Community Association Insurance Manual
By Jay Hansen, Esq.
Copyright 1997-2017. All rights reserved.
Community Association Insurance Manual
Table of Contents
Page # (to the right of topic)
In General 1
1. Variations on Murphy’s Law Will Apply to the Insurance You Buy 1
2. Be Sure Your Insurance Agent Asks for Your Declaration (CC&Rs), Bylaws, and Articles of Incorporation and Reviews Them for Insurance Requirements 1
3. Keep Each Year’s Policy Together in One Folder, and Keep Each Company’s Policy Together. Don’t Ever Throw Them Away 1
4. Be Sure to Carry All the Insurance Required by Law and Your Governing Documents 1
5. Inform Your Owners That They Need Their Own Insurance 2
6. When Required, Be Sure to Meet Lender Insurance Requirements – VA, FHA, FNMA (“Fannie Mae”) or GNMA (“Ginnie Mae”) 2
7. File All Claims Properly and in a Timely Manner 2
8. Find an Insurance Agent Who Knows and Deals with Association Insurance Regularly 2
9. Find the A.M. Best’s Ratings for Each Insurance Company You Use 3
10. Find Out if Each Insurance Company You Use is Admitted to Write That Insurance in California 3
Property Insurance 3
11. The Total Building Coverage Pays Just for the Cost of Rebuilding, Not the Market Value 3
12. Evaluate Whether “Special Form” or “Named Perils” (or “Fire and Extended Coverage”) is the Better Option 3
13. Buy Replacement Cost (RC), Not Actual Cash Value (ACV) 4
14. Be Sure You Know What Owner-Maintained Improvements You Want to and Need to Insure 4
15. How Large a Deductible Should You Obtain and Who Pays It? 5
16. Is Your Deductible Per Occurrence or Per Building? 5
17. Make Sure You Do Not Have Any Co-Insurance Problems 5
18. Do Not Under-Insure or Over-Insure the Replacement Cost of Your Property 6
19. Obtain a “Guaranteed Replacement Cost Endorsement” 6
20. If You Can’t Obtain a “Guaranteed Replacement Cost Endorsement,” Get an “Agreed Amount Endorsement” 7
21. Neither Forget Nor Over-Insure Personal Property 7
22. Who Pays for Relocation Costs, What Costs Are Covered, and In What Amounts? 7
23. Obtain Coverage to Pay for Building Code Changes 7
24. Optional – Coverage for Lost Rents, If Your Association Has Any Significant Rental Income 8
25. Optional – Coverage for Floods 8
26. Optional – Coverage for Glass Breakage 8
27. Optional – Coverage for Power Failure 8
28. Optional – Coverage for Earthquake 8
29. Be Careful About “Inflation Protection” Coverage 8
30. Optional – Walls, Fences, Swimming Pools, Spas, etc. 9
31. Optional – Boiler and Machinery Coverage 9
32. Optional – Valuable Papers Coverage 9
33. Check Who is Covered by the “Loss Payable Clause” 9
34. Obtain a “Waiver of Subrogation” Clause 9
35. Obtain “Primary and Non-Contributory” Coverage 9
General Liability Coverage 10
36. Obtain a “Commercial General Liability” (CGL) Policy 10
37. General Liability Coverage Typically Covers Your Association’s Liability to Others 10
38. Look for “Combined Single Limit” Coverage for General Liability 11
39. Be Sure the Policy Has a “Separation of Insureds” Clause 11
40. Avoid a Cross-Liability Endorsement 12
41. Remember that the Dollar Limits are Typically the Maximum Payout Per Year, Not Per Claim 12
42. Does Your Policy Obligate the Carrier to Defend? 12
43. Who Has the Right to Settle and to Select Defense Counsel? 12
44. Are Defense Costs Deducted from the Total Amount of Coverage? 12
45. Is There a General Liability Deductible? 12
46. Name the Management Company as an “Additional Insured” 12
47. Know the Limits of Coverage for an “Additional Insured” 12
48. Obtain Medical Payments Coverage 13
49. Obtain “Products Liability” Coverage 13
50. Obtain “Completed Operations” Coverage 13
51. Obtain Non-Owned Vehicles Coverage 13
52. Obtain Contractual Liability Coverage 13
53. Optional – Host Liquor Liability/Dram Shop Insurance 14
54. Optional – Garage Keeper’s Liability 14
55. Optional – Umbrella and Excess Liability Coverage 14
56. Optional – Security Guard Liability Coverage 14
57. Obtain Sufficient CGL Coverage to Qualify for Statutory Limitations of Liability 14
Directors and Officers (D&O) Liability Coverage 15
