Insurance Articles

D&O the Right Thing
Homeowner associations rely on members to volunteer time, talent and energy. They do this for no pay however there is still legal exposure for mistakes or errors made. Directors & Officers Liability insurance is designed to protect and defend HOA volunteers and is often included in HOA insurance packages. It also can be purchased separately. The following Q&A discusses various aspects of D&O:

1) Does our current D&O insurance cover our needs? If your homeowner association’s coverage is a part of a "package", you may not have the best available coverage. Although national insurance carriers offer good property and general liability coverage, their D&O coverage is typically inadequate. Specialty D&O carriers can offer your insurance significantly better coverage at a reasonable cost. Check and compare.

2) What key D&O coverages should HOAs have? Coverage should extend beyond the usual named "insureds" (current board and committee members). Coverage should include: 1) past directors and officers; 2) the HOA itself; 3) the managing agent and management company; and 4) developer-appointed board members. An adequate D&O policy includes:

Legal defense
Indemnity coverage.
Defines "loss" to include the costs, including attorney fees, incurred in defending a lawsuit.
Non-monetary claims such as injunctive relief, defense costs for breach of contract, discrimination and wrongful employment practices claims, and failure to maintain correct or sufficient insurance.

3) How can we determine if D&O insurance is adequate? Consult with an insurance agent with D&O policy experience. They can review your current policy and make recommendations.

Protecting the homeowner association against lawsuits is extremely important. It’s a good policy to review your insurance coverages every year and this one is no exception. Don’t wait to be served with a subpoena. D&O the right thing. BACK

Ordinance or Law Coverage
Homeowner associations (especially condominiums) are required to properly insure the common elements which may include structures. As buildings age, the unavoidable happens: they fall out of compliance with building codes. Building code changes periodically to improve fire and life safety, structural integrity standards and energy efficiency. As new building materials, equipment, engineering and designs are developed that meet that charge, code is revised. One example is the current standard of six inch versus four inch exterior walls to improve insulation performance. There are many other examples. The older the structure is, the more out of code it becomes.

While the building code generally doesn’t require older buildings to meet current code, if an out-of-code structure experiences fire, flood, wind or earthquake that does substantial damage, the code issue is likely to raise its ugly head. This means that even though the original structure wasn’t required to comply, the rebuilt structure will be, or at least the part of it that requires reconstruction. While this is logical (why rebuild to an outdated standard?), basic fire and hazard insurance only pays for rebuilding what is there, not what could be. So, if you insure four inch walls, the insurance will only pay the cost to rebuild four inch walls, not six inch walls. You pay the difference.

Fortunately, the insurance industry provides supplemental insurance coverage for older buildings called "Ordinance or Law Coverage" which is specifically designed to pay the increased cost of reconstruction. However, this coverage must be requested. It doesn’t automatically kick in simply because of building age.

If your buildings are ten years old or older, contact your agent to discuss the merits and costs of this coverage. It is usually very reasonably priced. BACK

D&O Insurance
Directors and Officers, or "D&O," liability insurance is designed to provide coverage for losses arising out of the management of the homeowner association. D&O typically provides coverage for claims made during the policy period for actual or alleged wrongful acts by an HOA’s directors and officers. Claims are usually limited to judicial, administrative, or arbitration proceedings, or demands for money damages, for which the directors and officers can be found liable.

D&O policies typically include two parts:

1. Liability coverage provides direct coverage to the directors, officers and any other designated individuals for wrongful acts that give rise to a claim for which they are legally obligated to pay. The term "wrongful act" is often defined to include any acts, errors, or omissions by a director or officer.

2. Indemnification coverage insures the corporation or HOA’s obligation to indemnify its directors and officers.

Difference between D&O and General Liability Insurance Coverage. D&O policies are "claims-made" policies, meaning the claim must be made during the policy period or within a limited time (usually 30 to 60 days) thereafter. In contrast, General Liability policies enable an insured to report a claim long after the event as long as it took place during the policy period.

Courts have recognized that insurance underwriters price D&O policies to limit losses to a finite period. They are not obligated to afford more expansive coverage than intended. However, in an effort to reduce the burden on insureds of detecting and reporting losses, D&O policies allow an insured to report notice of a potential or threatened claim during the policy period.

