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.

By Stephen Marcus

When community association boards ask, as they often do, "How much coverage is enough?" insurance agents I know invariably reply, "How much can you afford?"

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:  

1. Deductibles and shifting loss. Although some condo associations have moved to higher deductibles, all condo associations should consider increasing their traditional $1,000 deductible to $2,500, $5,000 or $10,000 to reduce premiums. Together with higher deductibles, condo associations should review their documents and consider adopting a resolution or amendment requiring unit owners suffering damage covered by the condominium master policy to pay the condo association's deductible. Unit owners are typically able to cover most of this risk through their own home owner policy. A few forward thinking associations are now requiring owners to carry a home owners' policy and to produce evidence of this coverage.

2. Agreed amount endorsement. This coverage eliminates the penalty that would apply if it turns out that your condo association or HOA is under-insured. If you have only $10 million in coverage on a building that should be insured for $20 million, the insurer would be required to pay only half of any claim - $50,000 on a $100,000 loss. An agreed amount endorsement would ensure full coverage despite that gap. This coverage is affordable and readily available, but you have to request it.

3. Non-hired auto coverage Assume that a condo association board member conducting board business accidentally kills someone in an automobile accident. If his personal coverage isn't adequate to cover the claim, the victim's family can sue the condominium trust for the balance. For an additional $50 to $75 a year, a condo association can obtain $1 million in coverage for this risk. Few HOAs and condo associations have this protection; all of them need it.

4. Workers' compensation. This coverage is necessary even for condo associations and HOAs that do not have any employees. Consider this not uncommon situation. A worker responds to an emergency in the middle of the night. Focused on the pipe that is spewing water by the gallons into the common area, no one bothers to obtain a certificate of insurance verifying that the contractor who employs the worker has insurance. The worker is injured and the contractor, in fact, provides no coverage. The Industrial Accident Board in this case is likely to find that the association is the employer and is obligated to pay the worker's medical expenses.

5. Directors' and Officers' liability coverage (D&O). These policies typically will cover claims for fair housing discrimination, unfair employment practices, and the like. You want a duty to defend policy, which will pay your defense costs, versus simply an indemnity policy, which will pay if you lose a suit, but won't cover your litigation costs in the meantime. Make sure your policy specifies that the coverage limit does not include the defense costs; otherwise, legal expenses could eat up most of the coverage you have, leaving little to pay any judgment levied against you.

6. Surplus lines. Pay careful attention to policies written through excess and surplus lines. Insurers sometimes use these lines, which are not subject to state regulations, to avoid risks such as terrorism and mold, which some states require them to cover. Your insurance advisor should be able to tell you whether these policies have excluded any other risks. Monitoring the source of the insurance is especially important when you are changing carriers, because you could end up with dangerous coverage gaps of which you aren't aware.

7. Terrorism insurance. The insurance and real estate industries, among others, were much relieved by the news that Congressional negotiators have resolved the impasse blocking approval of legislation creating a federal terrorism insurance "backstop" that will pay a portion of any future terrorism-related insurance claims.   Final approval of that legislation, more likely now although not completely assured, should make terrorism insurance both more available and more affordable, both for new development projects unable to proceed without the coverage, and for existing buildings in danger of defaulting on mortgages that required coverage owners were either unable to obtain or to afford.

8. Mold coverage. To the chagrin of the real estate industry and individual homeowners, insurance carriers have been successful in limiting mold liability coverage and dramatically reducing mold-related property damage coverage. While these exclusions are based on some very real and legitimate insurance industry concerns, the real estate community must carefully evaluate the new coverages to assess their risks.

9. Earthquake insurance. Damage risks are highest for buildings constructed on fill in downtown Boston (a good-sized quake will probably send them into the waters), but some level of coverage is important for all multi-family structures.

10. Fidelity insurance. Community associations are generally aware that they need this insurance against thefts by board members or staff members (the condominium statute requires it), but most don't have enough coverage and the policies aren't always structured properly. The insurance should be issued in the association's name with the property manager obligated under the association's policy. That will cover a theft by the management company principals as well as by the property manager. The property manager will have coverage through the management company, but that policy typically will cover the property manager only.

