Here are the more common Homeowner Insurance Policies.

HO-1: Limited coverage policy
This "bare bones" policy covers you against the first 10 disasters. It's no longer available in most states.

HO-2 Basic Homeowner Insurance Policy
A basic policy provides protection against all 16 disasters. There is a version of HO-2 designed for mobile homes.

HO-3: Most Popular Homeowner Insurance Policy
This "special" all inclusive policy protects your home from all perils except those specifically excluded.

HO-4 Renter Insurance Policy
Created specifically for those who rent the home they live in, this policy protects your possessions and any parts of the apartment that you own, such as new kitchen cabinets you install, against all 16 disasters  

H0-6 Condo/Co-Op Insurance Policy
A policy for those who own a condo or co-op, it provides coverage for your belongings and the structural parts of the building that you own. It protects you against all 16 disasters.

Master Property Insurance Policy

A policy for Community Associations, Condo Associations, Timeshare Properties and Homeowner Associations, where there are common areas to be protected.  Some areas include the property grounds, parking lots, roofdecks, buildings, hallways and lobbies.

 

All too, often some accident or casualty occurs, a claim is submitted to the Condo Associations insurance agent for forwarding to the carrier, and a response is received informing the Board and its Manager that this is not covered, or some obtusely worded exclusion applies.  Likewise, all too often these letters go on for pages quoting provisions from the policy which, in all candor, even we lawyers are hard pressed to follow.  Considering recent trends in court decisions holding Condo Associations liable not just to third parties, but to unit owners upon ever expanding bases, this presents a particularly troublesome issue.  And the problem can be particularly acute where a Unit Owner suffers property damage as a result of some negligence on the part of the Condo Association.

            One situation we faced involved a claim of smoke damage.  As part of its winterization of a predominantly second home, summer condominium complex, the Association capped the fireplace flues - that is, they sealed them with plastic, Unfortunately they failed to inform the owners of this and someone came down for a nice winter weekend, lit the fire in the fireplace, layed back on the couch with a fine brandy and a good book, only to have smoke pour back into the unit.

            The Condo Association filed a claim under its master casualty policy.  However, as in common, it excluded the personal property of the Unit Owner and, as is becoming common, it continued a large deductible.  As is equally often common the Unit Owner had no Condominium Owners Policy (an HO-6) and, thus, demanded that the Association pay for the cost of cleaning his expensive living room furniture, drapes, etc. 

            The Insurer took the position that since the Unit Owner was a named insured under the policy, a claim could not be made under the liability portion of the policy.  Rather, the Association could only collect under the casualty loss portion.  However, that only covered the Unit and not the Unit Owners personal property and was, as mentioned,  subject to substantial deductible.

            Fortunately, in that situation we were able to negotiate a resolution with the Insurer.  However, another similar situation has arisen with another of our clients and this time the Insurer isnt flinching yet.

            All this points to the need by Boards and their Managers to carefully review insurance proposals.  It also, unfortunately really points to the need to bring in qualified, independent insurance advisors to develop specifications for the Associations insurance needs and/or for the Association to have its counsel thoroughly review policies.  Many insurance policies, though seeming the same on the surface, are materially different when their terms are peeled back.  Facing this problem after a loss is not a pleasant experience. Rather, making the extra effort in obtaining the policies can avoid unpleasant surprises.

Source: Marcus, Errico, Emmer & Brooks, P.C.

You have seen your community manager inspecting the property and thought to yourself, "Gee, I hope she doesn't send me a letter of violation for installing a flag pole without prior board approval." Most homeowners and board members think about violations of policy when they hear the term "property inspection." They don't realize that when a community manager is inspecting a property, they are not just inspecting for violations of association policy.

When a community manager conducts an inspection, there is a lot more thought that goes into the process than just remembering what the governing documents dictate about pets, curb appeal, or usage.

Community Managers should develop a detailed site inspection chart for risk management and use this chart for each inspection. This chart should take into consideration what should be noted on a site inspection; all governing document requirements of a physical nature; interviews with various contractors, homeowners, and board members; board practices; rules and regulations; and insurance coverage.

That sounds like a lot of information to obtain initially, and it is, but it is information that is necessary to ensure that the association and manager are, at all times, fully aware of any potential hazards and able to take corrective measures. Also, as corrective actions occur, this chart will vary, just as it will vary as the community ages, board members change, and new risk situations arise.

