Do you Reserve for Insurance Deductibles?

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At the end of my presentation yesterday, someone asked the above question. And if one person asks it, I figure others are probably looking for an answer. So – do you Reserve for Insurance Deductibles? In different parts of the country this might be for hail damage on a roof, earthquake, water damage, or any one of a number of possible insurable losses.

But all will get the same answer. Insurance deductibles are inappropriate for Reserve designation because they fail test #3 of the National Reserve Study Standard four-part test for Reserve Components… that the expenditure’s timing must be predictable. An insurable loss by definition is unpredictable. That’s why you insure for it!

When you don’t know when the expense will occur, it becomes a guess, not something you can “plan” for in advance. So insurance deductibles are best handled through means other than a Reserve Component. While the Reserve Fund may play a role, (the association may use a short term loan from Reserves to pay the deductible while the association passes a special assessment to reimburse the Reserve Fund, etc.), it inappropriate to have a Reserve line item (component) for insurance deductibles.