Writing Condominium and Homeowners' Association Insurance

These documents and the management of a community association are not absolute, however. What many association boards do not realize is that, even if they follow the association's governing documents to the letter and intent of the rules, if the documents are contrary to state laws and regulations, they may find they have placed themselves and their association in jeopardy. In a legal battle, the board will be presumed to know the law. In Florida, these rules can be found in 2000 Florida Statutes, Title XL Real and Personal Property; Chapter 718 Condominiums; 719 Cooperative; 720 HOAs.

The Association Puzzle Pieces

In developing an insurance package to protect the association and its board, the place to begin is with a thorough understanding of the scope of the community association itself. The natural place to start is with the existing insurance products and coverage program. Get as complete a history as you can, going back several years.

After thoroughly reviewing the existing risk and current coverages, the second step is to review the association's governing documents with the intent of identifying the insurance requirements. Bear in mind that these documents often are crafted by the developer, and may simply contain cookie-cutter language not formulated in the best interests of the specific association.

Once you are sure you understand the requirements of the governing documents and are satisfied that they are appropriate to the association, you must determine if they comply with state requirements. Governing documents created years, if not decades ago, are probably outdated from a legal compliance standpoint. As an insurance professional, you will be presumed to know what the governing documents and the state laws say, or don't say, with respect to insurance requirements in the event of litigation.

If you lack experience in the area of community association insurance, then this is the time you become an expert: seek a community association insurance professional, a community association legal professional, and join the corresponding industry trade groups that will give you the resources you need.

Analyzing the Pieces

A current reserve study is key to analyzing the property exposure for a community association. If an association does not have a study or is outdated, then you should recommend that the association obtain one. This will identify the exposures, the condition of the exposures, and the life of the elements within the scope of the study. This tool enables the association management team, normally the board of directors and the community manager, to properly maintain the association's physical and real property assets. This, in turn, will obviate many of the other potential issues that can arise among the individual association members.

The next step in analyzing the property exposure depends on whether it is a condominium where the individual association members share the dwelling or a single-family homeowners' association. Again, this is where the association's governing document becomes critical. For a condominium, you must know the extent that the association's governing documents require the master policy to provide coverage. This is generally broken down into four options:

Bare Walls – the association is only responsible for the inside of the drywall.

Single Entity – the association is responsible for betterments and improvements, as set forth in the original built plans.

All In – the association is responsible for the unit owners' betterments and improvements.

Silent – the governing documents have no express requirement.

Understanding the extent to which the master policy must provide coverage can help you advise the association as to what it may recommend that individual unit owners carry in their individual policies, especially with respect to improvements and betterments coverage.

The property puzzle also includes items that tend to be problematic in many community associations:

Property Value – appraisals (due to the requirements of Citizens Property Insurance. This is very often available)

Replacement Coverage – actual cash value, full replacement cost, or guaranteed replacement cost.

Building ordinance (critical for older buildings).

Loss of use or extra expense coverage.

Flood, windstorm and earthquake.

Boiler/machinery and mechanical breakdown.

Special form (all-risk); broad form, basic form.

Out Buildings, Inland Marine, and other coverages unique to the risk.

General Liability Insurance

As agents, we are familiar with the general liability policy. We see these policies daily, and many of us can recite the ISO form definitions from memory. However, do not let this institutional knowledge lull you into a false sense of security. The community association has clear (although not complicated) issues. Again, you need to look to the governing documents for any express requirements, and compare them to any statutory requirements.

First, you should determine if the definition of "insured" includes the real estate manager. Many of these associations hire community managers, and most of the associations agree to "indemnify" the managers.

Personal injury coverage should be included. Anyone who lives in the world of community associations knows that the issues of defamation, invasion of privacy, and wrongful eviction offense become issues much more than we would hope.

While most associations do not have employees, workers' compensation exposure must also be considered. Similarly, most associations do not have auto exposure, but this is another risk that must be evaluated.

Finally, the general liability policy should include, if appropriate, Host Liquor Liability, Non-Owned/Hired Auto, and Fire Legal Liability.

Directors & Officers Insurance

The association is a legal entity managed by a board of directors. To convince the best individuals to sit on these boards, one must provide them the best and broadest coverage.

D&O coverages vary greatly from one carrier to another. Although this is a generality, it appears that most D&O endorsements in package policies do not provide adequate coverage for today's community associations. A comprehensive D&O policy should cover the following:

Defense of monetary and non-monetary claims.

Defense of failure to maintain or to obtain insurance.

Defense of third-party contracts.

Full prior acts coverage.

Definition of insured includes: Past, present, and future directors and officers; committee members; volunteers; employees, including leased employees; independent contractors; spouses; and domestic partners.

Discrimination coverage, including third-party discrimination

Personal Injury Coverage, including defamation, wrongful eviction, and invasion of right of privacy.

Employment practices coverage

Property manager included within definition of insured

Consent to settle clause, preferably with soft-hammer clause.

The exclusions in a D&O policy create a gap in coverage in the event that the association has employees and provides a "defined benefits plan," sometime referred to as the ERISA exclusion. This gap is filled with a somewhat misleadingly titled policy known as a "fiduciary" policy. As we know, the key duty of the board is fiduciary policy. However, a fiduciary policy is really for the purpose of filling the gap of the referenced exclusion.

Fidelity and Crime Insurance

The challenge of the fidelity/crime coverage is twofold. First, many package policies include sub-limits of employee dishonesty coverage. Second, the corresponding premiums are so low that many agents do not have the patience to spend time on the product.

One thing to keep in mind is that this coverage is very often a moving target. This is a first-party coverage, and what is being insured is what the association "owns." In this regard, accounting must be done to determine what the association has in all accounts and investments. The association should also be cognizant of windfall deposits such as insurance proceeds and the collection of special assessments that go beyond the normal fee accumulation of associations.

The best association fidelity/crime policies contain the following coverages:

Employee theft

Forgery or alteration

Inside the premises – theft of money and securities

Inside the premises – robbery or safe burglary of other property

Outside the premises

Computer fraud

Funds transfer fraud.

Umbrella Liability Insurance

The umbrella liability policy is becoming a much more important part of the community association puzzle as our society becomes more litigious. There are a couple of keys to the umbrella coverage. First, what limits are sufficient? Second, what is the umbrella policy actually covering? Again, many people do not look closely at the coverage because they are convinced that the umbrella policy will never be triggered.

What must also be kept in mind is that limits in and of themselves are not sufficient. Most umbrella policies are "following-form" policies, meaning they follow the terms and conditions of the underlying scheduled policies. If those policies do not provide adequate coverage, then the umbrella is just proving higher limits of inadequate coverage. In addition, umbrella policies also include their own exclusions that may be in addition to the underlying policies. Specifically, be cautious that they do not exclude D&O, EPL, or coverage for managers.

Conclusion

While no article can completely replace an agent's due diligence in knowing the risk and the industry, hopefully this article will provide a starting point for agents looking to add this niche to their book of business. It is never too late to master a new market.