58. Don’t “Cheap Out” on Your Own Coverage 15
59. Know Who is a “Named Insured” 15
60. Look For “First Dollar Defense” Rather Than a “Reimbursement Policy” 15
61. Know the Amount of the Deductibles 15
62. Ask if There is Any Co-Insurance, and Avoid It 15
63. Understand the Impact of a “Claims-Made” Versus an “Occurrences” Policy 15
64. Know the Exclusions from D&O Coverage 16
65. Find Out Whether Any Prior Acts Are Covered 16
66. Look for a Policy That Covers Non-Monetary Claims 17
67. Look for a Policy That Covers the Manager as a Named Insured 17
68. Look for a Policy That Covers at Least the Defense of Discrimination Claims 17
69. Look for a Policy That Covers Failure to Obtain the Proper Types or Amounts of Insurance 17
70. Who has the Right to Select Defense Counsel? 17
71. Who has the Right to Agree to Settle the Case? 17
72. Are Defense Costs Deducted From the Total Amount of Coverage? 17
73. Do You Need to Obtain an Extended Reporting Period or Overlapping Coverage? 17
74. Obtain Sufficient D&O Coverage to Qualify for Statutory Limitations of Liability 18
Fidelity Bond/Dishonesty Coverage/Crime Coverage 18
75. Obtain a Fidelity Bond or Dishonesty or Crime Coverage 18
76. Scope of Fidelity Policy Coverage 18
77. Does the Manager’s Fidelity Coverage Provide HOA Protection? 19
78. Time of Loss or Discovery of Loss and its Effect on Fidelity Coverage? 19
79. Other Pitfalls of Fidelity Coverage 19
Special Types 19
80. Obtain “Owned Vehicles” Coverage, Where Applicable 19
81. Is Worker’s Compensation Coverage Needed? 20
82. Should You Consider Employment Practices Liability (EPL) Coverage? 20
83. Builder’s Risk Insurance or Course of Construction (“COC”) Insurance? 20
Community Association Insurance Check List
1. Variations on Murphy’s Law Will Apply to the Insurance You Buy
. Below are some tongue-in-cheek comments, but there is an element of truth in all of them:
(a)……… Your policy will be written so there is no coverage for your claim.
(b)……… If your policy is written so there is coverage for your claim this year, it will be changed next year.
(c)…….. Even if the company defends you on a claim, they probably won’t pay to indemnify you if you lose, and it may require you to repay the defense costs.
(d)…….. The big print tells you the rights you have under the policy; the small print tells how the company takes them away.
To help minimize the impact of the above risks, observe the following rules, ask the following questions, and learn the following information about the insurance policies you examine. However, no manual can ever include everything you may ever want or need to know. Thus, you should check any other sources you can find for information and ask detailed questions of the insurance agents with whom you deal.
2. Be Sure Your Insurance Agent Asks for Your Declaration (CC&Rs), Bylaws, and Articles of Incorporation and Reviews Them for Insurance Requirements
. If your insurance broker does not ask for your governing documents, you may have a broker who does not know Community associations or their insurance requirements. It is far better to have the insurance you need than to look at a malpractice case against your insurance broker when you find out, too late, that your insurance is inadequate.
3. Keep Each Year’s Policy Together in One Folder, and Keep Each Company’s Policy Together. Don’t Ever Throw Them Away
. When a renewal policy comes, it will contain a declarations page with the form numbers applicable to that policy. They will send only new forms and endorsements. Check all the forms listed at the bottom of the declarations page. If any are missing, copy them from the prior year’s policy and clip or staple them together in that folder. If you have a separate policy for directors and officers liability coverage (“D&O”), keep all those forms together with that policy, but separated from the property and general liability policy or policies.
You may not need a policy until years after it has expired, so keep the policies indefinitely in a chronological manner so that you can find them.
