserve funding plans remain realistic.
California law already requires associations to conduct reserve studies and annually review reserve funding plans. However, recent economic conditions have exposed weaknesses in many reserve programs. Construction inflation, labor shortages, and supply-chain disruptions have significantly increased replacement costs for many common area components.
As a result, reserve studies prepared only a few years ago may substantially underestimate future funding needs. Boards should work with qualified reserve specialists to ensure projected expenses reflect current market realities rather than historical assumptions.
Prioritizing reserve funding can put the association in a stronger position during insurance renewals. Insurers view reserve planning and long-term repair planning as priorities when assessing community risks.
Assessment Planning Requires a Long-Term Perspective
Boards often face difficult decisions about whether to raise assessments. However, many associations have reached a point where modest, incremental increases may no longer be enough.
Insurance premiums remain well above historical levels, especially in wildfire-prone areas, while umbrella liability coverage continues to face significant rate pressure. At the same time, reserve obligations are increasing as aging communities address major repair and replacement needs.
Boards should resist the urge to hold assessments artificially low in response to homeowner concerns. Although increases are often unpopular, persistent underfunding can lead to special assessments, deferred maintenance, emergency borrowing, or disputes among owners.
A transparent budgeting process that explains insurance trends, reserve obligations, and expected capital expenses can help owners understand why assessment adjustments may be necessary.
Legislative Attention on Reserve Funding Continues
These financial challenges are compounded by the Legislature’s continued focus on reserve funding and association infrastructure. In response to several high-profile structural failures nationwide, California lawmakers have continued to consider legislation that would expand reserve funding, inspection, and disclosure requirements for common interest developments.
The Legislature is considering Assembly Bill 2050 (“AB 2050”), which would impose more rigorous reserve funding requirements if enacted. The bill would require each reserve study to state the minimum annual contribution needed to prevent the association’s reserve balance from falling below 0 over the next 30 years. Associations would be required to fund reserves at least at that level each year. If the required contribution exceeds the statutory limits on regular assessment increases, the association could, and likely would need to, levy a one-time reserve funding special assessment to restore funding.
Although reserve funding legislation remains pending and may change, boards should monitor developments and assess whether their current practices would satisfy a more demanding statutory framework. Associations with current reserve studies, regular component reviews, and steady reserve funding will likely be better positioned if new requirements become law.
Even before any legislative changes take effect, prudent boards should view reserve funding as an essential risk-management tool, not merely a financial exercise.
The Bottom Line
The improving insurance market offers encouraging signs for California community associations. Property insurance conditions are stabilizing, insurer competition is increasing in several coverage lines, and communities that prioritize maintenance and risk management are beginning to see real benefits.
Even so, significant financial pressures remain. Rising liability costs, higher deductibles, infrastructure demands, and continued legislative attention to reserve funding all point to one conclusion: successful associations will be those that plan ahead.
For boards of directors, the takeaway is clear: insurance planning, reserve funding, and assessment strategies can no longer be treated separately. They are interconnected parts of a comprehensive financial management program that protects the association and its members while helping the board meet its fiduciary obligations under California law.
Shelby D. Bennett, Esq. is an associate attorney at Beaumont Tashjian, where she provides general counsel services and advises associations on the preparation and redrafting of CC&Rs, Bylaws, and related documents.