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Insurance Articles |
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Indemnify the Manager "Indemnify" is an insurance and legal term that means "to secure (protect) against loss or damage". Just about all homeowner association management contracts have a provision which states that the association shall indemnify the manager under certain circumstances. Since it is likely that the manager is going to be named as a defendant in any lawsuit relating to the management of the property, such a clause makes sense. For example, if somebody slips and falls on the property most attorneys representing the injured person would sue the manager as well as the association. There are several ways the indemnification clause can be drafted and both management and association must take into account what protects each the best. Negligence vs Gross Negligence or Willful Neglect. The association usually wants an indemnification clause which states the association shall indemnify the manager from any actions except for negligence. That makes the manager responsible for negligent acts. The manager usually wants to increase that standard to gross negligence or willful neglect. So, mere negligence would not be enough to trigger an obligation of management to defendant itself. Sometimes the management contract states that management is liable for gross negligence and willful neglect only if a court decides that the manager is guilty of it. So, the association is obligated to provide the manager’s defense until a court determines that the manager is guilty. Since most cases are settled, this clause gives the manager an additional layer of protection. One compromise provision states if the insurance carrier provides negligence or gross negligence coverage, the association will indemnify the manager to the extent of the insurance protection. Because the manager is named as an insured under the general liability policy this is a fair way of dealing with the indemnification issue. Be wary of a management contract which states that the association indemnifies the manager in all cases (without regard to negligence, gross negligence or wrongful conduct). This kind of clause is not reasonable and the association gives up too many rights. In addition to indemnification there are other issues: 1. Manager Acting as Employer. For ease of administration, the manager may act as the employer for employees that, in fact, work for the association. Under the Americans With Disabilities Act, if an association has over fifteen employees, this may cause a problem for both the manager and the association. The association should be the designated employer for its employees. 2. Board Signs Contracts. Managers should have the board sign all contracts. That way, the board is always aware of the contracts and the manager is not subject to questioning whether there was authority to enter into the contract. 3. Use Association Letterhead. Managers should consider using association letterhead instead of company letterhead in all association correspondence. It will avoid any confusion as to who the true party is. For example, in a contract dispute, the contractor should be clear that the contract is with the homeowner association and not with the manager. Like other professionals, homeowner association managers must be as diligent in protecting themselves as they are in protecting their clients. Review the management contract for indemnification language and modify it as necessary to protect the manager from reasonable scenarios. Excerpts from an article by the Marcus, Errico, Emmer & Brooks. BACK
Insurance Victim Compensation While victim frustration and irritation always results, the most natural reaction is looking for someone to blame. However, this is a crime that usually has no perpetrator. Rarely does someone consciously set out to flood the neighbors. This is one of those irritating events controlled by unseen forces commonly referred to as "stuff" happens. What now? Of the two entities the victims would like to blame, the neighbor or the association, both have legitimate alibis. The neighbor’s toilet supply line probably broke when the neighbor was gone so there is considerable damage done their unit as well. And the event was nothing they had control over. Your neighbor may have even called his insurance agent about fixing his and your damage. The agent often replies either, "We’ll fix yours but not your neighbor’s" or "Call the association’s insurance carrier. They’ll pay for the damage to both". Technically speaking, correct but practically speaking, wrong advice. Like the neighbor, the association usually isn’t negligent in causing the damage. Things happen. And unless the result is catastrophic, involving many units and 10s or 100s of thousands of dollars of damage, the association’s insurance should not be involved in the repairs even if the policy covers it. Why? Insurance companies set their rates according to the number of claims filed and the dollar value of those claims. HOA insurance is written on the assumption that it will rarely be needed. And to keep premiums even lower, higher deductibles like $2500 are opted for. This encourages the association not to file small claims which may jeopardize insurability. Too many claims result in cancellation. All unit owners are required to carry homeowner insurance for a good reason...to spread the risk around and ensure that each owner has the correct amount and appropriate kind of insurance. Some need relatively little and some need more to cover valuable contents, home businesses and other special needs. It is important that owner insurance be the first line of defense when possible. In the scenario discussed here, unless either the neighbor or association was negligent in some