Do you know whether you are fully insured? Do you even know how to figure this out? Every homeowners and condominium association needs to protect itself from various losses, claims, and liability exposure through a comprehensive insurance program. Here are some tips to ensure you have appropriate and adequate insurance:
TIP 1: Know the four primary sources of insurance requirements:
- Colorado Law. If you are a post-CCIOA association (i.e. created on or after July 1, 1992), you need to follow the requirements under CCIOA, at C.R.S. § 38-33.3-313. If you are a pre-CCIOA association (i.e., created prior to July 1, 1992), you need to follow the requirements of your declaration, if any.
- Declaration. This document often establishes insurance requirements. If you are a post-CCIOA association, you will still need to follow any stricter requirements of your declaration. If you are a pre-CCIOA association, follow your declaration.
- Lenders. Lenders, including loan guarantor agencies and secondary mortgage market institutions, often establish insurance requirements. For example, the new Federal Housing Administration Condo Project Approval & Processing Guide (FHA Guidelines) require associations to carry minimum levels of hazard insurance, liability insurance, fidelity insurance and flood insurance.
- Board Judgment. The board must use its best judgment to determine insurance requirements. Most director and officer liability policies do not cover board decisions on insurance coverage matters.
TIP 2: Follow these four steps when buying property insurance:
- Define the property to be insured. The board and unit owners need to know who is responsible for insuring what. The association’s insurance policies should define unit the same way the association’s legal documents define it. This clarification helps to avoid gaps or duplications in coverage between the unit owners’ individual policies and the association’s policies.
- Determine the extent of coverage. The exact type of coverage provided is important. Original to construction or single entity coverage gives the association coverage to replace or repair the unit as it was sold under the original declaration, leaving the owner responsible only for his or her personal property and improvements. Bare walls coverage only restores the unit to the unfinished exterior surfaces of perimeter walls, floors, and ceilings and leaves everything else (appliances, cabinetry, fixtures, wall and coverings) to the responsibility of the unit owner and/or insurer. Unit owners can protect their own insurable interests if they know the type of coverage the association has.
- Determine the scope of coverage. Coverage should be provided on a special form or all-risk basis instead of a named peril basis. Special form coverage covers claims from any perils not explicitly excluded in the policy. The special form policy shifts the burden of proof of a claim from the insured to the insurer. A named peril policy covers only explicitly included perils, such as fire, and is a much more limited form of coverage.
- Determine the amount of coverage required. The amount of coverage required insurance does not necessarily equal the full market value of the unit(s). The market value includes the land and/or foundations that are unlikely to be affected by a covered loss. Obtain a specific replacement cost endorsement because it avoids having to negotiate deductions for depreciation of insured property in case of a loss. Seek an agreed amount endorsement which waives co insurance and protects against replacement shortfalls due to inadvertent underinsurance. You should either obtain a “guaranteed replacement cost endorsement” or have an inflation guard endorsement to protect against any gap in coverage from a rise in value or replacement cost during the life of the policy. Review coverage for complying with new building laws.
TIP 3: Follow these tips when buying liability insurance:
Liability insurance covers the defense and judgment costs of the association where it is found responsible to its members or others from some act or inaction that violates the rights of another person or entity or for failure to perform one or more of its duties. There are a number of factors to consider when buying liability insurance.
- Know whether your limits are on a per occurrence or claims made basis. The traditional policy form is the occurrence form in which the policy responds to a coverage claim that stems from a period when the coverage was in force, even if the coverage is no longer in force when the claim is actually made. The claims made form covers claims made during the time the policy is in force. To be covered for acts before or after the policy term, it is essential to purchase, at extra cost, a specific extension of coverage. Be aware, however, that some insurers do not provide this service. There is a serious danger of gaps in coverage when changing insurers. Boards should request occurrence form policies when soliciting insurance bids.
- Know the true extent of your coverage and obtain additional coverage that is not included in the basic policy. Consider your need for coverage, such as personal injury (nonbodily injury), premises medical payments, host liquor liability, watercraft liability, contractual liability, and nonowned automobile liability. Since most of these are not included in the standard general liability policy, discuss them with your insurance provider.
- Consider an umbrella liability policy for additional protection. To obtain higher amounts of coverage at a competitive price, many associations obtain umbrella liability policies that only come into play after the limits of the underlying policies are reached. This protection is especially important if the underlying general liability policy has an aggregate (combined total) limit that could be reached in a single occurrence, leaving the association bare in the event of future claims unless additional insurance is purchased.
- Contractors must maintain appropriate insurance. Require all contractors and subcontractors to show proof of adequate liability and workers compensation insurance. This proves that they are contractors and not employees. It also helps protect the association’s claims history and insurability.
- Review the scope of fidelity insurance. Most standard forms of fidelity insurance only protect the association from theft by its own employees. They do not cover theft by independent contractors such as management firms, and, in some cases, by the association’s own officers or directors unless specifically stated in the policy. Coverage purchased by the management firm protects only the firm against theft of its funds by its employees and does not cover the association’s funds. Association can broaden their fidelity coverage to include such exposures.
- Obtain director and officer liability coverage. CCIOA and most governing documents do not require D&O coverage. Board members should take necessary steps to protect themselves for claims filed against them personally. Because coverage differs, examine competing policies closely. Some things to look for include :
- The policy’s definition of named insured should include present and former board members, managers, officers, volunteers, and committee members.
- Understand the policy language, especially as it pertains to how you will be defended and by whom. Determine whether coverage for defense cost exists in suits that appear to be without basis or that may seem to fall outside the scope of coverage.
- Make sure the policy covers nonmonetary claims, since most of the claims filed against board members request a decision to be overturned rather than money.
FINAL TIP: Establish in advance how claims will be adjusted:
Per CCIOA, the board may adopt a resolution establishing a procedure for claim submissions to the Association’s insurance carrier, including how deductibles will be allocated handled. Deductibles can be absorbed by the association, passed on (assessed) to only the unit owner(s) who sustained the loss or whose negligence caused the loss, or equally passed on (assessed) to all unit owners in the association. If you don’t already have a policy in place regarding how Association insurance claims will be handled, adopt one now so as to notify owners of the proper procedures.