4. Be Sure to Carry All the Insurance Required by Law and Your Governing Documents
. While a board can and should purchase directors and officers (“D&O”) liability insurance to protect it against its own negligence (essentially “malpractice” claims), all D&O policies we have seen contain an exclusion stating that the insurance does not cover claims for failure to have the right insurance in sufficient amounts. The reason for this is that if a board could obtain insurance for failure to purchase proper and adequate insurance, there would be no need to purchase the correct types of insurance or insurance in sufficient amounts. In other words, the D&O coverage would provide the coverage for everything else.
If a board fails to have adequate insurance and is sued, the insurance may not pay to defend them, and the board members may have personal liability, not only for the cost of their own defense, but also for the full loss sustained due to the failure to have adequate insurance.
5. Inform Your Owners That They Need Their Own Insurance
. Don’t advise them of what coverage they need, but tell them they do need their own policies for their own personal property, for liability inside their units, for other housing if their unit becomes uninhabitable or for lost rent if they are a landlord, and any other coverage not provided under the association’s policy. Be sure they know the burden is on them and their agents to find out what is and isn’t covered by the association’s insurance. In particular, owners should consider “loss assessment coverage” to help pay for large special assessments to cover uninsured claims or under-insured claims, for example, claims due to earthquake which carry a large deductible, even if the association has an earthquake policy. (See Paragraph 35 regarding the effect of the association’s policy being “primary.”)
6. When Required, Be Sure to Meet Lender Insurance Requirements – VA, FHA, FNMA (“Fannie Mae”) or GNMA (“Ginnie Mae”)
. These requirements are generally set forth in the declaration, if your association has been approved to meet that lender’s requirements. Typically, VA and FHA projects must have greater property coverage for owner-maintained components than a non-VA or non-FHA project. (See Paragraph 14.) Many of the suggestions in this manual are either requirements or suggestions under the guidelines of these federally insured mortgage loan programs. Some examples of FNMA Selling Guide requirements are noted in various paragraphs below.
7. File All Claims Properly and in a Timely Manner
. Be sure you have a copy of the policy. It will tell you when and where to file claims. Don’t assume you can file them with your agent. File claims in writing, use certified mail, keep copies of what you send, and keep the certified mail receipts. If you are close to a deadline, don’t hesitate to use several methods to insure on time receipt, e.g., personal delivery, messenger service, fax, certified mail, etc.
8. Find an Insurance Agent Who Knows and Deals with Association Insurance Regularly
Don’t assume any agent or broker will know the needs of an association. Also, find out if the agent with whom you are dealing has the authority to bind the insurance company. That requires written proof on original documentation, not photocopies, from the insurance company; certainly the agent’s verbal representation is not sufficient. If the agent does not have authority to bind the company, your association cannot assume that it is covered or protected until you have something directly from the carrier.
9. Find the A.M. Best’s Ratings for Each Insurance Company You Use
. This guide is available to insurance agents. It provides a measure of a company’s financial ratings and thus its stability and ability to pay losses. The top Best’s rating is “A++ XV,” and the lowest is “F I.” The letter ratings range from “superior” (A++) to “in liquidation” (F) and represent a qualitative assessment by A.M. Best on the quality of the insurance company’s operations and its financial ability to respond to insured losses. (A comparable analogy is the bond ratings given by Moody’s or Standard & Poors for corporations and governmental bodies on their financial strength and stability and thus their ability to repay their debts.) The Roman numeral is a quantitative rating of financial size, specifically the capital, surplus and conditional reserve funds of the company. A Roman numeral “I” rating is less than $1 million, while a Roman numeral “XV” rating is more than $2 billion. FNMA looks for at least an “A VIII” rating in a condominium or planned development. See FNMA Selling Guide §701.01.
10. Find Out if Each Insurance Company You Use is Admitted to Write That Insurance in California
. With the Internet, this is much simpler. Check the home page for the California Department of Insurance (http://www.insurance.ca.gov/docs/index.html) and, at the time this was written, the admitted companies and the types of insurance they were admitted to issue were accessible from (http://www.insurance.ca.gov/docs/FS-Admitted.htm).
Insurance is often an esoteric subject that confuses many associations. Many people have said that you never find out whether your insurance is any good until you have to make a claim on it. Of course, by then, it is too late. From some of the misunderstandings and errors various associations have made, we have developed the following manual of items to consider when evaluating a particular policy or when looking for a new policy.