Insurers have taken nearly 400,000 policies out of the state-run Citizens Property, considerably reducing its exposure.

Fourteen Florida-based insurers have taken 361,324 homeowners' policies from state-run Citizens Property Insurance, reducing Citizens' exposure to hurricane claims by nearly $100 billion.

Another 25,000 policies are expected to exit Citizens by the end of the year.

Reducing Citizens' policy count is desirable because it reduces the company's exposure to hurricane risk and future claims. Yet, the insurer still holds the riskiest policies in the state: 253,785 windstorm policies along the coast in South Florida. Those policies add up to $134 billion in potential hurricane claims.

The bulk of the policies sent to so-called ''take-out'' insurers came from South Florida, including 71,506 policies in Miami-Dade County and another 61,053 in Broward.

Generally, these smaller firms take out policies with no windstorm coverage along coastal areas, but so far this year Citizens has ceded 19,999 homeowners' policies that included wind coverage.

At least one of the take-out insurers is focusing on condo association insurance policies, and so Citizens is able to get off its books 601 of those policies.

At the end of November, Citizens had 1,093,138 policies on its books, representing $411.7 billion in exposure.

Three companies accounted for the bulk of the take-out policies: 116,040 by Magnolia Insurance, based in Key Biscayne; 57,217 policies by Homeowners Choice, based in Port St. Lucie, and 48,217 policies by Florida Peninsula, based in Boca Raton.

Consumers and regulators have some concern about the financial stability of these small companies that are taking policies out of Citizens.

Alex Sink, the state's chief financial officer, has asked Insurance Commissioner Kevin McCarty to report to the Jan. 13 Cabinet meeting on his agency's evaluation of the financial solvency of these companies.

''We are relying on the Office of Insurance Regulation to perform the necessary due diligence around the financial strength and solvency issues,'' said Sink in a letter to McCarty asking for the presentation.

At a Citizens board committee meeting in Jacksonville Thursday, Citizens' chief financial officer Sharon Binnun said the takeouts are reducing the premiums collected by the company. She noted that many of the policies leaving include some of Citizens' larger policies with higher premiums.

Homeowners who receive an offer from a takeout insurer don't have to accept it if they would like to remain with Citizens.

Takeout companies are required to keep the policies they assume from Citizens for three years. Citizens has paid a bonus to takeout companies in the past, but not now.

 

• 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.

Liability insurance: The general liability insurance policy is the insurance the condo association or HOA buys for most types of personal injury claims. For example, if someone trips on the HOA property or in the Condo Association building and files a suit, the general liability policy is the insurance that provides protection to the Condo Assoication. I recommend that the declaration specifically require the condo board to obtain liability insurance. Many older condo documents require minimal amounts of condo insurance (such as $300,000), which is no longer commensurate with modern day risks.

• Bare walls - coverage for the common elements, usually excludes property within the unit such as interior walls, permanently installed appliances, fixtures, finishings, floors and ceilings
• Single entity - coverage for the common elements, usually includes initially installed property in accordance with the association's original plans and specifications
• All in - coverage for the common elements, plus initially installed property, plus improvements and betterments made at the expense of the unit owner

Workers' compensation: Unless the condo association employs four or more employees, workers' compensation is not legally required by the HOA or Condo Association. However, many condo associations which do not employ four or more people still purchase a "minimum premium insurance policy." The purpose of the minimum premium insurance policy is to provide stop-gap protection in the event an uninsured worker is injured on condo association premises. The benefit of workers' compensation is that it is the exclusive remedy for injured workers, meaning they cannot sue, but are entitled to a legally stipulated schedule of benefits to compensate them for their injuries. This should again be addressed in the declaration of condominium association.

Directors and officers liability insurance: Usually called D&O insurance or E&O (errors and omissions) insurance, this is one of the most important policies for the condo association or HOA. The purpose of the D&O policy is to provide coverage in a defense (a lawyer) if a suit is brought against the condoassociation (other than for personal injury) or its condo board directors. I do not believe anyone in her right mind would serve on a condo association board or HOA board that did not have D&O coverage, and I strongly believe it should be mandated through the declaration of condominium, not a permissive decision to be made from time to time by the condo board of directors or property manager.