way, the owner victims would file claims on their own insurance and pay the deductible out of their own pocket. The association can assist in sorting out claims and responsibilities by enacting an Areas of Responsibility Policy which clearly defines who is responsible for insurance and maintenance according to building and grounds components. This one page document establishes the guidelines for the Board, owners and insurance agents and eliminates most disputes. Once adopted, the Board should be extremely careful what things the association repairs. Fixing unit damage that the association is not responsible for may establish an expensive precedent. Avoiding insurance victimization is a matter of proper planning and notification. Make sure all owners know what’s what with an Areas of Responsibility Policy. Then, owners won’t get caught with their insurance pants down. BACK
Why Do D&O? General liability insurance will not protect directors and officers in the same way. This insurance is to cover against third party bodily injury and property damage. Directors and Officers insurance covers against third party financial damages and other claims not covered under General liability. Here’s a list of scenarios in which directors and officers have liability: Continuing a wrongful practice after
learning it’s wrong Because of all these traps and pitfalls a director or officer could fall into, D&O insurance should never be optional. No one should serve on a board without it unless, of course, you have absolutely nothing to lose. I personally don’t know one person that doesn’t. Do D&O. BACK
Insuring Success Homeowner associations have seen first hand the effects of these insurance industry "corrections". Some have seen premiums double or triple and others get pink slips even though they have never made a claim. Fortunately, the HOA insurance market hasn’t dried up altogether. As long time players are benched, others are coming up to bat, even in this roller coaster market. One underlying principle to keep in mind is that insurance in any form presents some form of risk for the insured. The gamble is that bad things won’t happen but insurance companies know that somewhere, sometime, they will. And when insurance pays off, the costs impact the premium rate structure. So, during tight insurance markets, the Board will need to consider increasing the HOA’s risk to reduce premium cost. Here are some strategies to help see you through: Shop Around Not all insurance carriers have experienced the same loss history and have lower premiums. Check with national companies that have a special line of HOA coverages like State Farm, Allstate, Farmers and CAU-Community Association Underwriters for options. Call each company’s administrative office and ask for the name of the agent that writes the greatest amount of HOA insurance. It’s very important to only deal with an agent that is knowledgeable about how homeowners associations work. There are also a variety of independent insurance agents who can shop a wide market of companies to build a policy for you as well. But again, it’s important that the agent understand what HOAs are about. The wisdom of this will become crystal clear as soon as you need to file a claim. Review Coverages All HOAs should have Fire & Hazard, Directors & Officers Liability, Employee Dishonesty and General Liability coverages. Some other desirable coverages include Earthquake (mandatory in some regions) and Building Ordinance or Law. The latter covers increased reconstruction costs due to building code or zoning restrictions. Earthquake insurance typically has a sizeable deduction, like 10% of the coverage amount. The Board should discuss with the agent the pros and cons of eliminating certain coverages. Or, reducing a particular coverage may reduce premium. Review options with your agent. Increasing Deductibles Increasing the deductible always reduces premium. It also means the HOA self insures for that amount. Offset raising your deductible with an insurance reserve. Control Claims It is extremely important for the Board to control the kind and frequency of insurance claims. To aide that process, an Insurance Areas of Responsibility Policy should be adopted that carefully defines what qualifies for an HOA insurance claim, and just as importantly, what does not. HOA members are charged with insuring certain things. In condos, it often is described as "from the decorated surface of the unit in". That means unit interior damage should be paid for by the member’s insurance, even if the source of the damage came from outside, like a roof leak or an errant sprinkler head (as long as the HOA wasn’t negligent in repairing these items). Directing claims to members’ insurance will reduce claims on the HOA insurance. The HOA insurance should typically be used for larger claims like wind, rain and fire damage that impact many units or other common area structures. (For an Areas of Responsibility Checklist, see Planning Tools). Reserve for Self Insurance Whether your deductible is $1000, $2500, $5000 or higher, that is the amount that the HOA is self insured for. It is reasonable to plan for one claim a year by funding an Insurance Deductible Reserve within your reserve account in the amount of your deductible. If you file no claims during the year the reserve can be rolled over to the next year’s reserves. If your HOA hasn’t filed a claim in years, you might set up a three year reserve, funding one third of the deductible each year. If no claims are filed, it’s money in the bank. Even though HOAs have been rocked by the insurance storm in recent years, using these strategies will help insure success at the most reasonable cost available. Since these costs are likely to climb even higher, be prepared by taking action early. BACK
Allocating Insurance Deductibles