11. The Total Building Coverage Pays Just for the Cost of Rebuilding, Not the Market Value
. If a building could be rebuilt for $3 million, but the collective market value of the units is $7 million, the carrier will pay no more than $3 million for a covered loss. If an association is in a high rise that the Coastal Commission or local codes would not allow rebuilding in its former configuration or height, the recovery will not exceed the reconstruction cost, even if the market value is much higher.
12. Evaluate Whether “Special Form” or “Named Perils” (or “Fire and Extended Coverage”) is the Better Option
. “Special Form” coverage (the term now used in place of “All Risk” coverage that is no longer available) insures against a broad spectrum of risks except those that are specifically excluded. While no coverage is truly all risk, “special form” coverage covers more types of risk than “named perils” coverage (also known as “basic form” or “fire and extended coverage”). Be sure you ask about and understand what risks are excluded. Named perils policies or fire and extended coverage policies typically cover only losses due to specified perils, such as fire, lightning, wind, hail, aircraft, riot, vehicles, explosion, smoke, vandalism and malicious mischief. If a peril isn’t specifically named in such policies, then the loss isn’t covered. There are also “broad form” policies, which are “beefed-up” named perils policies that include some additional covered causes of loss, such as burglary, theft or collapse and possibly even water damage. As an example of what concerns lenders, the FNMA Selling Guide §701.02 wants an association’s master policy to be either “all risk” or at least a “broad form” covered causes of loss.
NOTE: Due to events over the last several years, there is now a caveat about whether a Special Form (formerly “All Risk”) policy is the most desirable. Starting around 2000, many associations have seen their claims histories skyrocket, their premiums increase dramatically, and some have been told that their insurance company will not renew them because of significant increases in claims. This has arisen, in large part, from owners’ HO6 carriers (see Paragraph 35) insisting that the association’s master policy must evaluate any claim first, because the HO6 policy is excess, or secondary, to any amounts recovered under the master policy. This factor led to a significant increase in interior damage claims, usually caused by water, and due in many cases to such things as pipe leaks, ice-maker line leaks, water heater leaks, washing machine hose failures, sink and toilet overflows and other damage due to failures in owner-maintained components.
If the association obtains an all risk policy, it will cover damage claims from a larger group of causes, but it may also increase the number of non-catastrophic claims involving owners’ personal property and fixtures. Thus, the association may wish to consider either a named perils policy, or a broad form policy, if FNMA or other lender requirements allow it.
There are variations on what is meant by basic form (aka “named perils” or “fire and extended coverage”), broad form (typically basic form plus items such as broken windows and other structural glass, breakage of glass that is part of a building or structure, weight of snow or ice falling objects and water damage), special form (replacing what was formerly called “all risk”) and other fire and property coverages. A search on www.google.com will probably show some of the variations you may encounter. The descriptions typically apply whether you are looking at a homeowners or business and commercial policy.
13. Buy Replacement Cost (RC), Not Actual Cash Value (ACV)
. ACV pays only for depreciated value (effectively garage-sale value). Most documents require full replacement cost, usually subject to a reasonable deductible. See FNMA Selling Guide §701.03.
14. Be Sure You Know What Owner-Maintained Improvements You Want to and Need to Insure
. VA- and FHA-approved developments and others may require your association to insure many owner-maintained components, such as cabinets and other fixtures, wall and floor coverings, built-in and maybe free-standing appliances. If your documents do not require this, be sure you weigh (1) the generally lower cost of insuring these items through the association and (2) the size of your deductible against (3) the increased number of claims you may get if the owner’s property is insured, and (4) what your documents and rules say about who must pay the deductible for a loss.
Note that many commercial master insurance policies that cover the residential structures in condominium and Community associations automatically insure most of the attached components or “fixtures” that the owners normally maintain, such as floor and wall coverings, cabinets, plumbing and toilet fixtures, and built-in appliances, including furnaces and water heaters Some policies may not do this automatically, but they may state that these fixtures are covered to the extent the association’s governing documents require the fixtures to be insured. However, most governing documents do require an association to insure these owner-maintained components. The reason for this is that lenders are issuing mortgages for the value of the unit or home at the time of initial occupancy, and those components are included in the selling price and provide part of the security for the mortgage loan. Lenders do not want to have an owner walk away from a disaster in which the lender gets stuck paying for items that provided part of the security for the mortgage loan. They want the insurance to cover it. As an example, see FNMA Selling Guide §701.02 which recites this justification for insuring the fixtures.
