By Nicole Bailey, RBC Wealth Management
The funds collected and managed by community associations are designated to be used for the benefit of the association. Association governing documents require some part of the annual assessments to be set aside for the future repair and replacement of community assets. As these reserve funds accumulate, it’s important to ensure the funds are available when they are needed to pay for major repairs and asset replacements. The association’s reserve study provides a schedule of the reserve spending so that the association can build a plan to fund the reserve account sufficiently. The association can also work with a qualified financial advisor to structure an investment strategy that helps protect the funds and generates interest income to supplement the contributions to the account from the homeowners’ assessments.
The homeowners in the community have entrusted elected members, management, and other professionals to properly manage and maintain the association. Everyone who serves the association (homeowners, board members, managers, community experts, etc) is expected to act in the best interest of the association. When selecting a financial advisor for an association, the board and community manager should seek out an advisor who acts in the best interests of the association.
Once a qualified investment professional has been engaged, the board and the advisor can develop an investment strategy that helps protect the funds, verifies they are available as needed, and generates a reasonable return given the first two objectives are met. The association’s investment policy provides the general parameters that inform the strategy to be implemented by the advisor.
As part of the investment objective, the investment policy outlines the types of risk the association should avoid or attempt to mitigate. These risks often include credit risk, liquidity risk, and inflation risk. It is important to have an awareness and understanding of the other types of risk the funds could be exposed to even if they are invested in what are commonly considered “safe” investments.
All investments come with different types of risk, so it is important for the board to consider which types of risk are acceptable and which types are not. Below is a summary of the different types of risks involved with investing:
In addition to the restrictions on risk, the association’s investment policy includes information about the investment strategy and the relationship between the board and the financial advisor. The policy should outline the goal of the investment strategy – why are the funds being invested? Is it to ensure the full amount of the funds are FDIC insured (beyond $250,000)? Is the association seeking to increase the amount of interest being earned? When identifying the investment timeline, the policy should reference the reserve study. If the reserve study calls for limited spending for the next 5 years, the investment policy should not limit the investment timeline to 2 years. In alignment with the discussion of risk, objective, and timeline, the policy can identify the types of investment vehicles to be used or avoided in the account. Many policies restrict investments to certificates of deposits or investments guaranteed by the federal government, which is in alignment with the mitigation of credit risk. Some policies allow for a percentage of the funds to be placed into diversified stock positions which is in alignment with the mitigation of inflation risk. These restrictions and allowances should be carefully considered and approved by the board of directors. The board’s expectations for the management and communication around the account should also be specifically outlined in the policy.
Under the fiduciary umbrella, the board of directors should partner with a qualified financial professional and adopt a comprehensive investment policy. By leaning on professionals and policies, the community may reap the benefits of long-term growth in the account in order to meet the future needs of the association.
Nicole Bailey, CFP ®, Vice President - Financial Advisor
RBC Wealth Management, a division of RBC Capital Markets, LLC, registered investment adviser and Member NYSE/FINRA/SIPC.
Investment and insurance products offered through RBC Wealth Management are not insured by the FDIC or any other federal government agency, are not deposits or other obligations of, or guaranteed by, a bank or any bank affiliate, and are subject to investment risks, including possible loss of the principal amount invested.
RBC Wealth Management does not provide tax or legal advice. All decisions regarding the tax or legal implications of your investments should be made in consultation with your independent tax or legal advisor. No information, including but not limited to written materials, provided by RBC WM should be construed as legal, accounting or tax advice.
By Peter B. Miller, RS, and Rick McKittrick, MillerDodson Associates, Inc.
Now that we have marked the second anniversary of the Champlain Towers South partial collapse, it is time to examine where we have come regarding the Reserve Study field. This tragedy opened our eyes and made clear several issues, not the least of which was a reform of the way we do Reserve Studies. As we all know, the Community Associations Institute (CAI), was very active in its response to this disaster, starting with a physical presence on the ground in the days immediately following the collapse, followed by its Condominium Safety Public Policy Report within months of the event. CAI also appointed several task forces to study specific topics such as Reserves and Reserve Funding, Building Maintenance and Structural Integrity, and Insurance. The input from these task forces culminated with extensive changes to CAI’s Reserve Study Standards. These changes to the Reserve Study Standards are important to understand, not just for Reserve Specialists, but for Community Managers and Community Association Volunteer Leaders as well.