Insurance professionals note that insurers’ biggest concern is generally frequency of claims. Even small claims can be expensive. In addition to the claim itself, the insurer has the expenses of adjusting the claim. A number of small claims may wipe out the insurer’s profit. One of the key elements of risk management is risk transfer. This practice allows an association to shift certain risks of loss away from the association and to the party responsible for assuming the particular risk. The use of higher deductibles and the allocation of deductibles to owners may assist the association in controlling insurance costs. There are different philosophies as to how insurance deductibles should be allocated. Some take the position that all deductibles should be paid by the association as an expense to be spread throughout the community in the same manner that insurance premiums are allocated among everyone in the community. Others take the position that the person who receives the benefit of the insurance proceeds should pay the deductible. Yet others conclude that since many claims are the result of inadequate or deferred maintenance by owners, those responsible for the lack of maintenance should bear the cost of the resulting damages. Typically if deductibles are allocated to the owners, they are allocated in one of three ways: 1. The owner who would have maintenance responsibility in the absence of insurance is responsible for the deductible; 2. The owner who has maintenance responsibility for the damaged property in the absence of insurance will pay the deductible, unless another owner has negligently caused the damage; or 3. The owner from whose unit the problem originates will pay the deductible, even if the damage is to another unit, whether or not that owner was negligent. The first option has the advantage of simplicity, yet an owner who has done nothing wrong may have responsibility for a deductible. The second option is attractive because it assigns the liability for the deductible to the party who may negligently cause damage. The disadvantage of this approach is that it is more difficult to administer because determining whether or not a person has been negligent is not always clear cut. The third option also has the advantage of simplicity, yet as with the first option, an owner who has not been negligent or done anything wrong will be strictly liable for any damage that results from a problem in his or her unit. As associations look for ways to shift risk to the owners, it becomes even more important to educate owners on the importance of maintaining HO-6 policies. Individual insurance may assist with the payment of association deductibles. Depending on the scope of coverage on the owner’s policy, the deductible will often be covered under either the loss assessment coverage or under Coverage A of the property section. In some instances, an owner may increase such coverage with an endorsement at a small additional cost. If your association’s governing documents do not address the allocation of deductibles and your community is seeking ways to shift insurance risks to owners, you should consider adopting insurance guidelines that will allocate deductibles to the owners under one of the three methods described above. If the guidelines are not simply a reiteration of the provisions of the recorded documents, the board should record a board resolution setting forth the allocation of deductibles to ensure that all owners are on record notice of the requirements. The board should also distribute the guidelines to all owners and address the deductible issue in the community newsletter to enhance awareness of the guidelines so owners may take appropriate steps to protect themselves under their insurance policies. From www.OrtenHindman.com BACK Deductible Tug of War For years, there have been efforts by some insurance companies to shift exposures between condominium master policies and unit owners policies. This tug of war has intensified in recent years as the master policy insurance market has hardened (harder to get and more expensive). Master policies provide coverage for common property and, often, unit fixtures. Premiums for master policies have skyrocketed in recent years. In response, condominium associations have accepted substantially higher deductibles like $5,000 to $10,000.The cost of these deductibles is frequently passed on to the unit owners, but the manner in which they are passed along varies greatly from HOA to HOA. Given these variations, there are unresolved questions as to how a unit owners policy should respond to losses arising from master policy deductibles. Historically, condominium master policies were written as "bare walls" coverage. Under a bare walls master policy, the HOA insures only the building structure, common area fixtures and personal property and unit owners are on their own to insure unit fixtures and their personal property. Over time, bare walls master policies were replaced by "single entity" coverage that covers virtually all building property including fixtures in individually owned units. Those single entity master policies evolved from providing "original specs" coverage, which insured only the original fixtures in units, to "all-in" coverage that insures all permanent fixtures, including those added or substituted by residents. Under the standard language of unit owners policies, building property coverage becomes secondary to other insurance covering the insured property, such as an HOA’s master policy providing single entity coverage. In today’s hard insurance market, insurers of master policies have instituted higher deductibles to eliminate small claims. Insurance companies differ in how they respond to claims under unit owners coverage arising from these higher master policy