15. How Large a Deductible Should You Obtain and Who Pays It?
Higher deductibles generally mean fewer claims and lower premiums. Be sure you adopt a policy that specifies under what conditions the owners must pay the deductible. If you amend your covenants, include the policy in the amendment. Note that there may be a maximum limit to what your deductible can be without triggering problems with lenders. For example, the FNMA Selling Guide §701.03 states that the maximum deductible in a planned development with a master policy or in a condominium is $10,000 or 1% of the policy face amount, whichever is lower.
16. Is Your Deductible Per Occurrence or Per Building?
This applies only in policies covering multiple buildings. A per-occurrence loss is generally better and simpler. With per- building deductibles, if multiple buildings incur a loss, there will be no payment on a given building until the loss for that building exceeds the deductible, even if there is a huge loss, vastly exceeding the deductible on another building. A per-occurrence deductible simplifies adjusting the claim, as the only issue is the total damage, not the damage incurred on each building.
17. Make Sure You Do Not Have Any Co-Insurance Problems
. Co-insurance means that your association is sharing a percentage of each loss with the insurance company. The insurance company will pay part of the loss, and your association will pay the rest. There are two ways co-insurance problems can arise: the first is by contracting for it, and the second is by under-insuring the property.
Probably no association should ever contract for co-insurance. Most governing documents state something like the following:
“The Association [or the Board] shall obtain fire and extended coverage for the full insurable replacement cost of the common area and the units.”
If you contract for co-insurance, you will be agreeing to pay 10% or 20% or some other percentage of each loss rather than having the insurance company pay it all. In other words, if your association incurred a $500,000 loss, and if it contracted for 10% co-insurance, you would be self-insuring for, and would have to come up with, $50,000 out of the association’s or the owners’ pockets. Probably most owners and the board will be shocked if this occurs. Furthermore, if the documents require full replacement coverage, the owners may sue the board for failure to carry the required insurance. If that occurs, the board will probably have no liability coverage to protect it against suit. (See the discussion of inadequate insurance below and in Paragraph 4 above.)
The second type of co-insurance problem occurs from failing to have property insurance in an amount sufficient to cover the replacement cost to cover all the association’s property. As an example, assume an association carries $5 million in property coverage, but the replacement cost for the entire property is really $10 million. What happens if the association has a $500,000 loss? An initial reaction might be to assume that, as long as the loss is less than $5 million, the association is protected. Wrong! The insurance company will say that, since the association carried only $5 million in coverage when it needed $10 million total, the association was co-insuring 50% of all losses, not just the losses exceeding $5 million. Thus, the insurance company will pay only 50% of the $500,000 loss (i.e., $250,000), and the association and its members will have to come up with the other 50%. Ouch! To avoid co-insurance problems based on under-insuring, see Paragraph 18 below.
18. Do Not Under-Insure or Over-Insure the Replacement Cost of Your Property
. However, if you are going to err, it is better to err on the side of over-insuring. The only problem with over-insuring is that you are paying for more than you need, and thus that money is wasted. It is far more serious to be under-insured, because of co-insurance problems, as discussed in Paragraph 17.
How can the Board be sure its property insurance will cover full replacement cost? One option is to have a professional determine what the replacement cost will be. Such computations are generally based on the type of construction you have and the cost per square foot to reconstruct that type of building.
Some other options involve obtaining a “guaranteed replacement cost endorsement” (see Paragraph 19) or an “agreed amount endorsement” (see Paragraph 20).
19. Obtain a “Guaranteed Replacement Cost Endorsement”
. Guaranteed replacement cost guarantees that the carrier will replace the property without regard to the dollar limit purchased. In other words, if there is a total loss on a single building whose replacement cost is $6 million but it was insured for only $5 million, the guaranteed replacement cost will pay the full $6 million. (If this isn’t available, see Paragraph 20.) See FNMA Selling Guide §701.03.