Input from the hundreds of CAI task force participants showed that the Reserve Study Standards of the late-1990’s needed to be updated to reflect the current practices and the rapidly changing technologies in the 21st Century. The updated Standards challenge the older practices such as requiring only a 20-year minimum period for the Reserve Study. This has now been updated to require the Reserve Study to cover a 30-year minimum. Previous Reserve Study practices excluded many components that had a Normal Useful Life (RUL) greater than 30 years. The new Standards require that proportional funding be provided so that a component with a 40-year Normal Useful Life would have 75% funding at the end of 30 years, for example. Previously ignored or overlooked “in the wall” common elements such as plumbing pipes, and electrical and mechanical equipment must now be included as Reserve inventory items. Additionally, Reserve Studies previously required that replacement be “in-like-kind”, meaning that you replaced each component with an identical component. The updated Standards recognize that components can be replaced with newer, more energy-efficient technology, or with components that have a lower life-cycle cost.
The updated Reserve Study Standards also acknowledge that maintenance practices are integral in planning for the future physical and financial needs of a building, and therefore need to be considered in preparing the Reserve Study. The new practices recognize that a good maintenance plan can extend the Useful Life of components. Conversely, the lack of a maintenance plan can and should result in a reduction in the Normal Useful Life of the various components. Such a reduction in Remaining Useful Life, of course, increases the amount of Reserve Funding necessary for these components.
Most importantly, the new Standards recognize that the structural integrity of buildings can no longer be ignored. While the actual structural components of a building are still not included in the Reserve Study inventory, funding for periodic professional structural evaluations of certain building types should be provided in the Reserve Study. The Taskforce on Reserves and Building Safety recommends that buildings be evaluated structurally every 10 years up to year 20. Buildings older than 20 years should be evaluated every 5 years. The exact “scope” of these evaluations is not defined within the new Standards. However, it has been suggested that the scope of these evaluations be defined by the appropriate ASTM Standard.
It is hoped that the Reserve Study Standards will continue to be a model for State and local governments that are considering legislating Reserve Studies. And it is not just State and local jurisdictions that are tightening these requirements. CAI has seen outside forces such as Fannie and Freddie, other lending institutions, as well as the Insurance industry pushing for tighter Standards.
The new Reserve Study Standards can be found on the CAI website at www.caionline.org under Reserve Study Standards. It should be noted that the updated Reserve Study Standards do not change the requirements and qualifications for applying for the Reserve Specialist Designation.
Peter B. Miller, RS, is the President of MillerDodson Associates, Inc. He is a past member of CAI’s Board of Trustees and served as a Co-Chair of the Taskforce on Reserve and Building Safety.
Rick McKittrick has worked as an Analyst with MillerDodson for more than 15 years.
By James Phifer, ACCU, Inc
It is not uncommon for our esteemed colleagues in the industry to shy away from discussing financial management, especially when it comes to the delicate balance between providing professional advice that may not be appreciated and keeping the coveted contract.
However, before we proceed with our discourse, let us set aside the communities that are already flush with funds, diligently following their reserve studies, and dutifully maintaining their properties. They are already living the dream and we need not bother them with our humble musings.
The number of underfunded communities that are unwilling to raise their assessments is growing, and they are facing mounting pressure from the rising costs of construction, materials, labor, and insurance.
As previously expressed by attorney David Graf: "Bad management is obvious; mediocre management is visible; yet excellent management is unseen." It's no easy task to showcase the smooth sailing of a well-managed community. Said another way, it’s easy to show your worth in solving problems but it’s much harder to highlight your excellence in keeping problems from arising in the first place! No judgments here -- many of us are tasked with managing a community teetering on the edge of financial hardship or already immersed in it, all while trying to meet expectations on a shoestring budget.
