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In light of the upcoming special election to revise insurance-related CC&Rs, the Third Mutual board waded through members’ submitted questions during a special meeting Friday, May 14.

The vote aims to “remove the strict requirement that the community be insured for the full replacement value of the community,” according to a news release.

Current CC&Rs hold that Third must maintain all-risk, full-coverage property insurance.

However, an updated valuation of the Village increased coverage from the historic annual $700 million to $3.4 billion. Of that sum, Third is responsible to cover $1.6 billion.

Market shifts, state laws and even climate change have members poised to inherit the financial burden in full unless action is taken, Third leaders said.

A previous campaign, which included nonrelated changes to the CC&Rs, failed in a special election due to an insufficient turnout; at least two thirds of community members are required to validate election results.

While 2,805 members voted in favor and 1,039 were opposed, the previous vote drew only 46 percent turnout and thus did not meet the required percentage.

Third President Steve Parsons has said that this time around, the board dropped provisions outside of insurance matters, given the immediacy of the situation; insurance renewal is due in October.

Regardless of the election’s outcome, assessments will go up, Director Robert Mutchnick confirmed. The question is, how much?

“At this moment in time, we do not know,” Mutchnick said.

If members vote yes and reject the full-coverage policy, the board would be allowed to look into “more reasonable” options, such as an assumed loss policy, Director Donna Rane-Szostak said.

So, how did we get here?

Mutchnick provided background on what’s going on.

“For many years, Travelers Insurance covered the whole Village. Every year they would raise the rates by a certain small percentage,” he said. “Everyone was happy. There was no new valuation of the Village. Premiums were low.”

Then, two years ago, a change in policy disrupted regular arrangements. Travelers Insurance notified the Village that it would no longer be insuring the Village as a whole at its annual $700 million rate. Travelers would only cover the first $50 million, Mutchnick said.

The Village’s brokers at the time, Beecher Carlson, layered 35 other insurance companies to fill the gap.

The following year, Travelers updated its terms. It would only provide the $50 million upon revaluation of Village property.

The appraisal was conducted by independent contractor Duff & Phelps, which quoted coverage for the entirety of Village property at $3.4 billion — about five times greater than before.

“The insurance went up dramatically,” Mutchnick said. “We had no control over that.”

To cope, Third increased assessments to $20 per manor per month and reached into the Disaster Fund for a $48 per manor per month supplement – but that was a one-time solution, leaders said.

“This doesn’t account for any possible increases in insurance or services outside of insurance that’s to come this year,” Mutchnick said, noting the urgency to pay back the borrowed funds as well.

The hike is projected to include about a 20 percent to 30 percent increase in the cost of insurance, he said.

What does this look like for Third?

Third is likely to be facing an additional hike in 2022 assessments at $46 per manor per month, totaling $94 per manor per month. This increases the assessments by $1,128 per manor per year, totaling $8,350,000 for insurance coverage.

A switch to international, well-connected brokerage firm Arthur J. Gallagher & Co. was a strategic move to cut out the middlemen and bag a better deal, Mutchnick said.

So what’s causing the increase?

A higher premium rate is expected when any property’s valuation jumps, especially when that jump is from hundreds of millions to multibillions.

Another culprit is global warming, Director Lynn Jarrett said. Record-setting natural disasters — from wildfires to declining water supplies — contributed to an increase of insurance premiums globally.

The state experienced its worst and longest wildfire season in 2020 and, looking back, government intervention may be homeowners’ only way forward. Nearly 1 million California homeowners were rejected by insurance carriers for policy renewals from 2015 to 2019 due to high risk, according to the California Department of Insurance.

Third Director Ralph Engdahl noted that some insurance companies may only consider coverage if there’s an exclusion for damage caused by wildfires — a very real threat for Third members, with Laguna Coast Wilderness Park just 30 feet away.

Third’s 50-year-old buildings, stucco walls and absent sprinkler systems also hurt its chances in renewing some of its current policies in the upcoming year or joining a group policy, Engdahl added.

What about a deductible?

Deductibles create avenues for more affordable insurance plans by assuming responsibility for a certain out-of-pocket sum; however, Director Reza Karimi pointed out an indirect relationship between growth in premiums and deductibles.

Karimi reported a minimum deductible of $100,000, with some rates reaching $200,000 and up, for the upcoming year.

“The reduction in the premium is not sufficient to justify paying a higher deductible,” Karimi said. “We’ve got to continue exploring this issue.”

Why don’t we just renew the appraisal?

Some residents submitted questions insisting the Village should conduct a new appraisal, to which Director Craig Wayne said that isn’t an option due to timeliness — insurance renewal is due by October — and there is the possibility the valuation could return higher than Third’s $1.6 billion quote.