20. If You Can’t Obtain a “Guaranteed Replacement Cost Endorsement,” Get an “Agreed Amount Endorsement”
. Under a typical “agreed amount endorsement,” the insurance company agrees that the total amount of property coverage purchased is sufficient to replace the property, and it will not reduce the pay-out as long as the insured loss amount turns out to be lower than the full replacement cost. Thus, an agreed amount endorsement effectively removes the co-insurance clause. (See Paragraph 17.) However, if there is a total loss, an agreed amount endorsement will not make up the difference between the maximum amount payable under the policy and a higher total cost of repair. So, if there is a total loss on a single building whose replacement cost is $6 million, but it was insured for only $5 million, the carrier will pay out only $5 million. Thus a guaranteed replacement cost endorsement is better. (See Paragraph 19.)
21. Neither Forget Nor Over-Insure Personal Property
. If your association has any significant pool furniture, office equipment, cleaning equipment, or other personal property, be sure you have sufficient coverage for it. Although this coverage is generally inexpensive, don’t carry more than you need. Check to see if there is a separate deductible for personal property losses; frequently there is.
22. Who Pays for Relocation Costs, What Costs Are Covered, and In What Amounts?
If there is a major property loss, and owners’ units are condemned, they must move out. Is any of the relocation cost, rental of temporary lodging, etc., covered under your association’s policy, and if so, for how long and how much? If not, this is another reason owners need to have their own coverage for such losses. It is worth notifying owners in your annual insurance disclosures that most association master policies do not cover owners for alternate housing, moving and storage expenses, or loss of their personal property from fire and other losses. They need their own coverage for that.
23. Obtain Coverage to Pay for Building Code Changes
. This is sometimes called “ordinance and law” coverage. Most property policies cover only the cost of rebuilding the property as it existed before the loss, but that is usually the way it was built 10, 20 or 30 years ago. However, buildings have to be rebuilt to meet current building codes and that makes reconstruction more expensive. Coverage for those increased costs can be purchased as additional coverage, but not every company offers it, so look for a company that does. This coverage becomes increasingly more important as the community ages. Be sure that you obtain coverage for the following: (1) ”contingent liability,” which may require tearing down the undamaged portion of a building, if more than a certain percentage of the building was destroyed thus turning a partial loss into a total loss; (2) ”increased cost of construction” due to building code changes that have been implemented since the property was new; and (3) ”demolition costs” for removing the damaged property and portions of the building so that reconstruction can begin. See FNMA Selling Guide §701.04. For example, you may need to install fire sprinklers or even an elevator for second story units to provide access for persons with disabilities.
24. Optional – Coverage for Lost Rents, If Your Association Has Any Significant Rental Income
. This is normally excluded. It is important if your association has any significant rental income from laundry rooms or any other property. Absentee owners who are landlords should obtain their own coverage for their lost rents under their individual policies.
25. Optional – Coverage for Floods
. This is invariably excluded and generally available only through FEMA (Federal Emergency Management Agency). Flood coverage is certainly important in flood plains and other areas subject to flooding. It has been required for VA- and FHA-approved projects in flood hazard areas and similar projects in which other federally guaranteed mortgages are issued. However, absent at least a customized or special endorsement on the property policy for floods, there would be no coverage for mud slides, plumbing leakage, sewer backups, excess surface water run-off, etc.
26. Optional – Coverage for Glass Breakage
. Glass breakage coverage is often excluded or significantly limited under most property policies. If your association has any significant glass windows and doors, it is probably important. If there is a limit of $1,000 per occurrence and many plate glass windows are damaged or destroyed in a storm, your association could be seriously impacted.
27. Optional – Coverage for Power Failure
. If your association has a restaurant including refrigerated or frozen supplies that may spoil, or other facilities that must have a continuous or nearly continuous supply of power to avoid a loss, you will probably need a special endorsement to cover these losses.
28. Optional – Coverage for Earthquake
. This always requires a costly endorsement or separate policy that is subject to large deductibles. The cost is generally significant enough that owners must vote on it, because it likely will require an increase in assessments. If all or most owners purchase “loss assessment” coverage through their individual policies, that may go a long way toward paying for large special assessments for substantial damage, but it may only cover up to about a 30% to 40% loss. In a condominium, co-op, or community apartment project, if the association doesn’t buy the policy, the individual owners probably will be unable to obtain earthquake coverage for anything other than their personal property. Note that most earthquake deductibles are a percentage, but it is usually a percentage of the total coverage, not a percentage of the loss. If there is a 10% deductible, it could mean either that no coverage will kick in until 10% of the total insured value has been exceeded (e.g., until there is $2.5 million in damage on a $25 million policy) or until there is damage equal to 10% of the replacement cost per unit, if it is a per unit deductible (e.g., if it would cost $150,000 to rebuild a unit, there is no coverage until there is at least $15,000 damage per unit).
