The Trainer — June 2014
Controlling Rising Insurance Costs; Avoiding Mistakes with Replacement Reserves Accounts
In this month’s feature, we discussed how to manage insurance cost increases and reduce risks. Having appropriate insurance coverage provides a safety net for your assets and protects your site against liability. But insurance premiums have been creeping steadily upwards, and “shopping around” isn’t your only option for controlling cost increases.
In our article on avoiding mistakes when handling replacement reserves accounts, we explained that your auditor and HUD will be checking to make sure that you correctly followed the various rules that govern such accounts. These rules are set out in the site’s regulatory agreement and/or housing assistance payments (HAP) contract, and the HUD handbooks. If you make mistakes in handling the reserves, you could face audit problems—and, potentially, HUD could require the owner or managing agent to repay the site from its own funds.
QUESTION #1
Agreeing to a higher deductible in return for a lower insurance premium is always a good idea. True or false?
a. True.
b. False.
QUESTION #2
When it comes to liability insurance, many sites are over-insured. True or false?
a. True.
b. False.
QUESTION #3
You might be able to lower your insurance premiums by conducting routine site inspections to check for potential hazards, and showing your insurer the records of such inspections and the efforts made to reduce risks. True or false?
a. True.
b. False.
QUESTION #4
You own 40 sites—30 of them are family sites and 10 of them are sites for the elderly and disabled. You could probably pay less for insurance by pooling the 30 family sites together and insuring them separately from the 10 sites designated for elderly or disabled residents. True or false?
a. True.
b. False.
QUESTION #5
If you don’t make the required deposits to the replacement reserves account, HUD could require the owner to repay the missing deposits with nonfederal funds. True or false?
a. True.
b. False.
QUESTION #6
Investing the replacement reserves in longer-term investments, such as a five-year CD rather than a one-year CD is better, because longer-term investments pay higher interest. True or false?
a. True.
b. False.
QUESTION #7
If you’re current on the required deposits, it’s safe to assume your reserves will be adequate for your site’s future capital needs. True or false?
a. True.
b. False.
ANSWERS & EXPLANATIONS
QUESTION #1
Correct answer: b
False. Take a look at the claims you’ve made over the past few years before you accept the offer of lower premiums in return for a higher deductible. Compare how much money you would save now in premiums if you took the higher deductible with how much you could end up paying out as a result. Also make sure you have enough cash flow to handle the new higher deductible so you can cover losses out-of-pocket until you reach the deductible. Otherwise, you may have to borrow from the site’s replacement reserves or use residual receipts, and a couple of big claims could drain these accounts quickly.
QUESTION #2
Correct answer: a
True. Umbrella liability coverage of $15 million or more makes no sense in most cases. Practically speaking, the higher your coverage, the more someone suing you may demand. People tend to be willing to settle lawsuits for less money when they know your insurance coverage is lower, so don’t over-insure your site.
QUESTION #3
Correct answer: a
True. You may be able to persuade an insurer to lower your premiums if you can show that you have taken steps to manage risks that contribute to insurance claims and lawsuits. The best way to do this is to start a risk management program that identifies, evaluates, eliminates, and/or controls potential hazards at your site.
QUESTION #4
Correct answer: a
True. By pooling the sites separately like this, you’ll probably pay a much lower average cost for the family sites. Even though the cost of insuring the elderly sites separately may be a bit higher, the cost savings for the family sites might exceed any cost increase for the elderly sites if you pool them this way—resulting in an overall savings in your insurance premiums.
QUESTION #5
Correct answer: a
True. If you can’t make deposits because there isn’t enough site revenue, you could look for ways to reduce expenses, ask permission for a rent increase, or ask HUD for permission to temporarily suspend deposits.
QUESTION #6
Correct answer: b
False. It’s better to invest reserves in shorter-term, more “liquid” investments, even though they may not pay as much interest. That’s because, if the site needs some or all of the reserves before the investment time of, say, a five-year CD is up, the site may have to pay a withdrawal penalty for prematurely liquidating the investment. If that happens, HUD can require the site owner to repay the lost principal.
QUESTION #7
Correct answer: b
False. Don’t assume reserves are adequate for your site’s future capital needs just because you’re current on the required deposits. Once a year, analyze your site’s short-term and long-term capital needs and whether the reserves are adequately funded to meet those needs. As part of the annual budget process, ask your financial manager to prepare a capital improvement budget and provide an analysis of replacement reserve funding for the subsequent year.