Purchasing condo association insurance is one of the most important buying decisions the board will make. The decision addresses risk management and must meet or exceed any insurance requirements mandated by the state and the HOA's governing documents.

Step #1: Start Early. Begin the process at least 90 to 120 days prior to the renewal date by ordering updated loss histories from all insurance carriers who have provided coverage for the Condo Association for the past three to five years. While requesting the loss history, don't forget to confirm with the current agent/broker his opinion as to whether the current insurance carrier will be offering a renewal.

Step #2: Check Loss History Accuracy. Losses can be miscoded (like "Mold Claim," when it wasn't), or a loss that should have been attributed to a different insured or a loss that continues to appear on the loss history even though the insurance carrier successfully subrogated against the negligent party (got repaid). It's also possible your carrier's version of your loss history doesn't really reflect today's condition of the property. If your HOA has taken steps to improve the property since the losses occurred, write a narrative about those steps taken and attach it to the loss history. If a particular problem has since been corrected, make sure the carrier knows it.

Step #3: Assemble a Complete Bid Package. Preparing a complete bid specification will make the evaluation process easier. The bid package should include:

1. Brief description of the property including the number of units, year built, type of construction, overview of amenities (pools, spas, etc.) and any other structural improvements the HOA may have an insurable interest in;

    

2. Copies of the governing documents;

    

3. Copy of the site plan;

    

4. Current three year loss history on the prior carrier's letterhead;

    

5. Copies of the declarations page from the current year;

    

6. Copies of the HOA's most current financial statement and budget; and

    

7. Current appraisal (if available).

Steps #4: Assign the Markets. An condo association insurance carrier will only release a premium quote to one agent. If more than one agent wants to use the same insurance carrier, you'll have to assign which person will access that market on your behalf.

Step #5: Evaluate the Insurers. While there are five well-known insurance rating organizations, most HOAs rely on AM Best. The letter grade ratings (A through F) and financial size categories (Roman numeral I through XV) can give you a quick barometer of a carrier's health. In addition to the financial ratings, the board will want to consider the carrier's experience with HOAs. A carrier who is new to the homeowner association market is probably not a good fit.

STEP #6: Is the Agent Qualified? Consider years of experience insuring Condo Associations and HOAs and involvement in industry trade organizations like California Association of Community Managers (CACM), Oregon Washington Community Association Managers (OWCAM) and Community Associations Institute (CAI). The agent/broker professional designations should include CPCU (Chartered Property and Casualty Underwriter), ARM (Associate in Risk Management), CIC. (Certified Insurance Counselor), and CIRMS (Community Insurance and Risk Management Specialist).

STEP #7: Use a Spreadsheet. Even the most experience risk manager will create a "line by line" comparison of the coverages and benefits being offered by the various companies offering a proposal. A visual representation of this type will easily illustrate the merits or deficiencies provided by one proposal over another and will tell you if a certain proposal is competitively priced only because the agent/broker has omitted an important insurance coverage.

STEP #8: Let Price Be the Last Consideration. Price is important but don't fall into the trap of going to the "bottom line" first. If you do, you may forget the number one goal of buying insurance: protecting the HOA's assets. Be certain that you're getting what you need before signing the check.

All too, often some accident or casualty occurs, a claim is submitted to the Condo Associations insurance agent for forwarding to the carrier, and a response is received informing the Board and its Manager that this is not covered, or some obtusely worded exclusion applies.  Likewise, all too often these letters go on for pages quoting provisions from the policy which, in all candor, even we lawyers are hard pressed to follow.  Considering recent trends in court decisions holding Condo Associations liable not just to third parties, but to unit owners upon ever expanding bases, this presents a particularly troublesome issue.  And the problem can be particularly acute where a Unit Owner suffers property damage as a result of some negligence on the part of the Condo Association.

            One situation we faced involved a claim of smoke damage.  As part of its winterization of a predominantly second home, summer condominium complex, the Association capped the fireplace flues - that is, they sealed them with plastic, Unfortunately they failed to inform the owners of this and someone came down for a nice winter weekend, lit the fire in the fireplace, layed back on the couch with a fine brandy and a good book, only to have smoke pour back into the unit.

            The Condo Association filed a claim under its master casualty policy.  However, as in common, it excluded the personal property of the Unit Owner and, as is becoming common, it continued a large deductible.  As is equally often common the Unit Owner had no Condominium Owners Policy (an HO-6) and, thus, demanded that the Association pay for the cost of cleaning his expensive living room furniture, drapes, etc. 

            The Insurer took the position that since the Unit Owner was a named insured under the policy, a claim could not be made under the liability portion of the policy.  Rather, the Association could only collect under the casualty loss portion.  However, that only covered the Unit and not the Unit Owners personal property and was, as mentioned,  subject to substantial deductible.