29. Be Careful About “Inflation Protection” Coverage
. This is helpful, especially in periods of high inflation, to make sure your property coverage limits increase as building costs skyrocket. However, it may provide too much coverage in periods of low inflation. If your buildings can be rebuilt for $3 million, and you have $5 million in coverage, the carrier will never pay out more than $3 million, so you are paying for $2 million more in coverage than you could ever use. (See Paragraph 18.) Note that an inflation guard endorsement is required by FNMA, if it can be obtained. See FNMA Selling Guide §701.04.
30. Optional – Walls, Fences, Swimming Pools, Spas, etc.
Coverage for walls, fences, swimming pools, spas, retaining walls, ponds, piers, golf courses, or other unique property is often excluded or has limited coverage. Be sure to obtain sufficient coverage, if you have any significant components in these categories. Pools and spas may not be damaged by fire, but they could be significantly damaged from earthquake, vandalism, or some other occurrence, and wooden fences and even steel fences can be damaged or destroyed by fire or even storms. It may also require special care to develop a proper valuation of the potential losses.
31. Optional – Boiler and Machinery Coverage
. You may not need to have a boiler to need this coverage, and it will usually require a separate endorsement. If you have pumps, fans, or other mechanical equipment that breaks down, damage caused to the equipment itself by the failure is excluded. Associations with large air-conditioning systems should consider it. Ask your agent what this coverage will and will not provide if you obtain it. FNMA requires this, if an association has central heating or cooling. See FNMA Selling Guide §701.04.
32. Optional – Valuable Papers Coverage
. You should consider this endorsement to cover the labor cost of reconstructing valuable information, such as financial data, lost in a fire or other cause of loss.
33. Check Who is Covered by the “Loss Payable Clause”
. When there is a loss, the policy should pay the funds just to your association or an insurance trustee based on a governing document requirement to rebuild the damaged property. However, the owners and their lenders should also be named as insured under the policy.
34. Obtain a “Waiver of Subrogation” Clause
. Most governing documents require this. Because the owners are also considered named insureds (or “also insureds”), the insurance is designed for their protection as well as the association. Just as vehicle owners have property insurance to repair their cars, even if they are damaged by the owner’s own negligence, your association’s policy should pay to repair the property damaged by an owner’s negligence. Under most policies, a carrier will seek to enforce its “subrogation rights” to recover the loss they had to pay from the party responsible for the loss. However, in the association context, there should be a “waiver of subrogation.” This should apply at least to owners and their families, but some clauses extend to the tenants and guests of owners as well. See FNMA Selling Guide §701.04.
35. Obtain “Primary and Non-Contributory” Coverage
. The “primary” language treats your association’s policy as the primary policy, if owners and your association have overlapping coverage. The “non-contributory” language means that the primary policy will pay until it exhausts itself. Only when it is exhausted for all covered claims will the secondary and overlapping coverage be required to make any contribution toward the loss. This simplifies adjusting a claim when there is damage both to association-insured property and to owner-insured property causing multiple carriers to become involved in the adjusting process. The owners’ adjusters only need to deal with the portion of each owner’s claim not covered by your association’s policy, and your association’s carrier pays the maximum covered claim less any deductible.
Note that making the association’s policy primary is a requirement of most federally-guaranteed loan programs, such as the Federal National Mortgage Association (a.k.a. FNMA or “Fannie Mae”). See e.g., FNMA Selling Guide §701.04. The downside of the association’s policy being primary is that the association may find that owners’ insurers will have the right to require the association to file any owner’s loss with the association’s carrier and to make the association’s carrier pay whatever is covered under the master policy before the owner’s carrier has to pay anything. However, because most federally guaranteed loan programs want this, if you try to amend out such a requirement, it is likely to activate mandatory lender approval of the amendment. Even if there is no mandatory requirement for the master policy to be primary, it may end up being primary anyway. This is due to the typical language found in most owners’ policies. The owners’ policies are often called an “HO6” policy in a condominium or other association in which the association carries a master property damage policy. A common HO6 policy states that, if the association carries insurance on the same property covered under the HO6 policy, then “this [HO6] insurance will be excess over the amount recoverable under such other insurance.” In other words, the association policy is effectively primary, and the owner’s policy is secondary.