By using a chart and documenting all site inspections, continually updating the chart with corrective measures, and filing this chart as a permanent record of the association, the community reduces the risk of loss, and indicates to its insurance carriers that it has a proactive means of ensuring that the community is always on the look out for potential issues, takes corrective action, and promotes the health, safety, and welfare of all who visit the community.

As an example, if a community had a clubhouse for the use of owners and guests, the following items might be considered during the weekly inspection (in addition to the owner who violated policy by working out in his street shoes!):

1. Floor covering free of slip and fall hazards
2. Furniture in good condition
3. Kitchen area clean
4. Lighting operational in all areas
5. Rules and regulations posted
6. Ground fault interrupter push button tested (semi-annually)
7. Doors secured/all exterior door locks operational
8. Exercise and weight room equipment in good repair
9. Bathroom areas clean, clear, and dry
10. Changing area clean and clear of debris
11. Balcony area stable, wood in good condition
12. All handrails secure
13. Plate glass marked for protection
14. Fixtures and wall mountings secure
15. All exterior walking surfaces clear of debris
16. All emergency lighting operational
17. Smoke detectors operational
18. Emergency evacuation procedures posted
19. Communications systems operational
20. Office area clean, clear, and secured

Community managers need to think proactively while conducting inspections; situations change daily in every community. A grate that was secure over an inlet to a water retention area one week may not be the following week due to a storm that promoted severe ground erosion. This would be an immediate corrective action item, as loss of life could occur should a child enter into that grated area.

The community manager's role while conducting routine inspections should always include continually updating the inventory of an association's risk situations; recognizing and responding to exposures to possible loss that require immediate attention, and using appropriate resources to identify an association's exposure (i.e., vendors, contractors, homeowners, board members, engineers, and insurance risk specialists); in addition to reviewing alternative risk management techniques such as risk control through exposure avoidance.

Additionally, creating and using this type of inspection chart can take phased maintenance to a whole new level for the community, allowing for long term planning by being proactive and using avoidance techniques. An example of this type of avoidance technique with long term planning might be a case where the community manager noted that balcony support beams were showing signs of deterioration; the manager brought the situation to the attention of the board through her weekly chart reporting; the board then directed the manager to have a contractor review and recommend corrective action. Because this was all brought to light in the beginning stages of the deterioration, no balconies collapsed, a long range plan was incorporated for replacement or corrective measure, the association was not financially strapped because there was no "surprise element" involved, and damage from the risk was completely avoided.

So the next time you see a community manager inspecting the property, you now know that although he or she may be writing violations of general policy, this person is also continually looking for potential hazard and safety situations to promote the welfare, ensure the safety, and possibly save the lives of the homeowners in your community.

Source: Association Times

Community associations are non-profit organizations created to manage the community for its members. A board of directors is elected by the members to provide this management through the collection of dues, enforcement of deed restrictions, and other duties necessary to provide association services and protect property values. Despite an association's role as a non-profit organization and the board's volunteer status, management of an association includes legally-accountable duties and responsibilities.

The normal operation of a community association exposes it to risk of accidental loss. There are five basic types of loss faced by an association:

Property-buildings, land, inventory of equipment, supplies, furniture, signs, outdoor property and records

Commercial General Liability-third party property damage, bodily injury, or personal injury due to negligence

Income-loss of dues, maintenance fees

Workers Compensation-actions taken by an employee of the association resulting in bodily injury or uninsured/underinsured subcontractors hired by an association

Directors and Officers-providing coverage for "wrongful acts" by D&O's.

Despite these risks, an association's board of directors can take certain actions to minimize the exposure to loss through:

Reserve studies that will provide them with exact replacement cost values for all property, examining financial statements, maintaining accurate records, routinely inspecting property to ensure safety and maintenance issues, and hiring a professional manager and other industry experts.

Analysis of association policies and procedures to identify unsafe practices, which if changed, can reduce exposure and loss.

Transfer their risk for service-related tasks by hiring reputable, fully insured contractors for certain projects. While implementation of safety controls can reduce risk procedurally, an association may find that risk is best limited through financing.

Despite careful planning and management, associations must prepare for inevitable losses. Risk management can be either self-financed or transferred to a third party:

Self-financed-an association can finance risk by maintaining a reserve account to pay for damages or loss suffered or caused by the association and its employees.

Transferred to Third Party-an association can transfer the financial burden of damage and loss to an insurance company through purchase of a commercial insurance policy(s).

