Many board members and residents wonder why it is so important to have proper insurance coverage. The right types and limits of insurance create a safety net for the association that protects all members from unplanned, potentially catastrophic losses. This is important in creating a safe atmosphere in which to live. People can volunteer to create a better community as a board or committee member without fear of losing their personal assets.
Why do we need insurance?
Unfortunately, despite the best prevention efforts, accidents happen: people slip and fall, children get injured at the playground, and an association’s fence crosses into a homeowner’s lot. Despite an association’s best efforts to follow all the rules and procedures, someone can make a claim against the HOA. Without community insurance, association funds or homeowner’s personal assets from additional assessments must be used to defend against the claim. Even if the association successfully defends itself, defense costs alone can be significant.
What types of insurance should we have?
Every association should have comprehensive general liability and Directors & Officers insurance. Additional types of insurance to consider are commercial property, employee dishonesty, non-owned auto, umbrella and workers’ compensation.
Commercial General Liability (CGL): This insurance protects against claims others may make against the association. The four coverages provided are bodily injury, property damage, personal injury, and advertising injury. Coverage applies for accidents that occur during the policy period subject to policy limits. Homeowners are also covered as additional insureds. There is usually no deductible.
Directors & Officers (D&O): Disputes can and do arise over assessments, liens and DRV’s and certainly have been known to escalate to a claim. D&O protects the association and its directors from claims for mismanagement. Coverage is provided for claims that are made against the association during the policy period, subject to the ‘prior claims’ or retroactive date. A deductible for each claim applies.
Commercial Property Insurance: Most associations have some commonly owned property. HOA assets can range from modest for a small entry monument, to sizeable for condominium communities. Don’t overlook the poolside or clubhouse furniture.
Commercial Property should be insured for its full replacement cost. This value may not be the same shown on a reserve study which identifies the cost to repair various items. Also be aware of the property deductibles. Replacing uninsured or underinsured property that is lost due to a fire, windstorm, or other insurable events can strain the resources of an association.
Employee Dishonesty (Crime): This coverage protects against the theft of cash by an employee. The FHA requires condominium associations to carry this coverage.
Non-owned auto: This insurance responds to protect the HOA in the event someone who is driving on association business is involved in an accident and does not have adequate insurance to pay for all of the damages.
Workers’ Compensation: Many associations do not have employees. However, some jurisdictions, notably in California, have held associations responsible for paying workers’ compensation benefits to uninsured vendors injured while working for the Association.
Umbrella: An umbrella policy provides additional limits of insurance for liability claims. Every association should consider this relatively inexpensive additional coverage, especially if there is a pool.
What else should we consider?
Consider the service that your insurance agent has provided. Do you get a prompt response to your questions? What is the typical turn-around time for insurance certificates?
Some associations want three bids each year for their insurance policy renewals. While this may seem reasonable, there are factors to consider. First, this is a specialized type of insurance and there may not be that many bids available. Second, many insurance companies reward loyalty; should a loss occur, an insured that has been with a company for several years is less likely to get canceled.
Finally, some insurance forms are more tailored to the exposures of homeowner associations than others. Consider asking your insurance agent to provide comparisons for you of coverage differences in addition to the price.
Once the HOA board members have reviewed their insurance options of commercial general liability, Directors & Officers, commercial property, crime, auto, workers’ compensation and umbrella, and purchased the insurance they believe is right for their community, the fear of financial disaster from unplanned and unaffordable losses is eased and everyone in the neighborhood feels safer.