Insurance Articles
Articles may be reprinted in their entirety but must include:
"Used with permission from Regenesis.net"

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

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

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

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

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 3A and its two downstairs neighbors, each unit owner would be responsible for insuring damage suffered within his unit. The association’s insurance would not be involved.

4. If association common area property is damaged by an event that originates within a unit [like described in Item 3.], the association 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 association 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 association maintained source, the association 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 association 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.

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

Insurance: How Much is Enough?
If you own a condominium, adequate insurance for your dwelling is every bit as important as it is for other kinds of homeowners. Determining exactly how much insurance you need, however, can be tricky.

It is a common misconception by condominium owners that association insurance covers everything. Many wait until there is a major catastrophe to find out it doesn’t. One of the first things to do is to review your association’s governing documents to determine what you are responsible for insuring. Believe it or not, this varies greatly from association to association.

The governing documents should spell out who is responsible for insuring what, like common (all owners use) elements such as sidewalks, swimming pools, landscaping and limited (specific owner use) common areas like garages, decks, and so on. It should also state whether the association or owner is responsible for insuring building fixtures and appliances inside your unit.

Many association bylaws call for assessing each owner a proportionate share of major property and liability losses, also called a "loss assessment". For example, if a major fire wreaks havoc on your buildings or a repairman sues the association after falling from a ladder, you may be asked to pay a share of the losses not covered by insurance. In most locations, Unit Owner condominium policies provide an automatic $1000 of coverage for loss assessment for covered perils. But you may want to increase this amount with a loss assessment coverage endorsement if the deductible on the association’s master policy is higher than normal.

Not all loss assessments are covered by insurance. For example, if hurricane winds damaged the pool house, a resulting loss assessment would be covered by your insurance up to your limits for loss assessment. But if the association decides to remodel the pool house and owners are assessed, this would not be covered by insurance. Loss assessment coverage does not insure for poor planning.

Unit Owners insurance also provides for personal property coverage. You determine how much insurance you need. Experts recommend getting a replacement cost coverage endorsement. Without it, covered losses to your personal property will be paid according to their market value at the time of loss adjusted by depreciation. Replacement cost coverage costs a little more but if you have a covered loss, you will be able to replace most items with new ones with no deduction for depreciation. The policy deductible does apply and there are coverage limits on jewelry, furs, silverware and firearms.

How much insurance is enough? First make sure you have the right kinds of insurance to protect you where the association’s policy does not. Setting levels is the second step. Your agent can assist you with both steps. Don’t forget to review your policy periodically especially if property values have changed significantly. BACK

Managing Risky Business
I recently received a call from a community association about their recreational facility. Our conversation formed the basis of a case study on Board "risk management" that is applicable to other associations.

Here’s the scenario: This upscale community maintains a clubhouse and multi-pool facility. In addition to social events, the members can take advantage of aquatic classes of various kinds. While access to the pool area is restricted and controlled, there has been a growing concern by the Board that the association may not be providing adequate pool safety by way of lifeguards. On the other hand, the payroll costs for lifeguards is significant. What’s the proper/legal/moral/cost effective thing to do? Hmmm, a quandary on the horns of a dilemma.....

All Boards will face difficult decisions at some point. The most important part of a decision is not the outcome as much as how it was arrived at. For insignificant points of policy or budget, the process may be as simple as a motion carried by the majority. For other issues, such as our case study, it behooves the Board to break it down into its component parts. As the saying goes, "If you truly want to understand something, just try to change it."

The lifeguard issue can take on other forms, like security guards and parking patrols.. The Board needs good information to come to a reasonable decision. So what are the major points to consider? Some are no nonsense, strictly business while others are emotional and morality based. Let’s look at a few:

Governing Documents Before you go too far down the road of radical change, always check your governing documents and the state statutes to see what the association is obligated to do. If you are still unclear, consult with a knowledgeable attorney. If the proposed new service is not required by documents or statute or ordinance, the Board is blazing new trails. This isn’t necessarily wrong but the Board needs to examine the issue more closely than otherwise before coming to a decision.

Insurance Risk Insurance is a way of life in America and no community association should leave home without it. Take matters like this one to your agent and get a written reply as to what the current policy will [or won’t] protect against before and after the proposed change. Either the association is on solid ground insurance-wise or it may need additional coverage.