Managers, what are some essential resources at your disposal when dealing with an underfunded community?
Let's explore a few ideas:
Behold the power of the monthly management report! As the expert in the field, it's your responsibility to provide appropriate financial guidance. It falls upon the shoulders of the esteemed professional (that's you!) to navigate the treacherous waters and steer the ship in the right direction. This means making professional recommendations for responsible funding of the client, irrespective of how you believe the message might be received. There is an obvious stress that Board members will have in reaching out to their neighbors and asking for more money.
Next comes the delicate art of dealing with underfunded communities requesting bids. Please, I implore you, do not abuse your contractors. Many contractors are willing to give you a Rough Order of Magnitude (ROM) estimate. You know, the classic question of, "Will this cost us $1,000.00 or $100,000.00?" It's a fair question, and qualified contractors should be able to provide a ROM without significant investment of their time. If you do need a more precise estimate than a ROM, please ensure that you are sincere in considering using that vendor for the ultimate project. Bids do not cost the association anything -- but they certainly cost the vendor an investment of their time and if they repeatedly invest that time and do not get awarded the work, they will stop responding to your requests for bids.
Let's talk budgets, my fellow managers! Construct a budget that not only covers expenses but also reasonable reserves and present it to the Board during budget season. Even if your Board takes charge of their own budgeting process, I implore you all to build a budget that leaves no expense or reserve unaccounted for. And don't forget to save a copy of the budget you supplied to the Board in the designated folder for your company. If the community decides against raising assessments, you will have the data you supplied as evidence, proving that any shortfall was not the result of "mismanagement from the management company." This will surely save you from future headaches, whether it be in your current role or with a potential future management company.
Last, but not least, confide in your supervisor! Share the financial status of the community with your superior, enabling them to engage in a candid conversation with the Board. This will provide the Board with additional guidance and support during these trying financial times. Make no mistake-- if raising assessments to cover all anticipated expenses was easy, we wouldn’t be having this conversation. Board members are understandably cautious in raising assessments without a clear need to do so. So, make sure that the need is made clear to them so that they can be transparent with their owners.
Now, dear struggling Boards grappling with the financial affairs of your community, this one's for you! As inflation skyrockets and every budget line item sees a staggering increase from 10% to 1,000%, while equipment nears its end-of-life expectancy, and the underfunded reserve dilemma looms large, what options do you have for exemplary financial management?
Gather 'round, Boards! It's time for a meeting to discuss expectations, and boy, do we have some gems for you. If the community is stuck in a financial tight spot and can't afford to replace the (insert asset here) within the next (insert timeframe here), despite the dire need for repairs, make sure to communicate that information to the community. Transparency is the name of the game in association operations, and not just when the news is good.
But fear not, my friends, for clear communication is the knight in shining armor that will rescue us from a barrage of angry phone calls from upset owners. It's a win-win situation when it comes to handling the association’s reputation and owners’ expectations with finesse.
Ok team, let’s talk bank loans! They're like magical unicorns prancing through a field of financial possibilities. Now, hold on a sec while I put on my old man hat and reminisce. "Back in my day, a Board member had to sign a personal guaranty for an association to obtain a loan." But lo and behold, times have changed! Communities can now secure a loan through an assignment of assessments (aka UCC filing), and fret not, my friends, it doesn’t count against your personal credit report. A loan can inject some much-needed strength into our common elements, improving the overall quality of living and boosting resale value.
Pro Tip! - Just be aware that if you first levy a special assessment to raise the funds and owners default or defer payment, you may not be able to go back and get a loan because your delinquency rate may be too high for the lender.
And here's a nifty idea: chat with your management company about contractors who are willing to finance your project or explore external funding resources with long-term amortization payments. You'd be surprised to find funding companies out there flaunting repayment terms stretching up to 40 years! Now, that might just be the perfect fit for certain clients and their assets with a longer life span.
So, there you have it, folks! A delightful mix of humor and professionalism to guide us through the trials and tribulations of managing a community on a tight budget. Let's tackle these challenges head-on, and don’t forget to treat your community manager and their team with kindness.