As most associations operate with limited funding and reserves, purchase of an insurance policy can provide the greatest risk protection at limited cost. Often, most associations' governing documents require the purchase of certain insurance coverage. Federal regulations, state laws, and local ordinances can also establish insurance requirements for a community association. It is important for the board of directors to  understand the coverage required and to assess the exposure of the association in order to determine the proper insurance policies as reflected above.

It is also recommended that a board develop a bid request form in order to review bids uniformly. Determining what insurance policies to purchase and from whom is an important and necessary duty for protecting the association and its assets.

Source: Association Times

Risk management is the process of planning and implementing policies that will help decrease the possibility of accidental financial and physical loss to the community association. Several types of losses can occur in a community, namely, property, liability, income, and personnel. Theft, fire, wind, flood, and other catastrophes, including hurricanes, tornadoes, and hail storms, can cause property losses. Injury to another person or to another person's property are considered liability exposures. Income exposures, by comparison, are unsound financial practices such as fraud, embezzlement, and loss of rent resulting from a covered loss of an association-owned unit. Injuries received while on the job for the community association and claims of improper employment practices are personnel losses.

• Importance of securing and maintaining insurance

The purchase of insurance allows the community association to transfer the financial burden of paying for losses to a third party, namely, the insurance company. Requirements for securing insurance policies for the community association are defined in state statutes and governing documents. Mortgage companies and secondary mortgage markets such as FNMA, FMLC, and VA also require developers to include insurance mandates in community association governing documents to ensure that their investments are protected.

To protect the association against these potential losses, the board should consider all available insurance coverages through a bidding process. Typically, an association purchases a "commercial package policy" (CPP) that includes many property and liability coverages "packaged" together. Several are highlighted herein because they may be of particular importance or may be overlooked when purchasing insurance:

For property coverage, the board should choose a deductible that is affordable, but will yield a reasonable premium. In the current insurance environment, typical community association property insurance deductibles range from $5,000 to $10,000, and perhaps higher in areas susceptible to hurricanes or earthquake damage. If a higher deductible is selected to obtain a lower premium, the community association should create an operating reserve account or budget a separate line item or contingency category to accommodate a possible large financial burden caused by one loss or several losses in the same year.

When purchasing property insurance, be sure to request replacement cost coverage and not actual cash value (ACV). Just as it sounds, replacement cost coverage will pay to completely replace a covered item, such as a roof, at current costs, no matter its age. On the other hand, ACV depreciates the item so the association would receive payment based on the age of the roof. For example, if the roof is nearing the end of its useful life-perhaps it's 18 years old, and the life of the shingles is 20 years-ACV coverage would pay the association only a very small fraction of the amount needed to rebuild the roof.

Building ordinance insurance includes the following three coverages for property that is impacted by building code changes and possible condemnation due to a partial loss. None of the coverages duplicates those under the property insurance policy, so we urge all Associa-managed communities to include this policy in their insurance program.

If there is significant damage to most of the building, the municipal building department may condemn the entire structure, which requires demolition of the undamaged portion. Property insurance pays for the demolition of the damaged structure, but extra demolition coverage pays for the demolition of the undamaged portion of the building.

Contingent liability provides the funds necessary to rebuild the demolished but undamaged portion.

Finally, increased cost of construction coverage pays for the increased cost of building code changes, such as wider doorways, hard-wired smoke alarms, fire suppression systems, and approved roof material.

Building code changes can occur as often as each year, so building ordinance insurance is a very important coverage, especially as community associations age. Property insurance restores the building to its original condition, regardless of its age. Increased cost of construction coverage updates the building to comply with the current building code.

Electronic data processing insurance is a property coverage of more recent vintage. It covers information technology exposures such as computer equipment, networks, websites, security systems, and protection from hackers.

The following policies comprise the liability side of the CPP policy:

Commercial general liability (CGL) is a policy that covers damage to the property of others. If, for example, association employees are painting a building, and some of the paint overspray lands on an owner's vehicle, CGL will cover the damage to the vehicle. CGL also provides coverage for certain bodily injuries, such as if a guest trips over a sprinkler head and twists an ankle.

Personal injury coverage protects the association against slander (verbal defamation), libel (written defamation), and defamation of character, such as if a community association posts a list of delinquent accounts on the bulletin board against the community manager's advice.