Duty to Defend vs. Indemnify. Perhaps the most misunderstood aspect of a D&O policy is the absence of a duty to defend insureds that is present in most General Liability policies. Most D&O policies expressly state that the insurer does not have a duty to defend the insured. D&O policies are "indemnity" policies that indemnify an insured for its losses and reasonable and necessary legal fees incurred in defense of a covered claim. In other words, D&O policies will reimburse, or in some instances, advance an insured’s defense costs, subject to the insurer’s prior consent.

Common D&O Policy Exclusions. D&O policies contain exclusions that limit the scope of coverage. The common exclusions include those for dishonesty, personal profit, past acts and prior/pending litigation.

Insurance can be a mystifying and confusing product made more complicated by lack of standardization in the industry. Trying to compare apples to oranges is a waste of time. Contact your insurance agent and include him at a board meeting to explain the coverages and significant exclusions. BACK

Insurance Deductible Alert
In a homeowner association environment, there are two major types of insurance policies: the insurance carried by the HOA and insurance carried by the individual owners. In condominiums, the HOA’s insurance generally extends to the entire property, including the units themselves. However, to protect the HOA’s insurability, unit owners are required to carry a Condominium Owners policy which pays for insurable events within the unit. This spreads the risk so that the HOA only has to insure major events that affect multiple units (wind, fire, etc.).

Due to rising insurance costs in recent years, many HOAs have opted for much higher deductibles. Many $1000 deductibles are now $10,000 and even higher. With large deductibles comes the higher likelihood there may be a special assessment if there is an HOA claim for which there is no insurance deductible reserve.

If your HOA (especially a condominium) now has a much higher deductible, it’s important that the members be informed so they can review their unit owners policy with their agent and be prepared for the consequences of a large deductible.

Here’s a sample letter you can adapt for your HOA’s use:

Dear Member,
Due to rising insurance cost, our homeowner associations’ insurance policy now has a $_______ deductible for damage to any part of the building including the units. This potentially exposes our members to an insurance claim special assessment to pay for this deductible. With this in mind, you should contact your personal insurance agent to ensure that your Unit Owners policy is tailored properly.

Many insurance companies will allow an individual unit owner to submit the master policy deductible under a Unit Owners policy and only be responsible for the smaller deductible that is carried on the individual Unit Owners policy. There are two ways in which the deductible may be assessed:

To individual unit owners. Generally the "Coverage A – Building" area of the policy extends coverage.
To all unit owners. Generally, the "Loss Assessment" area of the policy generally extends coverage. It is very important to confirm that loss assessments can be applied to the building deductible. Some insurance companies only extend this coverage to liability losses.

A unit owner should also:
1. Make sure there are sufficient dollar amounts of coverage in their policy to meet the HOA’s deductible in both areas of their unit owners’ policy.
2. Make sure they have "special peril" building coverage rather than "named peril" building coverage.
3. Have their policy endorsed for earthquake if they have an earthquake concern. Be aware there may be serious limitations for earthquake under the loss assessments coverage.

Yours Truly,
Charlie Chairman
Nottacare Condominium

By Rich Ranf of State Farm Insurance. BACK

Insurance Bid Steps
Purchasing homeowner association insurance is one of the most important buying decisions the board will make. The decision addresses risk management and must meet or exceed any insurance requirements mandated by the state and the HOA’s governing documents.

Step #1 Start Early. Begin the process at least 90 to 120 days prior to the renewal date by ordering updated loss histories from all insurance carriers who have provided coverage for the Association for the past three to five years. While requesting the loss history, don’t forget to confirm with the current agent/broker his opinion as to whether the current insurance carrier will be offering a renewal.

Step #2 Check Loss History Accuracy. Losses can be miscoded (like "Mold Claim", when it wasn’t), or a loss that should have been attributed to a different insured or a loss that continues to appear on the loss history even though the insurance carrier successfully subrogated against the negligent party (got repaid). It’s also possible your carrier’s version of your loss history doesn’t really reflect today’s condition of the property. If your HOA has taken steps to improve the property since the losses occurred, write a narrative about those steps taken and attach it to the loss history. If a particular problem has since been corrected, make sure the carrier knows it.

