Insurance Deductibles Impact on Reserve Fund Balances

April 2023

The insurance crisis in condominium buildings is putting new pressure on reserve funds.

The unwritten rule is that an insurance loss claim is warranted when estimated at three times the deductible.  Risking an insurance premium or deductible increase to save $40,000, assuming a $50,000 deductible, was considered bad business.  With deductibles now reaching $250,000, this logic can be less compelling or harder to justify.

Reserve funds pay for major repairs and replacement of common elements.  They can be used to pay insurance deductibles for repairs to common elements, and an insurable loss if a claim is not filed.  These reserve fund expenditures are not foreseeable so are never reflected in funding requirements.  There is no way to predict the next flooding event, windstorm or fire.

Paying a large insurance deductible is devastating  without millions of dollars in the reserve fund, and requires owners to contribute more to ensure the fund is not depleted.  Funds to repair pipe leaks, replace damaged windows or replacement of an aging elevator system may not exist if used to pay an insurance deductible or related damage.

The minimum balance of a reserve fund should be an amount to ensure all foreseeable repairs and replacements can be maintained PLUS an amount to cover multiple insurance deductibles.

The reserve fund balance in an engineering report fails to include insurance deductibles and insurable losses when a claim is not filed.  Perhaps it should.