Association Insurance Fundamentals
One of the most important responsibilities that an association board has is the purchase of an association’s insurance policies. Insurance is a necessary and legally required expense to protect the membership from direct exposure to unforeseen expenses resulting from damage caused by certain occurrences. No association can prevent calamities, which is what makes adequate insurance so critical.
Many homeowner volunteers join a board with little to no experience in the various types of insurance that are needed, let alone what makes sense in terms of limits and deductibles, what legal or governing document requirements may exist, or if the carrier offering the insurance is appropriately rated and a credible provider for an association.
There is no single source that can completely guide a Board on what specific type of insurance is needed for their particular community. While California law provides some guidelines for types of policies and coverage limits, those can be augmented or even superseded by an association’s individual governing documents. As such, it is important to read and understand the specific insurance obligations in your community’s CC&Rs. Your association’s product type (i.e. condominium, single-family-home) also factors into the types and limits of coverage that should be purchased, not just for an association but for your own individual home as well, to work in concert with the association’s master policy.
Common insurance policies that an association can purchase include:
Property Insurance: This offers protection against property loss for many catastrophes. Fire is the most common type of loss, along with water losses from plumbing failures. Earthquakes and floods are the most common exclusions. If you live in a Planned Unit Development, this insurance will only be for common area and structures owned wholly by the association, such as a clubhouse or pool cabana. If you live in a condominium community, this insurance also applies to the common structure that contains the individual units owned by the members. This insurance does not protect any elements of personal property owned by individual members.
An association’s governing documents will determine what type of property insurance to carry if you are a condominium community, and it’s critical to understand that for such a community, insurance responsibilities rarely align with the maintenance responsibilities in the governing documents. Insurance companies generally offer three types of products for an association:
1. Walls In/All In/All Inclusive: The association’s insurance policy includes coverage for the residential structure as well as fixtures and improvements to the interior of the unit. These include floor coverings, cabinets, countertops, and bathroom fixtures. Imagine a giant picking a
building up and shaking it, so that everything not fixed to the structure falls out. The association’s insurance policy includes coverage for everything that stays stuck inside.
2. Walls In, Excluding Improvements and Betterments: This is the same as Walls In/All In/All Inclusive, except that improvements from the original construction are not covered. The association’s insurance policy includes coverage for the original builder installed fixture. Any upgrades to that component are the responsibility of the unit owner.
3. Bare Walls: The association’s insurance policy includes coverage for the residential structure, from the exterior of the building through to the interior surface of drywall. Imagine standing in the threshold of your home, facing the door jamb. Put one palm on the outside of the building, and the other on the inside. The association’s insurance policy includes coverage for everything between your palms. Anything on the inside of the unit is the responsibility of the unit owner.
Insurance responsibilities and maintenance responsibilities are rarely, if ever, the same. The variations of maintenance responsibilities are almost infinite, but they don’t change when a loss occurs. The party responsible for maintenance of the damaged property is still responsible for the cost of repairs. Insurance just helps us identify from where that party may obtain some of the money needed to make those repairs. It is critical for homeowners to have their insurance representative consult with the association’s insurance representative to ensure there is no gap in coverage if a loss occurs.
Earthquake Insurance: This is a specific type of property insurance and is only triggered in the event of a loss caused by an earthquake, as that damage is specifically excluded from other types of property insurance policies. The reason is that earthquake damage is often catastrophic and complete, making it a more expensive pay out by the carrier. Therefore, it costs more to purchase. Governing documents generally don’t require this type of insurance, and many associations find it to be cost-prohibitive. Additionally, the deductibles are often high and the payout formula complex.
Your board should work with a broker to explore options for the community and what the fiscal impact would be. Many associations opt against purchasing this coverage when confronted with the cost, which leaves the association with a significant exposure in the event of the catastrophic earthquake.
Flood insurance: This insurance is protection against damage from a river or lake flooding. This coverage is available to any community, but it is mandated for communities within certain federally identified flood zones.
General Liability Insurance: This insurance offers protection for an association against allegations of negligence that may have led to bodily injury. A common example is a trip and fall injury. If the association is found negligent, meaning the condition that caused the slip and fall could have been addressed and therefore possibly prevented, general liability insurance provides the cost of defense and will pay certain settlements and judgements if awarded.