Advertising injury covers instances such as an association's plagiarizing a newspaper or magazine article or publishing an article in the community newsletter without first obtaining written approval from the author or publisher.

Hired and non-owned automobile liability covers vehicles owned by others, but used for association business. If, for example, the association's newsletter editor is in an accident while driving to a print shop to copy the newsletter, hired and non-owned automobile liability insurance would cover the damage to the other car and any injuries to its occupants, but not to the editor's vehicle or injuries to its occupants. The editor's personal car insurance policy would cover that.

Directors and officers liability (D&O) insurance covers any wrongful acts of the board of directors and volunteer leaders. Some state statutes mandate D & O coverage and include minimum limits of coverage for community association boards. It is sometimes included, in a more limited form, as a rider with the package policy. Because D&O does NOT cover intentional wrongdoing or deliberate breach of fiduciary duty, however, it is absolutely essential that board members act in the best interest of the association at all times.

We urge board members to purchase a separate D&O policy with the broadest limits available. While board members may believe that they do not need D&O coverage because they don't expect to make a mistake, an owner still could sue for a perceived injustice. D&O, as well as most other liability policies, would pay to defend the association and the board as long as the board as a whole and the board members individually acted in the best interests of the association at all times.

Commercial umbrella liability insurance provides excess coverage above most of the other liability policies. For example, the commercial general liability policy provides $2,000,000 of coverage, and the association's governing documents require, or industry best practices recommend, a minimum of $10,000,000 in coverage. The association could obtain an umbrella policy of $8,000,000 so if the $2,000,000 limit is exceeded by court award or settlement, then the umbrella liability policy would pay the difference up to the limits of the policy. Umbrella liability insurance is more reasonably priced than a general liability policy because its underwriters gamble that any award or settlement will not exceed the general liability policy limits.

Fidelity insurance protects the community association against employee dishonesty that may lead to theft, fraud, or embezzlement of association money, securities, or property. The coverage should insure all persons who handle or have access to funds, regardless of whether they are paid, such as board members, committee members, volunteers, community manager, and management company employees.

Even if the management company has fidelity coverage of its own (and professional management companies do), the policy covers only the management company's funds. The association's fidelity insurance policy should have a rider, or endorsement, that extends coverage to the management company.

Workers compensation insurance is usually required by state statute and provides coverage for employee work-related injuries and death. Even if the community association does not have employees, it is wise to purchase a "minimum value" workers compensation policy to cover contractors' employees who may work on-site on behalf of the association, but the contractor allowed his coverage to lapse. A minimum value workers compensation policy is inexpensive, but very necessary, protection for the community association.

Employer liability insurance is a must if the association has any employees. It covers instances of alleged wrongful termination, sexual harassment, and other employment-related issues.

• The bidding process

How do you determine the limits of coverage? Certainly not by using the same old numbers from previous policies! The only way to ensure that the community is insured adequately is to hire an insurance appraiser or Reserve Specialist® to determine the insurable replacement cost of the common elements and buildings for which the association is responsible. Replacement cost appraisals should be conducted at least every five years to keep up with inflation and increased construction costs. Check your association's governing documents and state statutes for legal requirements that impact community association insurance

Source: Association Times

One area of Condo Association insurance coverage that is always a little vague to most of us is the issue of liability insurance coverage for elected Board members, as well as insurance coverage for appointed Officers, and those appointed Committee Members operating under the jurisdiction of the Board.

What is Directors and Officers (D&O) Insurance?

Directors and Officers Liability Insurance provides protection for the directors and officers of your association in the event they are sued in conjunction with the performance of their duties. Think of Directors and Officers Insurance as a management Errors and Omissions policy. Directors & Officers Liability Insurance can include Employment Practices Liability and Fiduciary Liability. Directors and Officers Insurance is often confused with Errors & Omissions Liability. The two are not synonymous; Errors & Omissions is concerned with performance failures and negligence with respect to your products and services, not the performance and duties of management. Since a director or officer can be held personally responsible for acts of the association, most directors and officers will demand to be protected and are not willing to risk their personal assets to serve as a corporate director or officer without such protection.

How is D&O Insurance applicable to Committee Members?

