Community Association Insurance: Condominium

This is the first in a two-part series on community association insurance issues. While not intended to be exhaustive, I do believe these articles will help serve you as a basis in which to evaluate your current association insurance needs.

Introduction

To some extent, community associations need insurance just like most businesses. Community associations need a variety of coverage, such as: liability/casualty, directors and officers, worker's compensation, flood, and various endorsements. However, the specific policy the association should purchase could vary significantly depending on the type of community association, the physical make-up of the project, the activities of the association, its directors, and members, the insurance requirements found within the governing documents, and applicable state law. This article discusses the different insurance policies available to community associations, along with considerations attendant with community association insurance.

Insurance - Generally

Initially, the board for an association should determine whether the association is required to carry certain insurance. Requirements for insurance may be found either in the law or within the governing documents. Even if the association is not required to carry insurance, the board should evaluate whether carrying some forms of insurance would be advisable.

 

Advisability may be determined by asking questions such as:

• Does the association own property or improvements at risk of loss to fire, elements, destruction?
• Do owners, invitees, and members of the public use property owned by the association or property owned in common by the owners?
• Does the association collect money from owners and spend those funds on community projects?
• Does the association have a maintenance responsibility?
• Does the association have employees?
• Are bonds in place to secure fidelity?
• Do the governing documents place minimum insurance requirements on the association?
• Does state law require the association to carry certain insurance?
• Do current lending underwriting guidelines require certain insurance?

   

  Underwriting Requirements

  The association's request for insurance will undergo what is called "underwriting." Underwriting is the process by which an insurer evaluates the association's insurance risk and determines whether to offer the association a policy of insurance. It is important for the association to understand the types of questions an insurer is likely to ask.

   

  Following is a list of questions an insurer is likely to ask when an association seeks to place an insurance policy:

   

1. What is the loss history of the association and its common area or structures?
2. What structures/improvements are to be covered under the liability and casualty policy?
3. Whether there has ever been any insurance coverage of the elements?
4. When the elements were constructed or put into use, what their value is?
5. Whether the project has completed the development phase, and what involvement the developer retains in the project?
6. What is the age of the development and its improvements
7. What is the legal structure and operations of association?
8. Whether potential liability areas exist within the development, such as detention ponds, swimming pools, athletic facilities, etc?

 

Finally, the association should expect the underwriter to request copies of all governing documents on file and any amendments, other various covenants or restrictions, financial statements like profit and loss statements or a balance sheet, and a list of directors and officers. Of course, if the record keeping of the association is in shambles, the fact will be apparent to the underwriter, who in turn will assume the association is a poor risk.

 

Types of Insurance Coverage

When looking to place an insurance policy for the community association, the board should consider its coverage needs. The types of coverage to consider are briefly discussed below. Other factors the Board should consider are:

 

1. How to value: will the policy cover actual cash value (ACV) or replacement cost value (RCV)?
2. What to value: will the policy cover just common areas and their improvements (Bare Walls), both common area improvements and Units (Single-Entity and All-in)?
3. What deductible amount to choose and whether owners may be responsible for the deductible payment in certain circumstances?

 

Casualty Coverage

Casualty insurance insures against the risk of property damage. It is imperative that the association have a comprehensive itemization of the property it owns and has maintenance or insurance responsibility. It is equally as important to have a realistic understanding of the property's value, so as to place sufficient insurance for its replacement in the event of destruction. Additionally, the association should periodically review these items to ensure proper coverage.

 

Liability Coverage

Liability refers to an association's exposure to loss as a result of a claim being brought against the association. The claim could sound in tort, such as negligence, or contract, such as breach of the governing documents. Liability insurance mitigates these claim risks.

 

Often, associations will cover these risks with a commercial general liability (CGL) policy. It is important for the board to understand the extent of coverage, the exclusions from coverage, and the additional endorsements available to the CGL policy.

Directors & Officers Coverage

The purpose for directors and officers coverage is to 1) protect directors and officers of the association from personal liability, 2) provide coverage for liability arising within the scope of the director and officer positions, and 3) fund corporate indemnification of the directors and officers. While no one expects perfection from directors and officers, the law does require those acting on behalf of the association to perform their duties within acceptable standards. If a claim arises questioning an act or omission of the board or its officers, a D&O policy may cover the liability, if any.

 

Further, as with other insurance policies, the D&O policy should provide the costs of defense of the claim, which is typically a substantial sum if litigation ensues. Depending on the policy, the costs of defense may or may not be counted towards the policy limits. It is important for the board to understand the policy exclusions, which may not cover claims for civil rights violations, claims for injunctive or other equitable relief, and claims occurring as a result of conflicts of interest.

 

Additional Coverage

Apart from the insurance types discussed in above, the association may have a need for other types of coverage. These needs may include:

• auto liability insurance
• workers compensation and unemployment for employees
• security guard liability, which provides assault and battery coverage
• business income insurance
• boiler and machinery
• flood insurance
• glass insurance
• inland marine insurance
• landscaping
• business records replacement