Cost The cost of additional services, like lifeguards, is significant. When spread out over hundreds of homeowners, however, the sum may not be unmanageable for each owner. Here, the economic status of the homeowners plays a big part. Is your community composed mostly of fixed income retirees, working professionals or young struggling families? Ability of the homeowners to pay should be a big part of the decision.

Benefit Who will benefit from the service? The majority, most or a few? Governments provide services for minority interests that are paid for by the majority under the theory that the more affluent have a social responsibility to care for the less fortunate. In community associations, the majority rules. This may mean that the minority’s needs go unmet.

Ethics It gets sticky trying to argue safety issues. No one wants anyone to get hurt and a caring Board wants to do the "right thing". This is certainly understandable. The question seems better asked, "Who’s responsible for providing the protection?" Historically, each citizen had the primary responsibility to care for those things or people that were held dear. Should the association step in and be more effective than an individual with a vested interest? Talk this one through before moving to other considerations.

Future Obligations Entering into a new or expanded service sets the stage for many years to come. Something that didn’t formally exist in short order will become an "amenity", an expectation. Amenities are difficult to undo even when their need or usefulness has long since passed. The Board needs to carefully consider future financial ramifications of decisions made today.

Legal On the one hand, the association needs to provide "reasonable" protections for its owners. On the other hand, by providing lifeguards, guard services and the like, some courts have held that owners, guests and even trespassers are relieved of personal responsibility when injury is suffered. Questions come up like: If it is valid for the association to provide lifeguards during normal pool hours, is it also reasonable for the association to have to provide a guard service in off hours to keep people from jumping the pool fence, swimming and drowning? These things have a way of growing beyond their original intended scope.

Homeowner Involvement For sweeping issues or increases in cost, it is reasonable that the Board inform and give a voice to the homeowners. While the governing documents may not require it, it makes practical sense. Faced with the conflicting aspects of our case study, a homeowner meeting specifically called to discuss the issue is appropriate. At that meeting, all arguments should be presented and homeowner opinion solicited. If the proposal is to fund a new service and the majority of owners disagree, the Board can either agree, go against the tide or step down and be replaced. Whatever the case, the record will show that the Board did its homework by soliciting professional and homeowner input. In short, the Board used "due diligence" in coming to its decision.

Conclusion Are there risky issues to deal with in your community? Remember that you are not alone in sorting them out. The effective Board is a team effort where the sum is greater than its parts. By taking advantage of collective experience, risky business can become business as usual. BACK

Insurance Gapposis
One of the all too frequent occurrences in condominium associations occurs when a gap exists between insurance carried by the association and insurance carried by each homeowner. This is not a small problem. According to Murphy’s Law: If there is a loophole, insurance adjusters will find it and refuse to pay a claim on it. In condominium associations where the association maintains and insures the common area and building exteriors, owners are expected to maintain and insure from the unfinished interior surfaces in plus all personal property . When different insurance carriers define coverages differently, a gap in coverage results.

One way to eliminate the possibility of insurance gaps is to have both the association and all owners insured by the same carrier. It makes sense to go one step further and all use the same agent. When the same carrier is used, where one policy stops, the other begins. No gaps.

Another way of solving the problem is for the Board to adopt a Maintenance and Insurance Areas of Responsibility List. This list can get rather lengthy because it identifies specific building components and subcomponents [such as Lights-Parking, Lights-Building, Lights-Entry, etc.] and either assigns responsibility to either the association or the owner. This list should be consistent with maintenance responsibilities found in the governing documents. Once the List is complete and approved by the Board, a copy should be provided to each owner with instructions that a copy be sent to the owner’s insurance carrier. All agents are then constructively put on notice as to what level of coverage is expected by the insured. The written notice should request any exceptions to the coverage to make doubly sure there are no gaps. If there are gaps, there will be an opportunity to close them.