            Fortunately, in that situation we were able to negotiate a resolution with the Insurer.  However, another similar situation has arisen with another of our clients and this time the Insurer isnt flinching yet.

            All this points to the need by Boards and their Managers to carefully review insurance proposals.  It also, unfortunately really points to the need to bring in qualified, independent insurance advisors to develop specifications for the Associations insurance needs and/or for the Association to have its counsel thoroughly review policies.  Many insurance policies, though seeming the same on the surface, are materially different when their terms are peeled back.  Facing this problem after a loss is not a pleasant experience. Rather, making the extra effort in obtaining the policies can avoid unpleasant surprises.

Source: Marcus, Errico, Emmer & Brooks, P.C.

What is an HOA Master Insurance Policy?

HOA or Condo Association insurance is provided by the board of directors. This is known as a Master Insurance Policy to cover all common areas of the HOA or Condo Association's property.

• Survey all areas to be covered under the homeowners association insurance policy. As a precautionary measure, explain to all association members exactly what grounds are covered under the HOA and what is covered under homeowners insurance. The standard HOA policies cover damage caused by wind, fire, rain, flood and lightning.
• Consult an agent who specializes in HOA insurance or condo association insurance. An agent will guide you in the right direction, explain what is covered and advise what coverage limits would be appropriate for your housing plan. In addition to structure coverage, the HOA insurance policy also covers employee dishonesty, theft errors and omissions.
• Calculate each portion to be covered under HOA insurance and how much it would cost to replace that portion of all the buildings and property maintenance. Establish a reserve for funding when it comes time to replace roofs, gutters and downspouts, pool/spa maintenance and concrete repair. Whether short term or long term, there are always maintenance and repairs that need to be done. Ensure you have adequate funds to cover these. If there is not enough funding available, it could result in lawsuits from the homeowners for negligence or injury. Funds are normally established by homeowners paying the homeowners association fees.
• Ask insurance agents what types of insurance other homeowners associations of similar size and shape to yours typically buy and what is recommended for your particular homeowners association.
• Talk with the officers of your homeowners association to get their views of what types of insurance are needed. No one knows your homeowners group better than the officers and those who live there.
• Identify all board of directors as employees for the HOA insurance only. This way they are covered under the theft and dishonesty portions of the HOA.

What is a condo association master insurance policy?

Risk management is the process of planning and implementing policies that will help decrease the possibility of accidental financial and physical loss to the community association. Several types of losses can occur in a community, namely, property, liability, income, and personnel. Theft, fire, wind, flood, and other catastrophes, including hurricanes, tornadoes, and hail storms, can cause property losses. Injury to another person or to another person's property are considered liability exposures. Income exposures, by comparison, are unsound financial practices such as fraud, embezzlement, and loss of rent resulting from a covered loss of an association-owned unit. Injuries received while on the job for the community association and claims of improper employment practices are personnel losses.

• Importance of securing and maintaining insurance

The purchase of insurance allows the community association to transfer the financial burden of paying for losses to a third party, namely, the insurance company. Requirements for securing insurance policies for the community association are defined in state statutes and governing documents. Mortgage companies and secondary mortgage markets such as FNMA, FMLC, and VA also require developers to include insurance mandates in community association governing documents to ensure that their investments are protected.

To protect the association against these potential losses, the board should consider all available insurance coverages through a bidding process. Typically, an association purchases a "commercial package policy" (CPP) that includes many property and liability coverages "packaged" together. Several are highlighted herein because they may be of particular importance or may be overlooked when purchasing insurance:

For property coverage, the board should choose a deductible that is affordable, but will yield a reasonable premium. In the current insurance environment, typical community association property insurance deductibles range from $5,000 to $10,000, and perhaps higher in areas susceptible to hurricanes or earthquake damage. If a higher deductible is selected to obtain a lower premium, the community association should create an operating reserve account or budget a separate line item or contingency category to accommodate a possible large financial burden caused by one loss or several losses in the same year.

When purchasing property insurance, be sure to request replacement cost coverage and not actual cash value (ACV). Just as it sounds, replacement cost coverage will pay to completely replace a covered item, such as a roof, at current costs, no matter its age. On the other hand, ACV depreciates the item so the association would receive payment based on the age of the roof. For example, if the roof is nearing the end of its useful life-perhaps it's 18 years old, and the life of the shingles is 20 years-ACV coverage would pay the association only a very small fraction of the amount needed to rebuild the roof.

Building ordinance insurance includes the following three coverages for property that is impacted by building code changes and possible condemnation due to a partial loss. None of the coverages duplicates those under the property insurance policy, so we urge all Associa-managed communities to include this policy in their insurance program.

