Do you know whether your association has adequate insurance? Do you even know how to figure this out? Every community association needs to protect itself from various losses, claims, and liability exposure through a comprehensive insurance program. This article provides some tips to ensure you have adequate insurance:
TIP 1: Know the 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. 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. The declaration (aka “CC&Rs” or “covenants”) often establishes insurance requirements. If you are a post-CCIOA association, you will still need to follow any stricter requirements contained in 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, Federal Housing Administration Condo Project Approval & Processing Guide (FHA Guidelines) require associations to carry minimum levels of fidelity insurance.
TIP 2: Follow these steps when buying property insurance:
- Determine the property to be insured. The board and unit owners need to know who is responsible for insuring what. Most often, the easiest way to ascertain this information is through a maintenance and insurance chart that is prepared by the association’s legal counsel spelling out all the various components in the community and who is responsible for the maintenance and insurance of each component. This chart can then be provided to the association’s insurance broker to ensure all necessary components are covered.
- Determine the amount of coverage required. The amount of coverage required 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. You should either obtain a guaranteed replacement cost endorsement, if available, 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:
- 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 (non-bodily injury), premises medical payments, host liquor liability, watercraft liability, contractual liability, and non-owned 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.
- 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 should cover present and former board members, managers, officers, committee members, and volunteers.
- Determine whether coverage of legal fees includes as part of the policy limit or over and above the policy limit.
- Make sure the policy covers nonmonetary claims (such as claims for breach of fiduciary duty).
- Review the scope of fidelity insurance. Ensure the fidelity policy covers the association from theft of funds by anyone who has access to association money. Also, again keep in mind that post-CCIOA associations are required to obtain minimum levels of coverage. In most cases association must obtain fidelity coverage of at least two months’ current assessments plus reserves, as calculated from the current budget of the association.
FINAL TIP: Easing the Insurance Buying Process
- Understand the Terms. You can’t decipher insurance without having a basic understanding of all the terms. You may want to consult our article on Understanding Homeowners Insurance to navigate through the myriad of insurance terms.
- Develop a form for bid comparison. Develop a form listing the specifications for the association’s coverage. Insist that bidders submit their proposals in this format. This allows the board to compare bids efficiently, and it is a way to evaluate competing insurers’ willingness to address the association’s specific requirements.
- Select your agent carefully. Pre qualify any agency that seeks to bid on your insurance needs. Ask for a description of their experience with community association insurance, references from other associations, and a list of insurance companies with whom they propose to work with.
Please do not hesitate to contact an Altitude Community Law attorney at 303.432.9999 if you have any additional questions concerning your architectural request forms and/or the approval process.