Insurance claim disputes are among the most frequent found in community associations. Many of them could be avoided by closing the gap between coverages and clarifying the maintenance and insurance expectations of the parties. If your community has not gone through this exercise, now is a good time to get started. And don’t delay. There’s too much at stake. And don’t forget to put it on your annual calendar to remind new owners. BACK

Insurance: Who is responsible?
A resident heard some noise sounding like water gushing outside the bathroom window of his condo unit, but when he checked outside, everything appeared normal. The incident was forgotten, but after two weeks the same noise was heard again. The resident immediately checked outside and discovered a damaged sprinkler spraying on the building. He surmised that it was this broken sprinkler that had been causing water damage to the inside of the unit he rented. The landscaper is responsible to inspect the sprinklers. Is the association responsible for the damages to the interior of the unit? How and by whom should this matter be pursued after the condo owner has made a cost evaluation?"

The relationship between a community association and its members is governed for the most part by statute and by the CC&Rs (Codes, Covenants & Restrictions). Under the law, the association must maintain and repair the common areas. However, it would be extremely unusual for the CC&Rs to explicitly require the association to reimburse a condominium owner for property damages. Some courts have treated CC&Rs as having the nature of a contract between the association and its members. Some CC&Rs even have clauses that protect the association from paying for property damage caused by water intrusion.

In the absence of negligence on the part of the association, the courts have stated that an association may shift the burden of loss to the homeowner. Even if the CC&Rs do not have such a release clause, it would be very difficult to interpret most CC&Rs to require reimbursement to condominium owners under these circumstances. The key question is whether a reasonable inspection would have revealed the broken sprinkler. If a reasonable inspection would not have revealed the problem, the association would not be liable. If a reasonable inspection would have revealed the broken sprinkler head and, therefore, prevented the damages, the association could be liable but could seek reimbursement from the landscaping company.

The resident might also have some responsibility in this matter. He should have reported the "gushing sound" to the association. With this information, the association might have been able to initiate an investigation which might have prevented the water intrusion.

For events where the association is not clearly negligent, it is common for the damage claim to fall on the homeowners insurance. Claims against the association should be avoided unless there is clear liability for some good reasons: The association insurance policy usually has a large deductible to consider plus exposing the association insurance to multiple claims will adversely impact the premium or insurability of the association.  

Excerpts for this article were written by Carl H. Starrett II, Esq. BACK

Earthquake Insurance Q & A
What kind of claims does earthquake insurance cover? This endorsement covers earthquake and aftershocks plus volcanic eruptions, explosions, lava and ash within a 72 hour period.

What is the deductible and how does it apply? The typical deductible is 10% of the coverage amount which is applied in two ways: One is to apply the 10% to the full coverage amount of, say, $1,000,000, resulting in a $100,000 deductible; The other is to divide the coverage among all buildings. Ten buildings valued at $100,000 each would each have a $10,000 deductible. Why is the deductible so much higher than other types of coverages? Deductibles are high to keep rates down. With low deductibles, the carrier would have to repair every little crack in the sheetrock.

Does a building have to totally collapse to be covered? No.

Without earthquake coverage, will the basic policy pay for personal property destroyed by a quake? Yes. Loss due to fire, theft, explosion and glass breakage caused by an earthquake are all covered under the basic policy.   BACK

Overexposed?
Volunteers serve on the homeowner association Board for a variety of reasons. Retirees may have time to give to the community, others serve to protect their assets while others serve to fill a void. Regardless of the reason, volunteer board members have liability exposure for actions taken or not taken.

Board members are responsible for association finances, policy making and signing contracts. These responsibilities involve the fiduciary duties of care, loyalty and honesty which are elements of the "Business Judgment Rule".

Some do's and don'ts to keep you out of trouble:

• Never use association funds for personal reasons, even as a loan. Many embezzlers started out as "borrowers".
• Never misrepresent authority, such as negotiating with a contractor when that authority belongs to the Board as a whole or the Board President.
• Stay informed about association business by reading all related correspondence and minutes.
• Use consultants when expertise is called for. Guessing at complex solutions only creates complex problems.
• Attend all board meetings. If unable to attend, make sure the meeting minutes reflect the reason for absence.
• Voice dissenting opinions to board votes when appropriate and make sure the dissent is recorded in the meeting minutes.
• Be familiar with the governing documents and, when in doubt, consult with a knowledgeable attorney.

If you inadvertently stumble, a suit may be filed against the Board and you personally as a member of a board. All is not lost! Bylaws typically provide that the association will indemnify (protect and defend) board members if the conduct meets certain standards like reflected in the Business Judgment Rule. The association should have a Directors and Officers Liability insurance policy that provides for legal defense. This is extremely important. If your board is not covered, contact the association insurance carrier as soon as possible.)