Author: James Phifer, President ACCU
ACCU, Inc. has been providing community management services to homeowner associations since 1979. For more information, please visit us at www.accuinc.com
By Paul Riggle, AGS Construction
*2023 Titanium Sponsor*
If you were having repair work done in your home, would you ever invite a contractor in who you have not verified their credentials or gotten references from? There is no difference if you live in a HOA community or serve on an HOA Board. The final work product you get from a third-party contractor will impact everyone in the community and a bad decision could be detrimental and even more costly in the long-run. One way to maximize the likelihood for the success of your project is to follow some best practices in selecting a contractor. By using techniques listed below, everyone will be on the same page through the evaluation, bidding, and construction process.
By Bryan Farley, Association Reserves - CO
Q) What is the difference between loss assessment coverage and special assessment coverage?
A) Loss assessments are the result of sudden and accidental damage that is covered by an insurance company.
A Special Assessment is an extra fee charged to the owners of an association to pay for projects that are not the result of sudden and accidental damage or a covered loss. For example, if a property has not budgeted for the eventual replacement of the roof, owners may need to be charged a special assessment to pay for the replacement of the roofing system.
Q) What is the difference between a sudden loss, capital improvements, and maintenance?
A) A sudden loss is something that happens unexpectedly, a capital improvement is an upgrade or large planned project, maintenance is something that is done regularly so that the asset can achieve its expected life.
An example of sudden loss is a hailstorm that causes damage to the association roof.
A capital improvement would be if the association wants to install a playground within the property when no playground previously existed.
Maintenance is the general upkeep of the assets that help the asset achieve its expected useful life. For example, items such as asphalt sealing, roof patching, siding painting, wood staining, boiler repairs, etc., will help these items achieve their expected useful life. Typically, ignoring maintenance projects will shorten the life of the asset or may even cause the eventual replacement value to increase due to lack of maintenance.
Q) Will an HO6 insurance policy cover a special assessment that is due to deferred maintenance?
A) No, it will not.
For example, an asphalt composition shingle roof was installed in 2000 is expected to last approximately 20-25 years. The roof is now, in 2023, approaching the end of its expected useful life. An owner is expected to maintain the roof, and the failure to do so is not a sudden and accidental occurrence that would result in a successful insurance claim.
Loss assessments are the result of sudden and accidental damage that is covered by an insurance company, special assessment is for special projects that are not the result of sudden and accidental damage or a covered loss.
Q) What is deferred maintenance?
A) Deferred maintenance occurs when s common area component needs to be repaired or replaced, but the association chooses to not the make repairs, and instead pushes the project back. For example, if the roof needs to be replaced this year, but the HOA does not have enough money to pay for this project, the board may decide to defer the project another year.
Q) What are the consequences of deferring our projects further?
A) Consider the roof will soon need to be replaced (with a remaining life of 0 years) per the recommendation of a qualified inspector. If the board chooses to defer the project, then there are a couple of outcomes:
- The roof will fail catastrophically with damage to the interior of a unit, which would now require a large restoration project to mitigate this issue. This will also negatively impact the HOA since the failure was caused due to board negligence. This could possibly result in lawsuits or other costly issues.
- The roof project will be deferred, but the cost will be higher in the future due to inflation and other unknowns (supply chain issues, labor issues, etc). The HOA will now need to charge the owners more money in this scenario to make up the difference in cost. This can result in a special assessment or large loan requirement.
Overall, deferring a project will always cost the owners more money. It is best to complete a project when it comes due.
Q) If we complete this project now, won’t our dues go up and that may negatively impact our resale value?
The data shows that well-funded reserves increase the resale value of a home. A well-funded association can increase the resale value of its homes by ~12% relative to a poorly funded association.
When a property is experiencing component failure due to deferred maintenance, a prospective buyer will see that they are buying a property in an HOA that cannot maintain its current financial obligations, and therefore may be less incentivized to pay top dollar for a property that is underfunded (roofs leaking, paint peeling, potholes in the parking lot) and cannot pay for basic maintenance needs.
