By Meghan Wilson, Neil-Garing Insurance
This article is going to address the basic needs of insurance for community associations. They all apply regardless of the type of association. We will discuss the Governing Documents as they relate to insurance, common policy forms, exclusions, and what to pay attention to, along with risk management tools to be proactive with.
When reviewing the insurance that an association should carry, it is critical to start with the coverages that are required by the Governing Documents. It is the fiduciary responsibility of the Board to adhere to the Governing Documents as they dictate how they should be governed and insured. The sections to pay attention to are the definitions and the insurance segments. The key items to pay particular attention to in the Governing Documents are below:
- Types/Limits of coverage required
- Definitions – focusing on common elements, limited common elements, and units.
- Insuring Agreement – The association’s insurance is responsible for either the common elements, limited common elements, and then units up to the bare walls, “as originally conveyed”, or All-In. Based on the insuring agreement, the Board can then set the replacement cost for what the association is responsible to insure in the event of a loss. Regardless of what causes the loss, the insuring agreement will state who is responsible for covering the building, interior finishes, and personal property.
- Replacement Cost Appraisals – Many Governing Documents put a requirement for the Board to have a replacement cost appraisal completed. Even if the declarations do not address it, we strongly recommend this be done at least every 3 years.
- The Declaration may just address the coverage, but it may also advise of a specific limit. For example, two months of assessments, plus all reserves.
- Directors and Officers
- This is intended to cover the directors and anyone making decisions on their behalf.
- May state that this be required if in a flood zone.
- Workers’ Compensation
- May state this is required if the association has employees.
- May state a specific minimum limit that association and or unit owner must carry.
- Other coverages the Declaration may address that the association needs.
- Equipment Breakdown/Boiler
- Deductible – may state a maximum deductible allowed.
- Coinsurance/Agreed Value
- Building Ordinance or Law
It is the Board’s fiduciary responsibility to make sure that the association has adequate coverage and has, at minimum, the required coverages in the Declaration.
Understanding Warranties, Exclusions, and Coverage Limitations
Not every insurance policy is created equal and certain policies can have warranties or coverage limitations. As the Board and community manager you will want to educate yourself to make sure you know what to ask. Here are a few of the warranties that we uncover when completing audits of policy forms:
- Extended Replacement Cost/Guaranteed Replacement Cost – Often times these coverage enhancements come with a warranty if the association is not insured to replacement cost at the effective date of the policy.
- Blanket building limit – Community Associations with multiple buildings should be written with a blanket building limit.
- Co-Insurance – Can create a penalty for being underinsured at the time of loss.
- Sub-limits on specific property coverages – Limitations on Building Ordinance or Law (A, B, and C), Sewer Drain, and Back-up of water.
- Building Ordinance or Law – Having enough limits on B and C coverages is often overlooked.
- Coverage A – Provided coverage for the undamaged portion of the building if a government entity requires it be torn down and rebuilt.
- Coverage B – Covers the demolition cost and disposal of the undamaged portion if the government entity required it be demolished.
- Coverage C – Covers the cost to bring the building to current code in the event of either a partial or a total loss. For example, Coverage C would cover retrofitting sprinkler systems in a non-sprinklered building.
- Directors and Officers – This is one line of coverage where not all policies are created equal and the limitations vary greatly from carrier to carrier. These are the items to pay close attention to:
- If there is a community manager does the coverage extend to them?
- Defense limits – Is the defense limit included in or outside of the aggregate limit? We have seen claims that all $1,000,000 of the aggregate limit was used on defense.
- Retroactive dates – Do you have coverage for the prior Board or community manager decisions? If there is a retroactive date, then decisions made before that date would be excluded.
- Exclusions – The most common two exclusions we find when auditing policy forms are non-monetary damages, and insured versus insured. Both exclusions present a significant gap in coverage for the Board or the community manager.
- Fidelity – There are limitations on this policy form depending on how the book-keeping processes handle the money. Adequate limits per state law are crucial.
- Umbrella – If the association has an umbrella, making sure it extends over the D&O policy is imperative.
The main purpose for insurance coverage is that in the event of a claim, the association will be restored to the condition prior to the loss. There are a few proactive items that community managers, Boards, and associations can do to help prevent claims. They include the following:
- Construction Activities – Associations should be collecting General Liability, Worker’s Compensation, and auto certificates from all contractors for the association and unit owners, along with contractors hired on behalf of the community manager. It is important to be aware of the exclusions that are on the contractor’s policy and what those exclusions do in terms of limiting coverage. The contractor doing the work has to have the correct coverage and limits. Contractors working on individual units or on behalf of the association need to endorse their policy to protect the association and unit owners.
- Facility Improvements – Associations should take a proactive approach to facility maintenance upkeep and/or upgrades. A checklist can be extremely helpful in this area.
- Vendor Contracts (Elevator maintenance, fire suppression services, landscaping, snow removal) – It is important to review vendor contracts before executing and making sure the association is protected by the contract.
Neil-Garing Insurance has been writing HOA insurance for the past 30+ years and currently insures over 700 HOAs in Western Colorado. If you have questions about any of the items mentioned above, please feel free to give us a call.