Step #3 Assemble a Complete Bid Package. Preparing a complete bid specification will make the evaluation process easier. The bid package should include:

1) Brief description of the property including the number of units, year built, type of construction, overview of amenities (pools, spas, etc.) and any other structural improvements the HOA may have an insurable interest in;
2) Copies of the governing documents;
3) Copy of the site plan;
4) Current three year loss history on the prior carrier’s letterhead;
5) Copies of the declarations page from the current year;
6) Copies of the HOA’s most current financial statement and budget; and
7) Current appraisal (if available).

Steps #4 Assign the Markets. An insurance carrier will only release a premium quote to one agent. If more than one agent wants to use the same insurance carrier, you’ll have to assign which person will access that market on your behalf.

Step #5 Evaluate the Insurers. While there are five well-known insurance rating organizations, most HOAs rely on AM Best. The letter grade ratings (A through F) and financial size categories (Roman numeral I through XV) can give you a quick barometer of a carrier’s health. In addition to the financial ratings, the board will want to consider the carrier’s experience with HOAs. A carrier who is new to the homeowner association market is probably not a good fit.

STEP #6 Is the Agent Qualified? Consider years of experience insuring HOAs and involvement in industry trade organizations like California Association of Community Managers (CACM), Oregon Washington Community Association Managers (OWCAM) and Community Associations Institute (CAI). The agent/broker professional designations should include CPCU (Chartered Property and Casualty Underwriter), ARM (Associate in Risk Management), CIC. (Certified Insurance Counselor), and CIRMS (Community Insurance and Risk Management Specialist).

STEP #7 Use a Spreadsheet. Even the most experience risk manager will create a "line by line" comparison of the coverages and benefits being offered by the various companies offering a proposal. A visual representation of this type will easily illustrate the merits or deficiencies provided by one proposal over another and will tell you if a certain proposal is competitively priced only because the agent/broker has omitted an important coverage.

STEP #8 Let Price Be the Last Consideration. Price is important but don’t fall into the trap of going to the "bottom line" first. If you do, you may forget the number one goal of buying insurance: protecting the HOA’s assets. Be certain that you’re getting what you need before signing the check.

Excerpts from an article by Timothy Cline, CIRMS BACK

Insurance Victimization
An oft repeated scenario in common wall communities is water damage which originates from a neighboring unit. Whether a broken pipe or washing machine hose, surf’s up! and usually between midnight and 4 am (disasters are funny that way).

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 "S**t Happens". What now?

Of the two entities that victims would like to blame, the neighbor or the HOA, 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 HOA’s insurance carrier. They’ll pay for the damage to both". Technically speaking correct, but practically speaking, wrong advice.

Like the neighbor, the HOA usually isn’t negligent in causing the damage. Things happen. And unless the result is catastrophic, involving many units and tens or hundreds of thousands of dollars of damage, the HOA’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 and rates assume that it will rarely be needed. To keep premiums even lower, higher deductibles like $2500-10,000 are opted for. This encourages the board not to file small claims which may jeopardize the HOA’s 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 HOA 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 HOA 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. A sample is available to Gold Subscribers of www.Regenesis.net in "Policy Samples" section. Once adopted, the board should be careful to follow it. Fixing unit damage that the HOA is not responsible to fix will 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

Fidelity Insurance
Fidelity insurance protects a homeowner association in the event someone associated with the HOA takes the HOA’s money and runs. Typically, fidelity insurance will provide coverage in cases of employee theft, theft of money and securities while on premises or in transit, forgery, fund transfer fraud, computer fraud, money order and counterfeit currency fraud, credit card fraud, as well as coverage for the cost incurred to investigate a loss.

Coverage for these types of crimes comes in two general forms, a fidelity bond or a fidelity policy. A bond is a contract between the bonding company and two other parties, such as an HOA and a manager or director. In a bond scenario, the bonding company will guarantee the honesty of the individual and if there is a loss, the bonding company will reimburse the HOA and then pursue the criminal for recovery of the stolen funds. The more popular and generally more cost effective coverage is a fidelity policy. A fidelity policy is between the insurance provider and the HOA. If the HOA experiences a loss, it will file a claim with the insurer. The insurer will then investigate and provide coverage for the loss subject to the specific terms of the policy.