Ultimately, the board has three options to pay for the upkeep of the common area assets:
1) Regular budgeted contributions into the reserve account
2) Special Assessments and Loans
3) Doing nothing
The most affordable option is to pay equally distributed contributions into the reserve account since every owner over the life of the property should have paid into this fund. Every owner will pay their fair share of their usage of the common area assets.
A special assessment and loan are sometimes necessary if the HOA does not have adequate reserves, however, these are more costly than regular budgeted contributions.
Doing nothing is the costliest because deferring maintenance could lead to structural damage, and potentially cause life safety issues for the property.
Each board has a choice to make, and the choices are not easy, but there is clearly a right choice and a wrong choice. The wrong choice could lead to costly emergency projects, or at the absolute worst, building failure.
The right choice to make is to spread out the inevitable costs of the ongoing deterioration of the common area components to all owners of the HOA. This way, every owner, regardless of when they happen to live at the property, will be paying a fair share of the reserve contribution obligations.
Bryan Farley is the President of Association Reserves, CO and has completed over 3,000 Reserve Studies and earned the Community Associations Institute (CAI) designation of Reserve Specialist (RS #260). His 12+ years of experience includes all types of condominium and homeowners’ associations throughout the United States, ranging from international high-rises to historical monuments.
By Kiki N. Dillie, Altitude Community Law
No one feels good about collections. Board Members don’t relish sending their neighbors to collections. Professionals, be they managers or account techs or attorneys, don’t enjoy it either. However, the reality is that collections is a necessary reality for nearly every Association at some point.
Sometimes a homeowner is in a bad financial situation through no fault of their own, such as a medical issue. Sometimes a homeowner is unable to pay an emergency special assessment. Sometimes a homeowner just doesn’t want to pay because they are unhappy with the Association’s lack of maintenance. Regardless of the reason behind the non-payment, the end result is the Association now has a homeowner with a delinquent balance. Inevitably, the Association where you are a Board Member or an Association you manage or an Association you represent will have someone that is unable or unwilling to pay their balance.
This situation can be uncomfortable for everyone involved. The Board has responsibilities to the Association and is obligated to ensure all homeowners are complying with the governing documents of the Association, which includes paying assessments timely. But, the Board is also aware that they are sending their neighbor to collections, which can be awkward when meeting that homeowner at the mailbox or park. Conversely, the Association has its own responsibilities to uphold and relies on all homeowners paying their assessments timely. If some homeowners do not, the Association may not be financially able to provide the services and amenities it is contractually obligated to provide. If enough homeowners fail to pay their assessments timely, it could result in the need for a special assessment, essentially making the paying homeowners pay their fair share plus a portion of their neighbors’ shares.
The Board has a duty to uphold the governing documents of the Association, including the Association’s Collection Policy. Therefore, when a homeowner falls delinquent, regardless of the circumstances, the Board should follow the Association’s Collection Policy and send the notices as listed under the policy. However, if a homeowner reaches out to the Board before the balance has been sent to an attorney for collections, it is generally recommended that the Board and homeowner have an open dialogue to try to reach a resolution. Both the Board and homeowner should be reasonable and try to resolve the situation. For example, a waiver of late fees and/or interest may be a reasonable solution. Alternatively, an extended payment plan option may be reasonable.
However, it is important for both the Board and homeowner to understand the limitations of the discussion as well. Generally, a waiver of assessments is not recommended or permitted by the Association’s governing documents.
Additionally, the Board should be careful to avoid possible selective enforcement claims. All homeowners in similar situations should be treated similarly. Having standard practices in place can help avoid selective enforcement. For example, a Board could have a blanket practice that any homeowner that initiates settlement discussions with them will be offered a waiver of late fees and interest if the remaining balance is paid in full. What Boards should avoid is unilaterally waiving a balance for a homeowner or deciding to not follow the Collection Policy for a particular homeowner just because they happen to know about a medical condition or financial misfortune impacting that homeowner. It is entirely possible that other homeowners are experiencing the same misfortune, but the Board does not know about it, resulting in potential selective enforcement claims.