deductibles. Standard unit owners forms provide a supplemental coverage for loss assessments by condominium associations, but this coverage applies only to assessments for losses to common property. Some companies take the position that the coverage provided in a unit owners policy applies to any amount not recovered from other insurance for eligible property. To illustrate, suppose that a unit suffers a $15,000 loss to individually owned building property that is insured by a master policy with a $2 million limit and a $5,000 deductible. Also, suppose that the owner-occupant of the damaged unit has a standard unit owners policy with a $25,000 building property limit and a $250 deductible. Some owners insurance carriers would pay the amount assessed against the homeowner, up to $4,750, the amount above the unit owners policy deductible and below the master policy deductible. Under this line of reasoning, the additional $10,000 loss would be recovered from the master policy ($15,000 loss minus the $5,000 deductible). Other companies take a different approach, that the coverage provided by a unit owner’s policy only provides coverage above the terms, conditions and limits of the master policy. These companies object when an HOA selects a higher deductible and shuffles the added exposure to the unit owners. Because the master policy insurance deductible issue can have significant financial impact on both the homeowner association and members and there have been a number of significant policy changes in recent years, the board is encouraged to review this issue with the HOA’s insurance agent to determine a strategy which will clearly define the member insurance obligations as they relate to the HOA’s insurance. Those strategies might include: 1. Maintenance & Insurance Areas of
Responsibility. Breaks down responsibilities by specific components. Excepts from articles by Joseph S. Harrington of American Association of Insurance Services and Orten & Hindman BACK
ABCs of D&O Some examples of claims under D&O:
As there are no standard D&O policies, each policy and proposal must be evaluated on its own merits. Here are some issues that should be considered: Claims-Made Policy. Most liability insurance policies pay for events that occur during the policy period. For example, an auto insurance policy will pay for an accident that occurs while the policy is in force. D&O policies, however, pay for lawsuits filed during the policy period. The wrongful act itself could have occurred years before. Claims-made policies respond only when a suit is filed or when a strong threat of a suit exists. The downside of a claims-made policy comes if the policy is canceled. Example: A D&O policy is put in force January 1, 2000, and is renewed in 2001 and 2002. In 2003, however, the board decides to terminate the coverage. Six months later, a letter from an attorney arrives announcing a lawsuit for discrimination in hiring that occurred in 2002. No coverage. Although the policy was in force at the time of the alleged discrimination, the policy was not in force when the suit was filed. The solution to this problem is the extended reporting period found in most policies (see the next paragraph). Extended Reporting Period. Claims-made policies only provide protection for lawsuits and actions brought during the policy period. In the event that coverage is replaced or cancelled, protection may be desired for events that took place prior to expiration/cancellation but for which no claim has yet been filed. This coverage is called an "extended reporting period" (ERP). Here are some issues to consider:
Policy Limit. What amount of coverage is provided by your policy? What's the total amount of protection offered for all claims during the covered time frame? Multiple claims can, in effect, use up the limit of coverage. Defense Within Limit. Most D&O policies include the cost of defending a claim (attorneys' fees, etc.) within the policy limit of liability. That means that the amount of coverage purchased must be enough to cover the awards and the defense costs of all claims. This can be an issue when considering the amount of coverage you buy. Failure to Provide Insurance Exclusion. This exclusion removes coverage for suits by alleging that the insured did not buy the right insurance or enough insurance. If you see this exclusion in your policy, ask that it be removed. Retroactive Date. Claims-made policies respond to claims brought during the policy period. Many policies include a date after which a claim must occur in order for the policy to respond—a retroactive date. Employment-Related Practices Issue. Most nonprofit D&O policies include coverage for employment-related practices—wrongful discharge, harassment, discrimination, etc. Check the policy's definition of "wrongful employment act." Does it include only certain acts, such as sexual harassment? Or is the coverage broad, including workplace harassment, for example? Are discrimination suits brought by third parties covered? Including employment practices claims in your organization's D&O policy could affect the limit of liability available for other claims. D&O Insurance vs. Personal Liability Insurance. Personal liability insurance (either homeowner's or umbrella) covers bodily injury and property damage for which the insured (you) are liable. Volunteer activities are covered, but only for bodily injury and property damage. D&O insurance covers damage resulting from wrong decisions but not bodily injury or property damage. Don't depend on personal liability to protect you from your actions on a board. And don't depend on D&O insurance to protect you from liability for bodily injury and property damage. Volunteer Immunity Laws. Volunteer service is no defense for improper acts. Many states, however, provide immunity from prosecution if the actions arise out of voluntary service in a nonprofit. State law cannot provide immunity from federal statues such as ERISA (Employment Retirement Income Security Act), ADA (Americans with Disabilities Act) or civil rights laws. By Scott Simmonds, CPCU, Insurance Consultants of Maine, Inc. BACK