Liability exposure should not be taken lightly. Prevent overexposure by understanding the obligations, limitations and scope of authority. Add a little common sense and proper liability insurance, and you’re covered!   BACK

Insurance Sense & Sensibility
Insurance claims in community associations are a frequent area of dispute. All too often, conflict arises because one party is underinsured and hoping another’s insurance will pay for a loss. Misunderstanding the insurance responsibilities of association versus owners abound. Governing documents are often vague and who reads them anyway?

There is a frequent misconception that the association will cover all major losses to owner property. To complicate matters, many insurance agents never read the association’s governing documents and don’t understand which coverages are appropriate for their owner clients. How can the board, homeowners and agents make sense out of this insurance mire?

A policy document called Maintenance and Insurance Areas of Responsibility can eliminate gray areas or gaps in both maintenance and insurance. By identifying building and grounds components and assigning responsibility to either the association or owner, gaps are effectively closed. The idea is to clearly define the point where association responsibility stops and owner responsibility begins. If you maintain it, you insure it. For example: repairs to all common water supply and drain lines are an association responsibility; repairs to all unit water supply and drain lines from connection point with common lines are an owner responsibility

Once the Areas of Responsibility are completed, approved and distributed to the owners and their insurance carriers, all have the same point of reference. Bottom Line: Maintenance requests and insurance claims are expedited and the association is only paying for things which are its responsibility. One caveat. For every rule, there is an exception. As exceptions are identified, the Areas of Responsibility should be revised.

The association must be careful on how many insurance claims it turns in. Frequency of claims affects the association’s premium level and insurability. Associations that file too many claims get canceled. Assigning certain insurance responsibilities to the owners reduces the association's exposure and keeps insurance affordable. Another cost cutting technique is to raise the deductible to $2500 or higher and have the association for smaller claims (also called self insurance). Raising the deductible will often result in a dollar for dollar savings in premium. Premium savings can be assigned to a budget category called "Insurance Deductible" to cover insurance losses that fall under the deductible.

It’s the board’s responsibility to make the best "sense and sensibility" by turning the vagaries of the governing documents into a practical policy. The work that goes into developing this policy will reward the association by reducing conflicts and promoting harmony.   BACK

When D&O Insurance Won’t Do
All wise community associations should carry D&O - Directors and Officers liability insurance which provides coverage in the event of a lawsuit claiming some Board act or omission caused harm. D&O insurance does not, however, cover a director or officer who is hurt while on the job. For example, if a Board member climbs on the roof to inspect it, falls and gets injured, there will likely be no insurance coverage for medical bills or lost wages. This is because directors are typically not required to climb on roofs as part of their job.

A typical D & O liability policy protects the association when someone makes a claim for monetary damage, not property damage or personal injury, arising from the negligent actions of the Board. Claims for personal injury or property damage usually fall under the association’s general liability policy. The insurance company is required by the terms of the insurance policy to defend such a claim and to pay any settlement reached or judgment entered due to the association’s negligence. Payments are capped by the policy limits less any applicable deductible.

Some general liability policies have "Medical Payments" coverage regardless of who is at fault, however, most policies exclude claims for medical payments to the "insured" and generally define the "insured" to include officers and directors.

Also, since directors and officers are rarely deemed to be association employees, they would not generally be covered by workers comp insurance.

Before an association is liable for an injury suffered by a director or officer, it must be established that either

(1) the association directly caused the damage,
(2) required the director to perform the task which injured him or,
(3) was negligent in some way that the director was injured. In the example, the association did not act in a negligent manner and, therefore, has no liability to pay for the director’s medical expenses.

One final consideration.  D&O coverage will NOT protect Boards that knowingly violate the governing documents or state law.  For this reason, it is very important that all board members review and become familiar with them.  Ignorance of the documents or law is no excuse.

Understanding the scope of association insurance coverages is an important part of serving on the Board. If it has been a while since the policy has been reviewed, invite the association insurance agent to attend a board meeting to explain the coverages and ways to improve it.  BACK

Areas of Responsibility
Understanding the scope of association insurance coverages is basic to protecting the vital interests of the owners. Do you understand what the association’s duties are when a fire, windstorm or burst pipe damages the common elements or unit interiors?