Generally speaking, when HOA Committee members have been appointed by a Resolution of a Board of Directors, are operating under clear and appropriately drafted Charters, and are conducting activities in conjunction with the Charter, liability insurance is assumed to be in place for all of these members. A common example would be a member of an Architectural Control Committee (ARC) making a decision, in a meeting, as part of the ARC Charter that is then challenged by way of a lawsuit against the Association and ARC members. However, for other activities of committee members, the line is not as defined. When a member of the "Welcome Committee" visits a new owner, and words are exchanged regarding the condition of the property, or perhaps worse, are the actions of the Welcome Committee covered should the new owner feel as though the visit was harassment, racial discrimination, etc? How about a scenario where the Pool Committee member decides to discipline a youngster who was running at the pool, by sending the child home, or making the child stay out of the water for 30 minutes. Did the Pool Committee member have the authority to "police" the pool area or just to establish the "Pool Rules"? The Condo Association itself will likely be covered under even the most awkward circumstances, but what about the committee member, should a lawsuit be brought against the committee member personally? These are all important aspects to consider when working with your Committees and their members. Asking your HOA insurance agent for details on committee member liability insurance coverage is paramount to a sound risk management program.

What are the key questions to raise when reviewing your HOA D&O policy?

• Are Association Committee Members included in the D&O Policy?
  
• If not, what types of insurance coverage can be provided that adds that extra protection for the association?
  
• Does the condo association's governing documents provide an automatic indemnity for Directors and Officers?
  
• Does the policy maintain coverage for a period beyond the HOA Board Member's term of service?
  
• Does the policy extend coverage beyond the policy period if circumstances that might give rise to a claim are disclosed during the policy period?
  
• Is there a minimal deductible per Director?
  
• Does the policy also feature a low aggregate applicable to one occurrence?
  
• Does the Policy cover claims against Directors, Officers, Committee Members?
  
• Can the Board of Directors choose their own legal representatives when defending a claim?
  
• Does the policy cover legal costs incurred through investigations that DO NOT result in litigation?
  
• Is the limit of liability for a single loss, or for total losses during the policy period, set at an appropriate level?
  
• Does the policy have any unusual exclusions?

Clearly, the best course of action is to remind directors, officers, or committee members who are looking after an association to only act within their own authority, commit the association to transactions or agreements that are within the law, and to avoid placing themselves in a position where their personal interest conflicts with those of the association.

The Condo Association, through the Board of Directions, should adopt concise Committee Charters, detailing the specific areas of responsibility, and requiring Committee Members to sign a copy of the Charter. As always, it is critical to review the association governing documents to determine the legal structure of committees, areas of permitted activities for those members, as well as the authority the Directors and Officers have with the condo association.

Source: Association Times

Having the HOA insurance or condo association insurance coverage you need in the areas in which you need it is the biggest challenge. The areas most often overlooked or structured improperly include:  

1. Deductibles and shifting loss. Although some condo associations have moved to higher deductibles, all condo associations should consider increasing their traditional $1,000 deductible to $2,500, $5,000 or $10,000 to reduce premiums. Together with higher deductibles, condo associations should review their documents and consider adopting a resolution or amendment requiring unit owners suffering damage covered by the condominium master policy to pay the condo association's deductible. Unit owners are typically able to cover most of this risk through their own home owner policy. A few forward thinking associations are now requiring owners to carry a home owners' policy and to produce evidence of this coverage.

2. Agreed amount endorsement. This coverage eliminates the penalty that would apply if it turns out that your condo association or HOA is under-insured. If you have only $10 million in coverage on a building that should be insured for $20 million, the insurer would be required to pay only half of any claim - $50,000 on a $100,000 loss. An agreed amount endorsement would ensure full coverage despite that gap. This coverage is affordable and readily available, but you have to request it.

3. Non-hired auto coverage Assume that a condo association board member conducting board business accidentally kills someone in an automobile accident. If his personal coverage isn't adequate to cover the claim, the victim's family can sue the condominium trust for the balance. For an additional $50 to $75 a year, a condo association can obtain $1 million in coverage for this risk. Few HOAs and condo associations have this protection; all of them need it.

4. Workers' compensation. This coverage is necessary even for condo associations and HOAs that do not have any employees. Consider this not uncommon situation. A worker responds to an emergency in the middle of the night. Focused on the pipe that is spewing water by the gallons into the common area, no one bothers to obtain a certificate of insurance verifying that the contractor who employs the worker has insurance. The worker is injured and the contractor, in fact, provides no coverage. The Industrial Accident Board in this case is likely to find that the association is the employer and is obligated to pay the worker's medical expenses.

