In all the years I’ve been practicing law, and particularly HOA law, there is one thing I learned for certain: Most people hate insurance. Why? Because insurance documents are difficult to understand and confuse many who attempt interpretation of them. Thank goodness boards and managers have insurance professionals to rely upon! This leads me to the first rule of thumb when it comes to insurance—make sure you have a good relationship with the association’s insurance representative so you are comfortable calling the representative and asking questions about your association’s coverage. But it’s hard to get answers if you don’t know what questions you should be asking.
Although there are many nuances when it comes to insurance, this article focusses on situations that may result in coverage gaps and identifying the “red flags” that indicate when it’s time to call the association’s insurance representative.
Claims Made v. Occurrence Based Policies
The most common coverage gaps occur when an association is changing insurers and fails to ensure the new policy picks up where the last policy left off. How is this possible? It is possible when one policy is a “claims made” policy, while the other one is an “occurrence based’ policy.
A “claims made” policy only covers claims that are made during the period that policy is in place regardless of when the claim actually occurred. On the other hand, an “occurrence based’ policy covers claims that occurred during the period the policy was in effect, even if such claims are reported after the policy no longer exists. Therefore, an association that is changing insurance policies from a “claims made” (original policy) to an “occurrence based” policy may experience a coverage gap if a claim occurred during the original policy period, but was not reported until the new policy kicked in.
To eliminate the possibility of the above described coverage gap, make sure you know whether the new and old policies are “claims made” policies or “occurrence based” policies. If the two types of policies are different, discuss additional gap coverage with the association’s insurance representative.
Another circumstance that may lead to a gap in insurance coverage is the wind/hail deductible. The current trend is for such deductible to oftentimes equal a percentage of one building’s or all the community’s buildings’ total valuation. Typically these percentage based deductibles range between 1% and 5% of the buildings’ values. Although this may not seem like a huge amount, if a particular building is appraised at $5 million and the deductible is 2% (per building), the association will be on the hook for paying a $100,000 deductible. If the entire community is appraised at $25 million and the deductible is 2% (of the entire community), the association will be responsible for paying a $500,000 deductible, which is not small potatoes.
What can be done to avoid this type of coverage gap? First and foremost, all owners in the community should continually be encouraged to obtain loss assessment coverage, which is an endorsement to their personal property policies covering special assessments imposed for the purpose of covering insurance deductibles. Having this type of coverage, will allow associations to special assess owners for the deductible amounts and have such special assessment paid by owners’ insurance carriers.
A second, and more difficult, option is to try and find a policy that provides a flat fee dollar deductible for wind/hail claims. Although very rare, some insurance carriers are willing to underwrite policies with a flat fee wind/hail deductible.
Another red flag to watch out for is a “co-insurance” clause in the association’s policy. In short, a co-insurance clause requires that buildings be insured up to a particular percentage of their value, or the association faces a monetary penalty when it submits a claim.
For example, your insurance may provide an 80% co-insurance requirement, which means the buildings must be insured to at least 80% of their full values. If the association’s total building coverage is less than 80% of the total value, the association becomes a “co-insurer” and must pay a portion of the claim out of its own pocket.
The best way to protect your community against this coverage gap is to make sure the association obtains coverage for 100% of the building(s)’ replacement cost and the community’s insurance policy does not contain a co-insurance requirement.
Although there are always risks that an association is not adequately insured or has gaps in coverage, the above three items are some of the most reoccurring causes of coverage gaps. So if any of these red flags pop up, make sure you contact the community’s insurance representative right away.
Should you have any questions concerning insurance coverage gaps or insurance in general, please do not hesitate to contact one of our attorneys at 303.432.9999.