Community Association Insurance for Condominiums & Homeowners Associations (HOA’s)
Insurance is the last thing you want to read about. Everyone wants the lowest price and then expects all claims to be insured and covered by the insurance carrier. This article will point out several areas that are often overlooked because the board voted on the lowest price. You Association should only work with an insurance professional that specializes in Association insurance – someone that is looking at the specific coverage, endorsements, and the exclusions in the policy.
Are you overwhelmed with all the insurance terms and coverages you need to understand and ensure your Association is properly protected? How do you know what is covered and what is not covered? Are you properly insured to make sure that a property fire, water damage or being served a lawsuit will provide the proper coverage for your Association? The attached checklist will assist you in reviewing your policy to make sure you have the coverage before a claim occurs.
Far too often, a board votes on the lowest price without really knowing what coverage they are losing. Serving on a board is important and it is critical that the Association provide the proper protection for the board and the unit owners.
So, let’s get started:
MASTER POLICY – This policy includes both property and general liability. The most common mistake found is the improper named insured on the policy. The policy should reflect the exact name of the entity. Often the policy was written prior to the Association becoming incorporated and the name was never updated.
Do you know the difference between an admitted and non-admitted carrier? An admitted or standard carrier has been approved by the State Insurance Department and backed by the state. Because of high claims or coastal locations, the Association may only be able to purchase insurance from a non-admitted or excess/surplus lines carrier. A non-admitted carrier is not subject to the same regulations which apply to an admitted carrier. The non-admitted carrier does not participate in any state insurance guarantee fund. The Association will want to inquire about the claims service offered by the carriers.
When evaluating any insurance carrier, be sure to check both their financial rating and financial size to assure they can meet their financial obligations to the Association in the event of a claim.
PROPERTY – Property Insurance will cover the condo building and common areas owned by the Association, including a clubhouse, pool, and other property.
Your governing documents will define the common elements, limited common elements and units. There is a lot of confusion between the unit owners responsibility for the maintenance and repair of the unit and the master policy coverage when a claim occurs. Both the Master Policy agent and the Homeowners policy agent need to understand how the documents define the replacement value and which policy will respond to the claim. Do the documents refer to 100% of the replacement cost? In Virginia, do the documents define the claims settlement as walls in, single entity, bare walls, studs in, all-inclusive or a combination? In Maryland the Condo Act defined the claims settlement as single entity. Not knowing where the master policy ends, and the homeowner’s policy begins could leave a tremendous gap at the time of the claim.
Check your Association Insurance policy for these areas that are often overlooked:
Can be a flat dollar amount or a per unit deductible
Look for a wind/hail deductible for coastal properties. You may find a 1%, 2% or 5% deductible. This means the deductible is a % of the building value, i.e. $1,000,000 building with 2% deductible would have a $20,000 deductible for wind or hail.
Ordinance or Law Coverage:
This is critical for any older structure and provides coverage for loss caused by enforcement of ordinances or laws regulating construction and repair of damaged buildings. Therefore, you need to make sure that your policy has three coverage parts:
Coverage A Contingent Liability for Undamaged portion of the building
Coverage B Demolition Cost
Coverage C Increased Cost of Construction
LIABILITY POLICIES – Often overlooked are the 3 additional insured endorsements that must be added.
- Most policies will include the property management firm as an additional insured for the General Liability portion of the policy.
- The Directors and Officers Liability needs to be endorsed to cover the property management firm.
- The Fidelity Bond language needs to be amended to define the property management firm as an “employee” under the Employee Dishonesty coverage.
General Liability – Covering both bodily injury and property damage liability. Check to make sure you have coverage for personal injury (libel, slander), discrimination, and unit owners and managers are named as additional insured. Check the exclusions such as assault and battery.
Non-Owned Automobile Liability – If your employees or volunteers use their own vehicles on association business, this coverage provides liability coverage in excess of an employee’s or volunteer’s auto insurance. The coverage will respond if the association is held liable for the employee’s or volunteer’s actions involving his or her vehicle and the limits of the individual’s personal auto insurance policy have been exhausted.
Hired Automobile Liability Coverage – Provides the liability insurance for a vehicle that has been rented, leased, or hired by the association to be used for purposes related to association business and the passengers inside.
Directors and Officers (D&O) Liability – Directors and Officers insurance will cover the decision made by the board. Boards have exposure to a broad range of potential lawsuits, including wrongful termination, harassment, discrimination, negligence, financial mismanagement, non-monetary lawsuit, and many others. Purchasing D&O by endorsement to a Master Policy will not provide the board with the broadest coverage. A specific comparison of the coverages and exclusions should be reviewed as well as the pending and prior date and/or retroactive date.
Cyber Liability – Cyber Security and Data Breach can cause a significant financial threat to Associations. This policy provides security failure liability, data breach response coverage, cyber extortion and ransomware demands and regulatory and penalty protection.
Umbrella Liability – Always check the underlying policies on the umbrella to make sure they reflect the Directors and Officers or Workers Compensation policies. If these policies are written with a different carrier and not listed as underlying policies, then the umbrella is not excess over those policies.
FIDELITY COVERAGE – Referred to as a fidelity bond or crime coverage or employee dishonesty, this coverage protects the Association funds from fraud or theft of funds. Both the Condominium Act and the Property Owners Act require the Association to maintain a blanket fidelity bond or employee dishonesty insurance policy insuring the Association against losses resulting from theft or dishonesty committed by the officers, directors, or persons employed by the Association. Be sure to verify the property management firm is defined as an employee under the bond.
HOMEOWNERS INSURANCE – Review your HO-3 or HO-5 for Homeowners or Site Condo Owners and HO-6 for Condominium Homeowners to verify coverage.
- HO-3 or HO-5 Dwelling coverage for Homeowners and Site Condos Owners
- HO-6 for the Condominium unit owner to cover betterments, improvements, upgrades, alterations, additions
- Personal Property of unit owner
- Cost to live elsewhere during period of restoration
- Personal Liability
ANNUAL REVIEW — It is particularly important that you meet with your insurance agent on an annual basis. Have there been any changes or activities within the Association? Be sure to discuss any changes in values, operations, fire or theft protections, sprinkler system or burglar alarms. Make sure you review potential policies that the Association should consider and review any potential exclusions.
Unit owners should review their homeowners insurance. Did you volunteer as a board member? Do you have the proper coverage?
Because claims are usually sudden, accidental, and unexpected, you should understand the primary types of insurance coverage required by most community associations to properly insure against loss. Knowing the insurance has been analyzed and reviewed will allow the Association to be better prepared and know what coverage they are insured for and what claims they might be self-insuring.
Connie E Phillips, CIC, EBP, CIRMS
Certified Insurance Counselor (CIC)
National Community Association Institute Educated Business Partner (EBP)
Community Insurance and Risk Management Specialist (CIRMS)