If there is significant damage to most of the building, the municipal building department may condemn the entire structure, which requires demolition of the undamaged portion. Property insurance pays for the demolition of the damaged structure, but extra demolition coverage pays for the demolition of the undamaged portion of the building.

Contingent liability provides the funds necessary to rebuild the demolished but undamaged portion.

Finally, increased cost of construction coverage pays for the increased cost of building code changes, such as wider doorways, hard-wired smoke alarms, fire suppression systems, and approved roof material.

Building code changes can occur as often as each year, so building ordinance insurance is a very important coverage, especially as community associations age. Property insurance restores the building to its original condition, regardless of its age. Increased cost of construction coverage updates the building to comply with the current building code.

Electronic data processing insurance is a property coverage of more recent vintage. It covers information technology exposures such as computer equipment, networks, websites, security systems, and protection from hackers.

The following policies comprise the liability side of the CPP policy:

Commercial general liability (CGL) is a policy that covers damage to the property of others. If, for example, association employees are painting a building, and some of the paint overspray lands on an owner's vehicle, CGL will cover the damage to the vehicle. CGL also provides coverage for certain bodily injuries, such as if a guest trips over a sprinkler head and twists an ankle.

Personal injury coverage protects the association against slander (verbal defamation), libel (written defamation), and defamation of character, such as if a community association posts a list of delinquent accounts on the bulletin board against the community manager's advice.

Advertising injury covers instances such as an association's plagiarizing a newspaper or magazine article or publishing an article in the community newsletter without first obtaining written approval from the author or publisher.

Hired and non-owned automobile liability covers vehicles owned by others, but used for association business. If, for example, the association's newsletter editor is in an accident while driving to a print shop to copy the newsletter, hired and non-owned automobile liability insurance would cover the damage to the other car and any injuries to its occupants, but not to the editor's vehicle or injuries to its occupants. The editor's personal car insurance policy would cover that.

Directors and officers liability (D&O) insurance covers any wrongful acts of the board of directors and volunteer leaders. Some state statutes mandate D & O coverage and include minimum limits of coverage for community association boards. It is sometimes included, in a more limited form, as a rider with the package policy. Because D&O does NOT cover intentional wrongdoing or deliberate breach of fiduciary duty, however, it is absolutely essential that board members act in the best interest of the association at all times.

We urge board members to purchase a separate D&O policy with the broadest limits available. While board members may believe that they do not need D&O coverage because they don't expect to make a mistake, an owner still could sue for a perceived injustice. D&O, as well as most other liability policies, would pay to defend the association and the board as long as the board as a whole and the board members individually acted in the best interests of the association at all times.

Commercial umbrella liability insurance provides excess coverage above most of the other liability policies. For example, the commercial general liability policy provides $2,000,000 of coverage, and the association's governing documents require, or industry best practices recommend, a minimum of $10,000,000 in coverage. The association could obtain an umbrella policy of $8,000,000 so if the $2,000,000 limit is exceeded by court award or settlement, then the umbrella liability policy would pay the difference up to the limits of the policy. Umbrella liability insurance is more reasonably priced than a general liability policy because its underwriters gamble that any award or settlement will not exceed the general liability policy limits.

Fidelity insurance protects the community association against employee dishonesty that may lead to theft, fraud, or embezzlement of association money, securities, or property. The coverage should insure all persons who handle or have access to funds, regardless of whether they are paid, such as board members, committee members, volunteers, community manager, and management company employees.

Even if the management company has fidelity coverage of its own (and professional management companies do), the policy covers only the management company's funds. The association's fidelity insurance policy should have a rider, or endorsement, that extends coverage to the management company.

Workers compensation insurance is usually required by state statute and provides coverage for employee work-related injuries and death. Even if the community association does not have employees, it is wise to purchase a "minimum value" workers compensation policy to cover contractors' employees who may work on-site on behalf of the association, but the contractor allowed his coverage to lapse. A minimum value workers compensation policy is inexpensive, but very necessary, protection for the community association.

Employer liability insurance is a must if the association has any employees. It covers instances of alleged wrongful termination, sexual harassment, and other employment-related issues.

• The bidding process

How do you determine the limits of coverage? Certainly not by using the same old numbers from previous policies! The only way to ensure that the community is insured adequately is to hire an insurance appraiser or Reserve Specialist® to determine the insurable replacement cost of the common elements and buildings for which the association is responsible. Replacement cost appraisals should be conducted at least every five years to keep up with inflation and increased construction costs. Check your association's governing documents and state statutes for legal requirements that impact community association insurance

Source: Association Times

You finally decided that your residence should be a condominium. Condos can be an appropriate choice for a number of reasons - fewer maintenance worries and no yard work are only some of the benefits. But what about insurance on your property?