5. Directors' and Officers' liability coverage (D&O). These policies typically will cover claims for fair housing discrimination, unfair employment practices, and the like. You want a duty to defend policy, which will pay your defense costs, versus simply an indemnity policy, which will pay if you lose a suit, but won't cover your litigation costs in the meantime. Make sure your policy specifies that the coverage limit does not include the defense costs; otherwise, legal expenses could eat up most of the coverage you have, leaving little to pay any judgment levied against you.

6. Surplus lines. Pay careful attention to policies written through excess and surplus lines. Insurers sometimes use these lines, which are not subject to state regulations, to avoid risks such as terrorism and mold, which some states require them to cover. Your insurance advisor should be able to tell you whether these policies have excluded any other risks. Monitoring the source of the insurance is especially important when you are changing carriers, because you could end up with dangerous coverage gaps of which you aren't aware.

7. Terrorism insurance. The insurance and real estate industries, among others, were much relieved by the news that Congressional negotiators have resolved the impasse blocking approval of legislation creating a federal terrorism insurance "backstop" that will pay a portion of any future terrorism-related insurance claims.   Final approval of that legislation, more likely now although not completely assured, should make terrorism insurance both more available and more affordable, both for new development projects unable to proceed without the coverage, and for existing buildings in danger of defaulting on mortgages that required coverage owners were either unable to obtain or to afford.

8. Mold coverage. To the chagrin of the real estate industry and individual homeowners, insurance carriers have been successful in limiting mold liability coverage and dramatically reducing mold-related property damage coverage. While these exclusions are based on some very real and legitimate insurance industry concerns, the real estate community must carefully evaluate the new coverages to assess their risks.

9. Earthquake insurance. Damage risks are highest for buildings constructed on fill in downtown Boston (a good-sized quake will probably send them into the waters), but some level of coverage is important for all multi-family structures.

10. Fidelity insurance. Community associations are generally aware that they need this insurance against thefts by board members or staff members (the condominium statute requires it), but most don't have enough coverage and the policies aren't always structured properly. The insurance should be issued in the association's name with the property manager obligated under the association's policy. That will cover a theft by the management company principals as well as by the property manager. The property manager will have coverage through the management company, but that policy typically will cover the property manager only.

By Stephen Marcus

When community association boards ask, as they often do, "How much coverage is enough?" insurance agents I know invariably reply, "How much can you afford?"

It may be possible to be too rich or too thin, but it is very difficult to have too much insurance today, and very risky to have too little. I haven't conducted a scientific survey, but I am reasonably certain that most community associations and apartment buildings are woefully under-insured. The Fannie Mae requirement for condominiums (and thus the industry standard) calls for $1 million in general liability coverage. But the amount of coverage needed to make Fannie Mae's underwriters comfortable is not necessarily the coverage needed to protect a community association (or an apartment building owner) from a potentially ruinous liability claim. There was a time when $1 million sounded like a lot of coverage - but that was long before $5 million and $10 million judgments had become almost routine.

I asked the apartment managers attending a recent Institute of Real Estate Management seminar to indicate, with a show of hands, how much insurance coverage they had. Out of 70 managers in the room, only 2 still had their hands raised at $10 million. How would your real estate company or your community association handle a $32 million judgment awarded to a tenant or a unit owner claiming damages related to mold? What about an accident in which your building superintendent accidentally ran over and killed a child in the parking lot? A $1 million policy would not begin to cover the likely jury award.

Given the financial risks, nothing is more important than the insurance protection you have in place. But I don't think there are more than five people - including insurance agents - who have ever read their insurance policy or who understand exactly what it covers. What you don't know about your policy can definitely hurt you. One recent example: A condominium in Gloucester was destroyed completely by fire a few months ago. When the association filed its claim, they discovered that because of a measurement error, the policy understated the size of the development by 10,000 sq. ft. As a result, the coverage was less than required to rebuild the community.