Collections is often uncomfortable for all parties involved and most people want to reach an acceptable resolution to help the homeowner get out of debt to the Association. It is important for Board Members to be aware of the potential problems with waivers or settlement negotiations, such as waiving assessments or selective enforcement. However, with the proper knowledge, collections can be done with compassion, while also being sure the Association is properly funded.
“Kiki Dillie is a Shareholder and Debt Recovery department head at Altitude Community Law, P.C., located in Lakewood, Colorado. Altitude Community Law specializes in representation of community associations all over Colorado and has offices in Lakewood, Loveland, Colorado Springs, Frisco and Durango.”
By Jennifer Kinkead, Goodwin & Company
90% of the Community Management Business is the relationships we build with our vendors, our peers, and, most importantly, our Boards of Directors. The relationship between the Community Manager and the Board of Directors can be defined as the most important relationship to nourish. The role and responsibility of a Board member is so important when it comes to managing an HOA correctly and accurately. We can all agree that being a Board member can be a thankless job at times, as they are homeowners who are graciously volunteering their time to serve the community they love.
The best way to understand the role of Board member is to understand their responsibilities to the Association they are serving on. The most important role of the Board of Directors is the fiduciary responsibility they have to the Association. It is crucial that all Board members commit to enforcing the Governing Documents of the Association, that is their job. This can be difficult for some Board members as some rules can be a point of contention to their fellow neighbors. Board members dedicate their time to guaranteeing the Association is being managed according to the law and Governing Documents of the Association. Current Board members play a huge role in developing current and future leaders in the Association who will represent the Community once they are gone.
I think it’s safe to assume that serving a community cannot be done without some assistance; and this is where the management company comes in. Boards entrust the manager, the same way the homeowners entrust the Board members. Together, the Board and management company accomplish the duties of the Association. It’s important that managers nourish the relationship with the Board, as that can also be the defining factor in them continuing to work with the management company they represent.
Board members are also trusted to represent the homeowner and speak on their behalf. It’s important to make sure there are active Board members at all times, and any vacant seats get filled according to the Governing Documents.
How is that done? Board recruitment!
Board recruitment is an on-going process as Board seat terms do expire and finding volunteers also cannot be easy, but it is meaningful to the Association. Below are just a few ways to recruit Board members:
As any relationship requires attention to grow; the same applies with your Board relationships. Once you are assigned to a new community, or a new Board has just been elected to your current community, don’t be afraid to nourish the relationship you have with them. The goal is gaining their trust to ensure you are serving the Community as one voice.
About the Author: My name is Jennifer Kinkead, senior community/ special district manager for Goodwin & Company. I so thrilled to be a part of an industry that is so rewarding, and I’m so proud to help bring Goodwin & Company to Denver Colorado!
By Nicole Hernandez
Putting it in today’s terms, one of my biggest “cringe” moments being an HOA insurance specialist is when a Board of Directors decides they do not wish to procure Directors and Officers Liability Insurance (D&O). In my mind, (and I’m sure many of you share this same opinion), this coverage is absolutely necessary to protect the Board from allegations of wrongdoing and the defense against such claims. Often, I find that the reason a Board may choose to decline procuring D&O coverage is because they do not understand why this coverage is necessary and what exactly it covers.
I recall the time I experienced a discrimination complaint in my prior life as a Community Manager. A resident was dissatisfied with the general landscape maintenance of the common areas and filed a complaint with DORA against the Board of Directors, the landscape company, Management, and the Association itself. Fortunately, we did have a D&O policy in place and coverage for the response and defense was provided by the insurer.
The first step in the complaint was gathering all the documentation related to the matter to bring forth with our response. In this case, we wanted to provide records of all landscape work orders, all planned and executed landscape projects and architectural control records related to landscape modifications. Additionally, any meeting minutes that mentioned the same and phone records were requested. I imagine with today’s technology, the compilation of these records would be much more streamlined, but back then it was a process to collect all this various documentation. Additionally, as management contracts often work, the additional time required to gather the records, copies and claim management were outside of the standard routine services as defined in the management agreement, so this all resulted in additional expenses for the HOA.