In most cases, homeowners insurance differs from condominium unit owners insurance. Homeowners insurance protects the building structure and the items inside, whereas condominium unit owners insurance protects the items you keep within your unit. Also, unit owners insurance may be needed to protect any additions or alterations you have made to your unit.

Know your responsibility. The condo association insurances  building structures and the common areas, like the club house or the swimming pool with the master policy. But master policies vary widely and it's important to read the bylaws and know what is covered by your association and what items are your responsibility to insure.

As a unit owner, there are several insurance coverage options to consider:

• Personal property - protects personal items such as clothing and furniture.
• Building property - protects the additions or alterations you made to your unit.
• Loss of use - coverage for the necessary costs to maintain your standard of living after a major fire, tornado or another insured catastrophe.
• Personal liability - protects you if someone makes a claim or brings a lawsuit against you for bodily injury or property damage for which you or a member of your family are responsible.
• Rentals: If you own a unit that is rented to another party most of time, ask your insurance agent about any special insurance coverage arrangements.

Learn to protect your personal property while living safely within your condominium community.

It may be possible to be too rich or too thin, but it is very difficult to have too much insurance today, and very risky to have too little. I haven't conducted a scientific survey, but I am reasonably certain that most community associations and apartment buildings are woefully under-insured. The Fannie Mae requirement for condominiums (and thus the industry standard) calls for $1 million in general liability coverage. But the amount of coverage needed to make Fannie Mae's underwriters comfortable is not necessarily the coverage needed to protect a community association (or an apartment building owner) from a potentially ruinous liability claim. There was a time when $1 million sounded like a lot of coverage - but that was long before $5 million and $10 million judgments had become almost routine.

I asked the apartment managers attending a recent Institute of Real Estate Management seminar to indicate, with a show of hands, how much insurance coverage they had. Out of 70 managers in the room, only 2 still had their hands raised at $10 million. How would your real estate company or your community association handle a $32 million judgment awarded to a tenant or a unit owner claiming damages related to mold? What about an accident in which your building superintendent accidentally ran over and killed a child in the parking lot? A $1 million policy would not begin to cover the likely jury award.

Given the financial risks, nothing is more important than the insurance protection you have in place. But I don't think there are more than five people - including insurance agents - who have ever read their insurance policy or who understand exactly what it covers. What you don't know about your policy can definitely hurt you. One recent example: A condominium in Gloucester was destroyed completely by fire a few months ago. When the association filed its claim, they discovered that because of a measurement error, the policy understated the size of the development by 10,000 sq. ft. As a result, the coverage was less than required to rebuild the community.

Having the HOA insurance or condo association insurance coverage you need in the areas in which you need it is the biggest challenge. The areas most often overlooked or structured improperly include:  

• Step 1:Survey all areas to be covered under the homeowners association insurance policy. As a precautionary measure, explain to all homeowners exactly what grounds are covered under the HOA and what is covered under homeowners insurance. The standard HOA policies cover damage caused by wind, fire, rain, flood and lightning.
• Step 2:Consult an agent who specializes in homeowners association insurance. An agent will guide you in the right direction, explain what is covered and advise what coverage limits would be appropriate for your housing plan. In addition to structure coverage, the HOA insurance policy also covers employee dishonesty, theft errors and omissions.
• Step 3:Calculate each portion to be covered under HOA insurance and how much it would cost to replace that portion of all the buildings and property maintenance. Establish a reserve for funding when it comes time to replace roofs, gutters and downspouts, pool/spa maintenance and concrete repair. Whether short term or long term, there are always maintenance and repairs that need to be done. Ensure you have adequate funds to cover these. If there is not enough funding available, it could result in lawsuits from the homeowners for negligence or injury. Funds are normally established by homeowners paying the homeowners association fees.
• Step 4:Obtain several insurance quotes. Amounts of coverage and premiums vary according to how many units are in the housing plan.
• Step 5:Ask insurance agents what types of insurance other homeowners associations of similar size and shape to yours typically buy and what is recommended for your particular homeowners association.
• Step 6:Talk with the officers of your homeowners association to get their views of what types of insurance are needed. No one knows your homeowners group better than the officers and those who live there.
• Step 7:Identify all board of directors as employees for the HOA insurance only. This way they are covered under the theft and dishonesty portions of the HOA.

Tips & Warnings

• Hire a survey professional to look at your homeowners association insurance needs.
• Protect against lawsuits from homeowners by clearly stating what is and what is not covered under the HOA, and also state that all homeowners must have homeowners insurance. This way, HOA insurance is left to help with major damage to multiple units in case of disaster.