Many associations have relatively high insurance deductibles, sometimes as much as $100,000 or $200,000. This is the case in particular in hurricane prone areas. I have been asked several times if it should be a reserve item or how to go about funding it. Sometimes I already encounter it in an association’s current reserve schedule when I am doing a reserve study for them. Before I answer, let me first explain what a reserve item is. A reserve item is a physical asset or component with a useful life when new of more than one year that has a repeating life cycle. More succinctly, it has to last more than a year and repeat.
Fails the Test
In this case, an insurance deductible fails both tests because it does not repeat and it does not really even have a useful life (it clearly would be hard to know when you expect to use an insurance deductible). With this being the case, an insurance deductible should not be a reserve item.
Never Go Below a Certain Point
So, then how do you fund for it? Well, keeping a minimum amount (threshold) or reserves would be the best strategy. It is likely that most associations do not have the same replacement years of items all at the same time, so associations in this case would be in good shape naturally. It is a good practice to do this anyway and not let reserves ever fall below a certain point, say $100,000 or 10% of the total of all replacement costs. Another quick test is always strive to stay above at least 30% funded overall for reserves to maintain a healthy percent funded.
You May be Better Off than You Think
If a catastrophic event (tornado or hurricane, for instance) completely destroyed all association buildings, then the association would not concern itself with a new roof, re-painting, new elevators, clubhouse renovations, recreation area renovations, etc. Since these items were destroyed, you can then use the funds in these categories to cover your insurance deductible. You would also not be hurting the funding of any of these items because they would go back to a full useful life. For example, a roof with a remaining life of 8 years was blown off and after the insurance deductible was met, the roof was replaced. Now, the roof would go back to a full life of 20 years remaining. Even if you had to use all of the reserves for that item, you are not behind in funding it, and you have its full useful life to fund for its next replacement.