The greatest expense for the community was the attorney fees and court costs required to respond to the complaint. The attorney had to review the records through the lens of the complaint and draft a response to the State regarding the allegations. As is common with such claims, additional information needed to be provided before the State eventually closed the complaint with no finding of any violation by the defending parties.
Due to the nature and desired resolution of the original complaint and the Board’s sincere desire to rectify the issue and resolve any lingering feelings of being wronged, several meetings were held with the complaining party, Board and landscapers trying to come to a satisfactory resolution of the landscape in question. The additional meetings required a mediator, which was also provided and funded by the HOA itself.
In the end, the response and defense of the claim took over nine months and an estimated expense of $50,000 in attorney fees, court costs, and settlement expenses, all of which would have been funded by the association if it had not carried D&O coverage. I am not aware of any communities that regularly budget a $50,000 contingency, attorney fee expense, or other relevant line item, so it is likely that a loan or special assessment would have been necessary to fund this unexpected expense.
It seems like such a silly example. We had to engage attorneys, a mediator, and the court system to resolve an aesthetic issue with common area landscaping (I hear the chuckles coming from my Community Management friends now….do I dare mention native grasses?!), but these are common situations when we live in proximity and are unable to find common ground on matters that may be seen from different perspectives.
I use my personal example of landscaping to illustrate the types of D&O claims we experience in HOAs. Allegations of discrimination, unequal covenant enforcement, improper meeting notice or elections, ACC processes, or decisions are all examples of an issue that may arise at any point in our communities. Without Directors & Officers Liability coverage, the community would be left to self-fund the additional expense related to the response and defense of the claim. Remember, this is not just attorney fees and court costs; the additional time and energy costs should be considered too.
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With over twenty-two years of combined Community Association Management & Insurance experience, Nicole understands the structure of Community Association Management and the challenges Managers and Boards face daily. Nicole is passionate about helping Boards and Managers assess their risk and designing proper insurance programs that cater to their communities.
By Aletta Marciano, ADV Insurance Agency
If you’ve spent any time working for, or around, community associations, you know that they tend to carry a lot of insurance. These standard policies include general liability insurance - to cover the slips, trips, and falls that can occur on association ground; property insurance - to insure the value of the common areas, association property, and buildings and clubhouses the association is responsible for; directors & officers insurance - to protect the interests of the community members serving in their capacity as elected board members; and workers compensation - to protect the association in the event an employee is injured during the course of work at the association (to name a few, many associations have additional policy types, but these four are standard).
With so many different policies and coverage types, many associations fail to see the need for an additional short-term policy, because these underlying policies should be more than sufficient, right? Not quite. The policies listed above are designed to protect the association during the day-to-day activities seen on premises, not for the types of risks seen during a special event. Special event insurance should be obtained if the association is planning any of the following:
Now, you may very well be thinking, “every event in the history of enjoyable events has one of these features”, and you’d be right! Special events insurance should be obtained for any out of the ordinary planned occurrence where people may congregate to ensure the association is adequately protected from the additional risk present as a result of the event. The benefits of this type of policy are tremendous, but for convenience and quick reference, the four biggest benefits are listed below:
The premium for a special events policy averages $250 for a one-day event and can provide coverage of $1 million per occurrence (per claim). This coverage would apply to property damage and bodily injury that arise as a result of the event.
Many cities and counties require permits for large events, and require they be listed as an additional insured in order to obtain the permit. Instead of adding them to the liability policy for the association, and then taking them off again after the event (a hassle for both you and your insurance agent), you can simply add them to this short-term policy to satisfy the requirements to obtain a permit.
If you’re serving or selling alcohol at the event, you need liquor liability insurance. This will protect the association from claims of contributing to the intoxication of a person, serving to underage patrons, and/or violating ordinances or regulations relating to the distribution or use of alcoholic beverages.
If your association has no employees, they may not carry workers compensation insurance. If this is the case, obtaining this coverage as a part of your special event insurance policy will provide for medical, disability, or death benefits in the event an “employee” is injured in the workplace.