By Stephen Marcus

Ask an audience of condo association board members if their communities are "fully insured," and you will almost certainly receive a unanimous and confident show of hands.  Ask if they have reviewed their HOA insurance policies in recent memory, or have ever read them at all, and the hands will begin to waiver.  If participants are honest, the show of hands should all but disappear.  That's not surprising.  Condo Assocation Insurance is complicated, dry, and unlikely to be a favorite topic of conversation for anyone, with the possible exception of insurance professionals and their close relatives.  As a result, many communities have serious coverage gaps that often do not become obvious until after a disaster, when the insurer pays less than the amount of the loss, or declines to pay anything at all. How Much Is Enough? The Fannie Mae requirement for condominiums (and thus the industry standard) calls for $1 million in general liability coverage.  But in a world in which litigation is constant and multi-million-dollar awards have become the norm, a $1 million policy no longer goes very far.   It certainly wouldn't have helped the community forced to pay a $32 million judgment awarded a resident claiming damage from mold, nor would it begin to touch the claim if your building superintendent accidentally runs over and kills a child in your Condo Assocation's parking lot.  Property damage claims are more common than liability losses, but insurance professionals will tell you that coverage in this area is also inadequate.  That is partly because some boards set insured loss caps intentionally too low to reduce their premiums, but it is also because many boards don't know how the coverage they have matches their community's needs.  What condo association boards don't know about their coverage can definitely hurt them, as the board of a Massachusetts condominium discovered after their building was destroyed by a fire.  When this board filed the association's claim, they discovered that because of a measurement error, the policy understated the size of the development by 10,000 sq. ft.  As a result, the coverage fell far short of the amount required to rebuild, and owners had to absorb a $50,000 - $70,000 per unit special assessment to close that gap.  A condo association insurance policy offering "guaranteed replacement cost" coverage (paying whatever it costs to rebuild) would have taken care of the problem.  But that coverage, once widely available, is hard to find today.  Few carriers offer it and those that do are extremely selective about the condo associations or HOAs they will cover.  However, most policies do include an automatic inflation adjustment provision, which increases the policy limits annually to reflect increases in area building costs.  HOA boards should make sure their community's policy includes that inflation trigger and also make sure the cost benchmarks the insurer uses are reasonable.    It is also a good idea to have the property appraised periodically - at least every three or four years - to make sure the coverage limits are adequate.  Also make sure you add coverage for any additions you have built or improvements you have made since the existing policy was issued.  Having enough coverage is critical, but allocating it properly is equally important.  A stick-built suburban town house condominium paid $11,000 annually for a policy that provided 100 percent replacement coverage for earthquake damage.  That was probably overkill, given the relatively low risk that a quake would completely destroy a complex of this type.  On the other hand, this community had a $55,000 per building deductible for wind damage - an extremely high risk for these buildings, which were located on a hill.  Having the right amount of coverage overall won't help if your policy leaves you exposed in the areas where you most need protection.  These are the kinds of issues condo associations and HOAs should consider, but often don't, when they are obtaining assocation insurance coverage or renewing existing policies.  Most treat condo associaiton insurance or HOA insurance like a commodity and shop for it based almost entirely on price, without considering the nuances that may make one policy, even if somewhat more expensive, a more cost-effective choice than another.  Shopping for Condo Association Insurance The best way to shop for a condo assocation insurance policy is to issue a request for proposals and then have an insurance adviser evaluate the bids you receive, explaining the similarities and the differences and comparing the costs and coverage different companies are offering. If you aren't working with an adviser, you should deal with an insurance agent who specializes in the coverage you need.  This is particularly important for community associations, because condominium insurance is complicated and unique; your brother-in-law or a friend of a friend who happens to be an insurance agent is not likely to be the best choice.  You want an agent who can analyze the association's coverage and make sure it dovetails properly with the unit owners' policies.  Otherwise, the association and individual owners could end up paying too much for coverage, or discover after-the-fact that no one had the coverage they needed.  Problem Areas Having the coverage you need in the areas in which you need it is the biggest challenge.  The areas most often overlooked or structured improperly include:  Deductibles.  Many HOAs and condo associations have increased their deductibles from the $1,000 that used to the industry norm to $2,500, $5,000 and as much as $10,000.  Those that haven't yet made that adjustment should do so.  Higher deductibles will both reduce the association's premium cost and eliminate the small claims that can trigger future increases and may threaten future coverage.  Associations should also amend their by-laws to or adopt a rule requiring unit owners who suffer damage covered by the condominium master policy to pay the association's deductible - easy for owners to do if they have the deductible coverage that is an inexpensive addition to an owner's policy.  Tapping the owner's policy first is less costly for the community and makes the master policy do what it is supposed to do - insure the community against catastrophic losses.  