The association’s insurance duties are addressed in the governing documents (sometimes called CC&Rs - Covenants, Conditions & Restrictions). The insurance company’s duties are based on the wording of the policy. The two documents often contradict. Surprisingly, the insurance policy often pays for the repairs that aren’t even an association’s responsibility. Are there reasons why such broad coverage may not be in the association’s best interest? If an owner negligently causes a loss, is it fair that the repairs be done under the association’s policy?

Traditionally, association insurance policies have fallen into one of three different categories. The narrowest is called "bare walls" and covers little of the owner’s fixtures and finishes. Next, and most common, is the broader coverage known as "single entity". This type expands coverage to include standard fixtures and finishes provided by the builder. The broadest is referred to as "all-in" or "modified single entity" which includes coverages for owner installed upgrades such as cabinets, light and plumbing fixtures.

Many association insurance policies are the "all-in" type which creates a dilemma. While the association could cover many owner claims, it’s unwise to do so. The association’s policy is somewhat like an auto policy in that multiple claims may increase future premiums or cause the policy to be cancelled. So, many association governing documents require the owners to insure their own interior finishes and fixtures and the association insurance only comes into play if there is multiple unit damage due to, say, a fire. This spreads the risk around and keeps the association insurance viable.

Since the association and owners each have distinct repair and insurance responsibilities, it’s very important that those responsibilities be clearly delineated. "Inside=Owner" and "Outside=Association" won’t cut it because there are exceptions. And at some point, "Inside" and "Outside" meet. Where exactly is that dividing line? A way to clarify this has been developed called the "Maintenance & Insurance Areas of Responsibility". It lists grounds and building components like the Roof, Gutters & Downspouts, Plumbing-Interior, Plumbing-Exterior, etc. and assigns responsibility either to Owner or Association.

The Areas of Responsibility not only eliminates many disputes, it advises both association and owners’ insurance agents what kind of coverage is necessary. It also helps the Board and Manager perform consistent maintenance because there is a clear roadmap. This document is one of the building blocks of community harmony. Don’t wait for the next insurance "event" to come crashing or burning in. Write your own "Areas of Responsibility" and be prepared.   BACK

Condo Owners Insurance
While a condominium association has its own insurance, equally important is the kind of insurance carried by the owners. Condominium Unit Owners Insurance is available to a condo owner who resides in an association that purchases blanket coverage on the structures. When purchasing it, provide the insurance agent with a copy of the governing documents and association insurance policy.

There are several key coverages:

• Building Property This covers the unit features that are an owner’s responsibility to maintain and insure including finishes (wallpaper, flooring), fixtures (lighting, cabinets), unit alterations and additions.

• Personal Property Covers items like clothing and furniture. Make sure to buy replacement cost insurance, not depreciated basis.

• Inflation This automatically increases the amount of coverage by an inflation index.

• Loss of Use This coverage pays certain expenses if a condo is damaged and uninhabitable.

• Additional Living Expense This covers the expenses in excess of what the insured would normally have spent for food, shelter and related items, for the shortest time required to repair or replace your unit or to relocate elsewhere for a certain period of time.

• Loss Assessment This will pay the insured’s share of a special assessment required if the association has an insured loss and the insurance does not cover it.

• Personal Liability This pays the insured’s legal liability for financial damages resulting from someone being injured in the unit. It also pays for legal defense against these claims or suits.

• Medical Payments to Others This pays necessary medical expenses for guests who are accidentally injured.

It’s critical that the owners’ insurance provide coverage for those things that are their responsibility. The association should have a clear guideline as shown by an Areas of Responsibility List which defines those responsibilities. 

Some final considerations: All condo insurance is not the same. It’s best for association and owners to have the same insurance carrier to avoid gaps in coverage. Keep in mind that condo owners insurance is a personal insurance policy so home businesses require additional riders or a separate policy. Also, if the condo is rented, landlord insurance is required. Cost for insurance can be reduced by taking a higher deductible (amount insured pays before the insurance company pays anything). Share this information with your association members and ask them to review it with their agents.  BACK

© Copyright by Regenesis.net
All rights reserved