Obtaining fidelity insurance has always been a wise business decision but it has recently been made mandatory for HOAs that wish to receive FHA certification. This requirement mandates coverage for all HOA directors, employees, and all other individuals who handle the funds of the HOA in the amount of three months of assessments plus everything in the reserve account. If the HOA employs a management company, the HOA is required to ensure that the management company also has its own fidelity insurance that provides coverage for all employees, officers, and agents who are responsible for management of the funds of the HOA.

Fidelity coverage maintained by a management company is a different type of coverage and will not suffice to provide coverage to an HOA in the event of a loss because the management company’s insurance protects the management company from its losses and not the HOA’s losses.

One of the differences between fidelity insurance held by the HOA and fidelity insurance held by the management company is who is able to file a claim with the insurance carrier. For example, if a management company employs a community manager who steals $100,000 from a reserve account belonging to an HOA, only the management company can file a claim with its insurance carrier on behalf of the loss suffered by the management company. The HOA has no direct claim on the proceeds of the management company’s fidelity insurance. If the management company did not restore the money to the HOA’s reserve account for some reason, the HOA would need to file a lawsuit to recover the stolen funds. Any legal fees incurred because of the filing of the lawsuit would have to be paid by the HOA until a settlement was reached or judgment obtained. If the HOA had its own fidelity coverage, however, it could immediately file its own claim with its own insurance carrier, who would pay the claim directly to the HOA (but who would turn around and go after the management company’s insurance carrier for repayment). The HOA would not have to spend any of its hard-earned money on legal fees.

Therefore, it is in the best interests for HOAs to obtain fidelity insurance, regardless of any coverage that may be offered by their management companies.

By Molly Lucas BACK

Proaction in Action
One of the biggest traps for common wall homeowner associations like condominiums is that their insurance coverage often permits payment of claims that rightly belong to homeowners. This is due to the broad or "blanket" coverage nature of the policy. In effect, the insurance carrier looks to the board to determine whether it should pay a claim or not. If given no direction, the carrier usually errs on the side of the homeowner.

The problem is that if the board allows all insurance claims regardless of their source or cause, soon the premium would skyrocket or worse, the policy would be canceled. To protect the HOA insurability, the board should develop and enact a policy concerning insurance claims and put the HOA’s insurance carrier on notice. Each owner would then be responsible for notifying his own insurance carrier of the HOA’s policy.

Barring conflicting insurance requirements in the governing documents or state statute, here are reasonable guidelines for the HOA to follow in developing a policy for handling insurance claims:

1. The HOA is responsible for repairing only those things for which it has maintenance responsibility.

2. If the HOA is negligent in performing maintenance that results in unit damage, like failing to repair a leaking roof in a timely manner when notified, the HOA is responsible to repair the unit damage.

3. Each unit owner is responsible for insuring his own unit and personal property. For example: If a washer hose breaks in Unit A on the 3rd floor, damaging that unit and its two downstairs neighbors, each unit owner would be responsible for insuring damage suffered within his unit. The HOA’s insurance would not be involved.

4. If HOA common area property is damaged by an event that originates within a unit as described in Item 3, the HOA may hold the unit owner liable for the damage and seek recovery under the liability portion of the unit owner’s insurance. This is based on the principle that the HOA has the authority to define who is responsible for repairing common area damage according to the source of the damage. If the damage originates from an HOA maintained source, the HOA is responsible. If it originates from an owner maintained source, the owner is responsible. Owners do not have the same policy making authority as the HOA and can only make claim against a neighbor's policy if negligence can be proven.

5. To help clarify these principles, the board should adopt a Maintenance and Insurance Areas of Responsibility Policy. This policy eliminates gray areas in maintenance and insurance. It provides a quick reference for the board, property manager, owners and insurance carriers. It also expedites maintenance requests and insurance claims. A sample Insurance & Maintenance Areas of Responsibilities Policy is available to Gold Subscribers of www.Regenesis.net

Since insurance is such an important element of the HOA’s well being, it behooves the board to formalize a comprehensive policy. Why wait for an accident to happen? An HOA policy on insurance claims is proaction in action. BACK

No "Grills" Allowed!
Now that summer is here and grilling season is in full swing many people who live in condominium or townhome associations are finding out that their new grill is banned from use on their beautiful wooden deck. This is the time of year we often hear the statement "WHAT? It's my home! How can anyone tell me what I can or cannot do on my own deck?"

