Insurance is a necessary component of proper community association governance and risk management. All community associations are vulnerable to the loss of property and finances. Board members have a fiduciary duty to protect association assets. The association’s insurance program is a key component for asset protection. How can a board of directors determine the particular insurance needs of the community and set up an effective association insurance program? The declaration (CC&Rs) governing the community will usually contain specific provisions regarding the types and details for insurance which must be carried by the association. The Colorado Common Interest Ownership Act (CCIOA) requires communities formed after July 1, 1992 to purchase and maintain certain insurance policies “to the extent reasonably available.” This article summarizes those insurance requirements.
REQUIRED INSURANCE COVERAGES
The applicable provision of CCIOA is C.R.S. § 38-33.3-313. That provision does not apply to communities formed before July 1, 1992. Nevertheless, the declaration may require certain types of insurance, minimum policy limits and specific insurance provisions. The declaration requirements must be followed even if CCIOA does not apply.
The CCIOA requirements for insurance are mandatory “to the extent reasonably available.” The quoted language has not seen any judicial interpretation, but would relate to whether the types of policies were available for a reasonable premium cost. Nevertheless, it is difficult to forecast any situations where even significantly higher insurance premiums would excuse an association from carrying the minimum coverages available in the market. Three types of insurance are required: 1) property insurance, 2) commercial general liability insurance, and 3) fidelity insurance. Each type of insurance is discussed in detail below.
1. Property Insurance
Associations are required to carry property insurance on the common elements. The amount of the insurance policy (the insurance limits) must be not less than full insurable replacement cost of the insured property, less applicable deductibles at the time the insurance is purchased, and at each renewal date. The replacement cost of the common elements is best determined through a reserve study or similar analysis by an insurance specialist. The policies need not insure items normally excluded from property policies, such as land, excavations, and foundations.
There is considerable terminology associated with property coverage that can lead to confusion. For example, it is common for property policies to also be referred to as “casualty” insurance. Additionally, property insurance is sometimes called “all risk” or “comprehensive” insurance, or even “extended coverage” or “special form coverage.” “All risk” usually means insurance for “all forms of physical loss” except for specific exclusions which are set forth in the insurance policy itself. Hail, fire, and vandalism are typical coverages included in an all risk or comprehensive policy.
2. Liability Insurance
The second required insurance policy is commercial general liability insurance, often referred to as “CGL”. Pursuant to CCIOA, the CGL policy must ensure against claims and liabilities arising in connection with the ownership, existence, use, or management of the common elements. The amount the policy, known as the insurance limits, is the maximum amount the policy will pay out for a claim. CCIOA provides that the limits shall be not less than any amount specified the association documents, or else an amount otherwise deemed sufficient the judgment of the board of directors. Thus, the directors must investigate and make an informed decision based on their best judgment as to the amount of liability insurance to carry.
The CGL insurance must insure the board of directors, association, manager, and the association’s respective employees, and agents. The declarant is also required to be included as an additional insured, but only in the declarant’s capacity as a unit owner and board member. Unit owners must also be included as additional insureds, but only for claims and liabilities arising in connection with the ownership, existence, use, or management of the common elements.
3. Fidelity Insurance
Fidelity insurance is required if a unit owner, employee or manager controls the funds of a community with thirty or more units. Fidelity coverage protects the community from theft of funds (embezzlement) by unauthorized individuals. The minimum coverage pursuant to CCIOA is two months of current assessments plus reserves, calculated from the current budget of the Association. However, condominium communities that wish to become or remain FHA certified, must carry a fidelity policy in the amount of three months of current assessments plus reserves.
RECOMMENDED COVERAGE
CCIOA does not require associations to carry directors and officers (D&O) insurance, but the declaration oftentimes does require this coverage. Even if a declaration is silent, we strongly recommend that associations carry D&O coverage to protect officers and directors from spending association and/or personal funds to defend against suits brought by owners and third parties. The CGL policy does not cover claims based on decisions of or conduct by board members unless an accident on a common element caused property damage or personal injury. All other suits alleging wrongdoing by the board or association typically fall under the D&O policy coverage.
ADDITIONAL CCIOA INSURANCE REQUIREMENTS
If property insurance or general liability insurance is not reasonably available, or if such policies are canceled and not renewed, CCIOA requires the association to promptly hand-deliver or mail notice of that fact to all owners.
Additionally, association insurance policies must contain four specific provisions as follows:
- The policy must provide that each unit owner is insured under the policy with respect to liability arising out of such unit owner’s interests in the common elements or membership in the association;
- The policy must contain verbiage that the insurer waives its rights to subrogation under the policy against any unit owner or member of his household—this aspect is discussed in greater detail below;
- The policy must provide that no act or omission by any unit owner (unless the unit owner is acting on behalf of the association) will void the policy or be a condition to recovery under the policy; and
- If there is other insurance held by the unit owner covering the same risk/property as the risk/property covered by the association’s policy, the association’s policy will be the primary insurance, meaning it is utilized first.
With respect to deductibles and the entire claim submission process, CCIOA authorizes associations to adopt written, nondiscriminatory policies and procedures concerning the submittal of claims, responsibility for deductibles, and other matters of claim adjustment.
CCIOA also provides if an association settles claims for damages to real property, the association may assess negligent unit owners causing such loss the cost of all deductibles paid by the association.
The attorneys at Altitude Community Law P.C. can provide guidance to boards about compliance with CCIOA’s insurance requirements. Please feel free to contact us if you have any questions at 303.432.9999.