Directors and Officers Liability Insurance: This is perhaps the most critical insurance coverage for an association’s board. It specifically protects volunteer board members from liabilities that may arise over the exercise of their judgment and decisions they make in their role as a board member. This insurance is critical because lawsuits happen (even frivolous ones), and everyone makes mistakes. If board members were all held personally liable for good faith mistakes, no one would agree to serve as volunteer directors for an association.
The expanded title of this type of professional liability insurance is Directors and Officers, Errors and Omissions coverage. As long as the board is making decisions in the best interest of the community, in good faith, and with the advice of experts, there is protection for the directors so that they are not personally liable. For example, if a board made a decision to put off a concrete repair project because there was a more pressing repair to be done, and someone was injured as a result of that decision, directors and officers coverage would likely pick up defense and protect the directors, as they were reasonably exercising their judgment.
Umbrella/Excess Liability Insurance: This is not a specific type of insurance, as we are listing out here, but as the term suggests, it acts as an umbrella over multiple types of policies. This allows it to serve as an additional layer of coverage above the policy limits (for example, general liability) in the event the policy limits are less than the financial liability. Umbrella policies are generally less expensive to purchase because their coverage would only be triggered if there was a loss that exceed the primary policy’s limits. This is a tool used to purchase more coverage and save the association on the overall cost of insurance.
Fidelity/Crime Insurance: This is a specific type of insurance coverage (often a bond) designed to protect an association’s funds from theft. This is a required coverage per most community CC&R’s. In newer communities (built in the last decade) it is becoming more common to find details on how the limit of coverage must be calculated. In addition, California has enacted legislation that requires a limit at least equal to three-months of assessments, plus reserves.
As our society becomes more computer based for payments, fraud and theft in this area is increasing, which makes this coverage more important than it historically has been. In addition, coverage can be augmented with Cyber Crime and Cyber Liability insurance, to protect against those digital attacks.
Workers Compensation Insurance: This is potentially the most overlooked type of coverage, as most associations don’t have direct employees and often assume they don’t need this coverage. However, there are minimal policies that should be strongly considered that can serve two important purposes. The first is protection for homeowner volunteers who may suffer an injury, such as a sprained ankle while performing a property inspection. The second is to provide an association with “gap” coverage, for lack of a better term, in the event an association vendor has a lapse in their coverage while working on the property and a worker suffers an injury.
While there are other, more specialized types of insurance policies available, the polices outlined above are the most common.
For condominium owners, or attached Planned Unit Development owners, understanding what the master policy covers is critical to ensuring there are no gaps in coverage that leave the individual homeowner exposed. Owners should always have their personal insurance representative speak to the association’s insurance representative in order to determine the policy coverage and limits that provide the most protection for the owner.
Additionally, homeowners should look at their individual insurance policy to determine if there is any “loss of use” coverage, which would cover them, in whole or in part, should temporary off- site accommodations be necessary. It is important to note that if there is a fire or significant water loss, an association has no obligation to pay for off-site accommodations for any affected homeowner. That responsibility lies with the individual owner and having coverage as part of an individual package can provide peace of mind during this difficult time. It’s also important for individual owners to disclose and discuss with their insurance representative if the unit is their residence or a rental unit; a rental unit will often require a different set of coverage limits maximize owner protection.
Property insurance coverage is becoming extremely challenging for insurance providers if the community is in a high fire danger zone. The size and number of wildfires in California are increasing, and many catastrophic losses, particularly in northern California, over the past few years have driven costs up exponentially. The state is considering allowing insurance carriers to differentiate between wildfire risk and typical home fire risk in pricing models, which will allow for more affordable options to California residents but will also create an additional class of insurance risk that associations will need to consider if this methodology is adopted. For information on this concern and how you can support it with the California legislature, please visit https://caiclac.com/increased-rates-of-insurance-due-to-wildfire-risk/.
If you have any questions or feedback that you would like to share regarding this educational piece, please feel free to contact Dave Potter, Regional Vice President of PMP Management, at dpotter@pmpmanage.com.