Many homeowner associations have rules that do not allow any kind of flame on or near combustible buildings or decks and if the associations don't, insurance companies do. This can be very frustrating for owners who anxiously wait months for barbecue season to arrive. These folks have often spent a great deal of money on beautiful state-of-the-art grills with the latest safety standards only to find out that deck use is prohibited. Resentment can develop on all sides from the person who wants to use their grill to the property manager or board who has to tell them they cannot as insurance coverage may be in jeopardy. The best approach ensures everyone understands the reasons behind the rules and the alternatives that may be available.

Statistics show that U.S. fire departments respond to an average of 10,000 residential fires from grills per year. These fires include an average of 15 deaths and 120 civilian injuries with over $100 million in direct property damage. These statistics are not just related to charcoal grills. There is fire danger anytime there is a flame on or around combustible materials. Living in a community association brings multitudes of benefits as well as responsibilities to those who live in them. One person's actions can affect the entire community, so rules must be made to keep everyone safe and the property protected.

Living in harmony in a multi-family home means cooperation and consideration of all which includes abiding by rules. While wafting fumes of a meticulously prepared and marinated meal is one person's delight, it may be another's annoyance. A board of directors is tasked with making sure that rules are reasonable and fair for all. Certainly this isn't an easy task when it comes to managing people's investments and living conditions.

Life safety and preservation of property must be the priority when a board develops and enforces rules. Education with regard to the development of those rules helps avoid feelings of persecution and discrimination. One suggestion is to put together a committee who want to find a viable solution as to where and how grilling can be allowed. Perhaps a safe common area exists where grills can be used on an approved basis. The association might purchase a "community" grill that all can use and maintain as another option. Seeking owner input and finding innovative solutions leads to a better sense of understanding and a stronger community spirit all around.

Grilling can be a fun and delicious way to cook when school is out, the days are long and everyone is relaxing on the deck with a cold drink. The combination of wood and fire can be a great thing when sitting around a cozy fire or cooking with family or friends but a very dangerous one when done within 10 feet of a wood building or on a wood deck.

By Deb Schumacher - Fournier Group BACK

Whole Lotta Shakin’
One kind of insurance that homeowner associations, particularly common wall communities, located in high risk zones should consider is earthquake. But not all earthquake insurance is created equal. Many homeowner association (HOA) boards believe it covers all damage when the "big one" happens. However, building foundations, walkways, pools, carports, garages, fences, underground pipes, walls and paving are examples of components that may not be covered.

Earthquake Sprinkler Leakage (EQSL) is a coverage within earthquake policies that is extremely important if the buildings have fire sprinklers. Without EQSL, if the sprinklers break due to an earthquake and cause water damage to unit interiors, the damage is not be covered under the earthquake policy.

What about other earthquake damage to unit interiors? Earthquake policies often follow governing documents. If the governing documents are vague, unit interior damage might not be covered. If the HOA has a bare walls policy, the earthquake policy would likely cover only bare walls only as well. A specific coverage amount can be included, however, the board needs to make sure this is done.

Earthquake deductibles are based on Total Insurable Value (TIV), not the amount of coverage or damage. This means, for example, an HOA with buildings valued at $10 million with a 5% deductible would have a maximum deductible of $500,000.

Does the earthquake policy have a Statement of Value clause? This clause limits the coverage to a per building value (like $5 million each). Removing this clause allows blanket coverage and extra coverage to a building that ends up costing more to replace up to the total coverage amount listed on the policy. This is only beneficial for HOAs with multiple buildings.

What is the definition of an "occurrence" under an earthquake policy? Some policies have a 72 hour waiting period while others are 168 hours. This time frame could be the difference between one or multiple deductibles. Earthquakes tend to have aftershocks and having a longer occurrence period is beneficial.

The bottom line is that homeowner association boards should understand what is covered and not covered in an earthquake policy. Not all policies are the same. Earthquake coverage tends to be a costly expense so know what you're buying before there is a whole lotta shakin' going on.

By Sara Eanni - American Benefits Insurance www.abipdx.com BACK