Ordinance or law.  Even the scarce but desirable guaranteed replacement cost coverage described earlier won't pay to bring older structures into conformity with building code requirements adopted after the buildings were constructed.  If a building is damaged severely or destroyed, a standard policy might pay the cost of restoring the building to its pre-disaster condition, but it won't cover the cost of installing sprinklers, adding parking spaces, increasing setbacks, and making other changes an updated building code will require.  Association master policies typically exclude losses resulting from "governmental orders"; ordinance or law coverage, which associations can purchase as an endorsement to a standard policy, erases that exclusion and restores the coverage.  Agreed amount endorsement.  This coverage eliminates the penalty that would apply if it turns out that your property is under-insured.  If you have only $10 million in coverage on a building that should be insured for $20 million, the insurer would be required to pay only half of any claim - $50,000 on a $100,000 loss.  An agreed amount endorsement would ensure full coverage despite that gap. Business interruption.  If a fire or other disaster forces owners to relocate and temporarily disrupts the collection of common area fees, this insurance would enable the association to continue meeting its financial obligations until its normal income stream is restored.  Fidelity insurance.  Condo associations are generally aware that they need this insurance against thefts by board members or staff members, but most don't have enough coverage and their policies aren't always structured properly.  The insurance should be issued in the association's name with the property manager obligated under the association's policy.  This structure will cover a theft by the management company principals as well as by the property manager.  The management company will have its own insurance, but that will typically cover the property manager only - it won't cover a theft perpetrated (as some have been in the past) by the management company's owners.  Non-hired auto coverage.  Assume that a board member conducting association business accidentally kills someone in an automobile accident.  If his/her personal coverage isn't adequate to cover the claim, the victim's family can sue the association for the balance.  For an additional $50 to $75 a year, a community association can obtain $1 million in coverage for this risk.  Few community associations and apartment owners have this protection, but all of them need it.  Workers' compensation. Many boards overlook this coverage, assuming they need it only if the community employs workers directly.  But associations without anyone on their payroll may still be vulnerable to claims, for example, if an employee of a contractor the association hired is injured while doing work for the community.  If the contractor does not have the appropriate coverage, the laws in many states will make the community liable for the worker's medical expenses. Directors and officers liability coverage (D&O).  These policies typically will cover claims for fair housing discrimination, unfair employment practices, and the like.  Some policies will pay off if you lose a suit, but you will have to pay the litigation costs in the meantime.  You want a policy that includes indemnity coverage for the cost of defending actions against you, and you want to make sure the policy specifies that the coverage limit does not include the defense costs; otherwise, legal expenses could eat up most of the coverage you have, leaving little to pay any judgment levied against you.  Boards should also be aware that the D&O coverage many companies include as an endorsement in the insurance packages they offer community associations don't typically cover non-monetary claims (for board election challenges, architectural review decisions, rules enforcement, and the like, which represent the majority of the liability claims most communities are likely to file.  A mono-line or stand-alone policy is more expensive, but it will cover these non-monetary claims. Surplus lines.  Watch out for companies writing coverage through "surplus lines," issued by subsidiaries or affiliates that are headquartered in another state and sometimes in another country.  These out-of-state entities aren't subject to state insurance regulations, which means they don't have to provide the coverage the state may require.  Monitoring the source of the insurance is especially important when you are changing carriers, because you could end up with dangerous coverage gaps of which you aren't aware. A few more insurance tips for community association boards:  Be proactive about risk management.  The best way to reduce premium costs is to limit the number of claims you file.  Use the association's reserve study to identify risks and quantify exposures.  An older roof is more likely to be damaged in a severe storm and so represents a greater risk than a newer one. Shop the community's insurance periodically to compare the coverage available with the coverage you have.  If you are changing carriers and/or agents, ask the agent to certify in writing what the new policy covers.  You want this statement to include an apples-to-apples comparison listing the coverage you had in the old policy, the coverage you are getting in the new policy that you did not have before, and the coverage you had previously that the new policy will not provide.  Establish claims management procedures and follow them if your community has a claim.  Most policies will specify the steps boards should take after incurring a loss, but it is also a good idea to ask the carrier to specify in writing any additional measures the company requires. Educate owners.  Make sure they understand why it is essential for all owners to have individual unit-owners' policies, and consider adopting a rule requiring owners to demonstrate that they have this coverage.  Understand what property the association owns and what property it is responsible for insuring.  Don't assume that your community is "fully insured."  Read the master policy to make sure it provides the coverage you think you have and the protection that your HOA or condo association needs.