Top 10 D&O Claims
If you serve on an HOA board, you are charged with handling business in a business like way. Treat these Top 10 seriously and you’ll fulfill the mandate. By Joel Meskin McGowan & Company, Inc. BACK
Who Pays for Damage? First, determine the actual cause of the loss and whether any of the involved parties were negligent in their maintenance responsibilities (like, left the water running). Then, review the governing documents to determine what guidance there may be for maintenance and repair. Pay special attention to the definitions of: unit, common element, limited common element, maintenance responsibilities of owners and the homeowner association, insurance responsibilities of owners and the homeowner association and enforcement procedures. These provisions often differ from HOA to HOA. Generally, owners are responsible for maintaining anything they own or that lies within the unit boundaries, and the HOA is responsible for maintaining the common elements and limited common elements. However, limited common elements are usually allocated to the exclusive use of a unit owner and the unit owner may have the maintenance responsibility for repairs. An important principle to keep in mind is that the obligation to maintain a particular component does not necessarily mean that there is an obligation to repair another damage to another unit if that component fails. Say that the water heater in Unit A fails and damages Unit B. According to most governing documents, Unit A bears the expense for repairing the water heater and any damage to Unit A. There is no obligation for Unit A to pay for damage to Unit B unless the owner of Unit A was negligent in some way. For example, if Unit A owner knew the water heater was leaking slowly and steadily and let it continue to leak for long enough to damage Unit B, Unit A owner would be negligent. On the other hand, if the water heater tank ruptured spontaneously and flooded Unit B, it would not be negligence. Barring negligence, each unit owner repairs his own unit. The same principle applies if there is a leaking roof which is maintained by the HOA. Roofs leak from time to time. If a unit owner does not inform the HOA when a leak occurs, how does the HOA know to fix it? It’s like the old saying, "If a dog barks in the woods and there is no one there to hear him, is he still a bad dog?" Now, if the HOA is informed of the leak, does nothing to stop it and the unit is damaged, that is negligence and the HOA should pay for the unit repairs. Some would argue that since the HOA’s insurance is paid for by the members, unit damage should be paid for by the HOA in every case. Unfortunately, any HOA that does not carefully control the type and frequency of claims made will find itself without insurance or paying enormous premiums. This is why it is critically important for the board to establish a clear policy on maintenance and insurance responsibility which will safeguard the HOA’s insurability. This policy should identify all major building components and assign responsibility either to Owner or HOA that is consistent with the governing documents. Unit insurance agents should be provided this information so they know what their insured is responsible for. This is all about spreading risk around and saving the HOA insurance policy for the Big Claims as much as possible. There is a sample Areas of Maintenance & Insurance Responsibilities policy available to Gold Subscribers BACK
Directors & Officers
Insurance Checklist Not all Directors & Officers insurance is created equal. There are no "standard" D&O policies. As a result, doing apples to apples comparison can be tough. But some basics: Avoid D&O coverage as an add-on or endorsement to a package policy which, generally speaking, is inadequate. Many add-ons and endorsements exclude defense coverage for non-monetary claims. Considering that 75% of HOA claims involve suits for non-monetary damages, this could be a big exposure that comes back to haunt you. Instead, look for a stand-alone policy which provides better coverage for a minimal, if any, cost difference. Work with an underwriter who knows real estate and has experience writing HOAs. The Most Frequent D&O Claims 1. Breach of Fiduciary Duty (examples):
2. Breach of By-Laws (examples):
3. Wrongful Employment Practices (examples):
How Claims Work. Directors & Officers insurance is a "claims-made" policy. If the board suspects that a situation could lead to a claim, it should immediately notify the insurance agent. The report of a potential claim will not impact the HOA's insurance rates. Choosing Policy Limits. Limits vary from policy to policy - ranging from $1 million to $5 million. These limits may be extended by most Commercial Umbrella policies. Look for a policy that does not diminish the limit of liability for defense. While the "right" limits depend on your situation, it is rare for any D&O claim, defense and/or indemnity to break the $1 million mark. Directors & Officers Liability Insurance Checklist. Make sure it provides coverage for:
Insurance is Only the Beginning. Finding the right Directors & Officers Liability Insurance is critical, however, there is a lot you can do in terms of risk management and loss control to limit the odds of being involved in a suit such as:
Directors & Officers insurance is a fundamental coverage that no HOA should be without. When you shop for it, use this checklist to ensure you get the kind you need. BACK |
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