These policies are quick and easy to obtain, and provide a tremendous amount of coverage and an additional layer of protection for your community. There are programs online where board members can input the event specifics and have a policy in hand the very same day, and any insurance agency specializing in community associations will be able to assist boards and managers in reviewing and obtaining these types of policies should more assistance be needed. Insurance should provide peace of mind, and in obtaining special event insurance you’re purchasing just that! Plan the party, get the policy, then relax and enjoy your hard work!
ADV Insurance Agency is an independent insurance agency specializing in habitational risks and community associations, working closely with board members and managers to provide the education, products, and understanding needed to empower associations to make the best insurance choices for their communities. Aletta Marciano is the Lead Community Association Producer for the state of Colorado, and has specialized in community associations since 2019.
By Tressa Bishop, USI Insurance Services
Picture this: The association’s manager hires a contractor to trim trees and bushes on the community’s property. They require the contractor to provide a current Certificate of Insurance (COI) showing General Liability coverage and Workers’ Compensation coverage. The dates on the COI show that the policy will cover the dates that the work is scheduled to be completed. During the project, a worker is injured and goes to urgent care for treatment. The claim is reported to the contractor’s Workers’ Compensation carrier, however, it is denied as the policy was canceled the prior month due to nonpayment of premium.
Community associations frequently use independent contractors to perform various services. It is difficult, if not impossible, for an association to verify with absolute certainty that all of the independent contractors they use have an in-force Workers’ Compensation policy at the time work is being performed onsite. Even a signed statement by the independent contractor verifying their independent contractor status may not be enough to keep an association out of a claim.
Under certain circumstances Colorado statutes allow individuals who are injured while in the service of another to make a claim against that person or organization for Workers’ Compensation benefits without regard to previous representations by such person that they are an independent contractor. Contrary to popular belief, it is not possible to sign a waiver eliminating a statutory requirement. If the injured party is successful in showing that they were an employee, as defined by Colorado’s Workers Compensation statute, and that their injury occurred during the course of serving an association, they, or their heirs, are entitled by law to Workers’ Compensation benefits.
The Commercial General Liability coverage carried by community associations does not apply to Workers’ Compensation claims. In fact, it specifically excludes coverage for such claims. The only way to fill this gap in coverage is for community associations to carry a Workers’ Compensation and Employer’s Liability policy.
Community associations carrying Workers’ Compensation policies with no direct employees are rated on zero payroll. The carrier is not intending to cover anyone under the policy but will respond to a claim if any exposure presents itself during the term (referred to as If/Any coverage). They will audit the policy during or after the term to pick up any incidental payroll for contractors who weren’t able to provide proof of coverage.
In addition to the If/Any coverage afforded to associations by a zero payroll Workers’ Compensation policy, there are some policies offered in the marketplace which include Volunteers in the definition of Employee. This could be very helpful for an association with an active volunteer pool. If a person volunteering for the association at the direction of the Board is injured, the volunteer may be covered under the policy.
These relatively low-cost policies do have a few requirements that must be met in order for the volunteer coverage to be afforded:
Below are a few examples of volunteer claims* covered by such policies that include Volunteers in the definition of Employee:
Even communities that try to do everything possible to reduce the chance of loss can find themselves involved in a situation where they must “self-insure” or pay out of pocket for an accident that may have been covered by a low-cost insurance policy. It is highly recommended to speak to an insurance professional who specializes in community association coverage about the need for a Workers’ Compensation policy for your community.
*Source: https://www.caislive.com/coverage-considerations
Tressa Bishop, MBA, CIC, CIRMS is an Executive Vice President with USI Insurance Services. Tressa has specialized in the community association insurance niche for over seven years and has helped hundreds of communities with strategic insurance placement, claims advocacy, and Board and member education. She holds the Community Insurance Risk Management Specialist (CIRMS) designation through CAI, the Certified Insurance Counselor (CIC) designation through The National Alliance for Insurance Education & Research, and has earned a BA from Colorado State University and an MBA (Finance) from Fairleigh Dickinson University.
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