Condominium Insurance Seminar
Note - This paper was presented at the seminar “Insurance, are we Covered.” on May 1, 2004 by Steven M. Ott and Dennis Rango of State Farm.
Condominium Insurance Seminar
Insurance can be the most important and most expensive responsibility facing the association. It is also the least understood responsibility and therefore subject to the most abuse. A wise Board has a good relationship with competent insurance personnel.
If a unit owner was roller-blading on association property, tripped over a speed bump, fell, and became badly injured, would the association and/or community manager be safe from a lawsuit? Probably not. In fact, the resident could opt to sue the association (for being injured on the property), and could also sue the manager (for not maintaining the speed bumps properly, as well as for not advising the association as to the hazards that speed bumps create). Insurance was created for times like this, but do you know which kind you need to protect yourself and your management company from the claim filed by our novice roller-blader? In fact, a manager would need two different kinds of insurance to be covered properly in this case--and neither one is included in a basic multi-peril package. No one really likes to think about insurance, but it's dangerous to assume that an elementary property and liability policy will always get the job done. You can hope that no resident ever takes up a new sport on association property again--or you can bolster your defenses by practicing good risk management. There's no better way to protect yourself than through prevention.
Areas of Concern
- Terminology
- Lack of understanding
- Inaccurate and inconsistent terminology in the declaration and by-laws
- Coverage analysis includes:
- Evaluation of exposure to loss
- The selection and cost of appropriate insurance
- Understanding the ramifications of deductibles
- Whether deductibles are per claim or occurrence-wide
- Exclusions
- Variations in coverages for Directors and Officers liability
- Just current officers or past officers also? Committee members? Managers?
- Risks Insured
- Scope of risks goes with type of insurance, e.g. D&O, P&C, EPLI etc.
- Careful review of policy coverages and exclusions
- Settlement and Adjustment
- Who pays deductible
- The person who receives the benefit (equitable approach)
- Association pays deductible (association expense)
- Required types of Insurance for Condominium Association
- Casualty – real property, equipment and buildings
- Public Liability – coverage of bodily and personal injury arising from claims that occur on or relate to the common areas. Examples are slip and fall cases, accidents, slander, false arrest, contractual liability, tort liability
- Directors and Officers – failure to perform their duties properly
- Other types of Insurance
- Fidelity Bonds
- Workers compensation
- Performance bonds
- Appropriate Insurance Program
- Financial protection to owners against possible loss of common property because of fire and other perils
- Financial protection to the owners against the possible loss due to liability for accidents or errors occurring in the common areas or because of action or inactions of the board
- Steps in determining appropriate insurance responsibility
- Determine extent of insurable interests
- Anything that the association has a financial responsibility to the unit owners
- Review applicable statutes, declaration and by laws
- Educate unit owners to integrate their policy with the association's to prevent gaps in insurance coverage
- Investigate insurance companies
- Review solvency rating –
- A.M. Best, Standard and Poor, Moody's Investor Service, Duff and Phelps
- Compare rates between carriers
- Also consider quality of service, expertise, experience agent, and premium cost
- Board should consider including the following special considerations
- Inclusion of unit owners as additional insured's
- The insurer's waiver of its right to bring actions against unit owners to recover claim proceeds paid to the association caused by a unit owner (waiver of subrogation)
- Insurer's acceptance of an insurance trustee to collect insurance proceeds if so required by the governing documents
- Severability of interest clause that insulates the coverage of innocent insureds from the effects loss-causing acts of other insureds
- A no-control clause that will cover the loss even though the insured acted outside the associations control and delegation of authority
- Cross-liability clause that allows one insured to bring a claim against a co-insured
- Replacement of the standard mortgage clause with the issuance of a mortgagee interest certificate which prioritizes the association as the first named insured over the mortgagees to receive the claims proceeds
- Insurance implications of local, state and federal laws
- Workers Comp, changes in local building codes and zoning codes
- National Flood Insurance Program
- Secondary Mortgage Lenders (VA, FHA, Fannie Mae, Freddie Mac)
Directors and Officers Insurance
Name the manager and/or management company on the association's general liability (GL), directors and officers liability (D&O), and fidelity bond policies. Also, make sure the association's D&O policy has an employment practices liability insurance (EPLI) endorsement
D&O insurance pays for the financial consequences of certain wrongful acts committed by a board of directors. The policy should cover any directors and officers--past and present--of the association. Coverage can be extended to include employees and other volunteers, such as committee members. Limits of coverage typically exclude bodily injury and property damage (covered under the General Liability package), intentional acts of dishonesty, and situations where the insured may have gained personal profit or advantages for which he or she was not legally entitled. Some policies may exclude sexual harassment, discrimination, and wrongful discharge suits.
More importantly, D&O coverage also pays for the defense (i.e. attorney fees and court costs) of a claim of wrongful acts.
Purchase a policy from a company that has a history of working with community associations. This is important--if you submit a claim under the policy, the claim adjuster and attorney assigned to your case will be properly experienced in protecting your interests and the interests of your association.
Also look for an insurance company with an A.M. Best rating of at least an "A" or higher. A.M Best is one of several private organizations--including Standard and Poor, Moody's Investors Service, and Duff and Phelps--that rates property and liability insurers. Make sure your insurance company has a high rating from one of these organizations.
Once you select a D&O program, stick with it. Don't switch carriers every year based on small variations in price. Your new carrier could deny your claim due to prior knowledge of a claim by a board member at the time the application was signed. Or, if your agent switches you to an occurrence policy (covers claims for alleged wrongful acts which occurred during the policy period) from a claims-made policy (covers claims for alleged wrongful acts when a claim is made and reported during the policy period), there could be a gap in coverage.
TAKE THE D&O TEST
Is your D&O policy as broad as it should be? Take the following test. If your policy does not offer the items listed below, look for a program that does.
* Insures past and present directors, officers, committee members, volunteers, trustees, and employees
* Insures the association named in the definition of insured
* Does not exclude prior acts
* Insures the builder/developer while serving on the board
* Defends nonmonetary damages
* Does not exclude sexual harassment, discrimination and wrongful discharge
* Does not exclude libel, slander and defamation of character
* Does not exclude publishers' liability and copyright infringement
* Provides a duty to defend
* Carries an A.M. Best rating of at least an "A"
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