General Liability Coverage
36. Obtain a “Commercial General Liability” (CGL) Policy
. Most carriers offer a CGL policy which includes not only a “general liability” policy (see Paragraph 37) but additional types of liability coverage for protection against other claims. The additional liability coverage may include coverage for Medical Payments (see Paragraph 48), Products Liability (see Paragraph 49), Non-Owned Vehicles (see Paragraph 51), etc.
37. General Liability Coverage Typically Covers Your Association’s Liability to Others
. It is typically limited to claims of bodily injury (“BI”) and property damage (“PD”) caused by the acts or omissions of your association and its agents. Look for a policy that also covers claims for advertising injury and personal injury (“PI”) which often are sold together. Personal injury includes non-bodily injuries such as humiliation and mental anguish. These categories of insurance cover claims such as slander; libel; false arrest, detention or imprisonment; wrongful entry, eviction, or invasion of right of private occupancy; invasion of privacy, etc. In a broadly worded policy it may include a civil rights or discrimination claim, where insurance against such offenses is not prohibited by law. It is worth notifying owners in your annual insurance disclosures that most association general liability policies typically will not protect owners against claims from other people injured on or in their property. They need their own coverage for that.
38. Look for “Combined Single Limit” Coverage for General Liability
. If a policy has $2 million “combined single limit,” the carrier will pay up to $2 million for any individual loss that occurs during the policy period but will pay out no more than a maximum of $2 million for losses occurring in that year, regardless of the number of losses or the total amount of those losses. This compares with a policy that may be $1 million “per occurrence” and $2 million “in the aggregate.” If there were a $1.3 million dollar loss and a separate $300,000 loss in the same policy period, the carrier would pay both claims under the combined single limit coverage, but if the policy is a “Per Occurrence/Aggregate” policy, the carrier will pay out just $1 million maximum on the $1.3 million occurrence and the full $300,000 on the $300,000 occurrence, even though the total loss is less than the $2 million aggregate for the year. If there were four separate losses of $1 million, $500,000, $400,000 and $300,000 for a total of $2.2 million, each occurrence is small enough to be covered under either the combined single limit or the occurrence/aggregate policies, but neither one would pay out more than $2 million in losses for the year, so both would be $200,000 short of the total needed.
39. Be Sure the Policy Has a “Separation of Insureds” Clause
. The term “separation of insureds” is a newer term for what used to be called “severability of interest.” This concept deals with the issue of what happens to the insurance coverage, if one insured party sues another insured party. For example, automobile insurance carriers do not want a daughter who is injured by the negligent driving of her father to be able to sue the father for her auto accident injuries and also require the automobile insurance carrier to defend the claim and pay any damages for negligence. Instead, the carriers want the parents to carry medical insurance rather than initiating lawsuits to pay for medical expenses. The chances for fraud and collusion are high when related parties are both plaintiffs and defendants in such cases.
In an HOA general liability policy, typically both the HOA and the homeowners are insured against liability claims due to negligence involving the common area, and most primary insurance policy forms contain this provision, but you need to check. On the other hand, excess or umbrella policies (see Paragraph 55) may not, so if you have an excess or umbrella policy, you need to check that too. But what if a homeowner is injured due to the negligence of the association? Will the carrier say that it has no obligation to defend and indemnify the association against the owner’s lawsuit because both are insured under the same policy? If there is a “separation of insureds” clause in the HOA general liability policy, then the policy will cover the party against whom the claim is made as if a separate policy had been issued to each insured party. Thus, if the “separation of insureds” clause exists, the HOA would be defended, even though the suing party is also insured under the same policy.
Many governing documents, and many secondary mortgage market lenders, like Fannie Mae, VA and FHA, require this in HOA policies, so be sure to obtain it, or at least obtain assurances that there is not a clause in the policy that prohibits one insured party from suing another insured party. Note that the beneficial effects of a separation of insureds provision can be negated by a “cross-liability endorsement.” (See Paragraph 40 below.)
40. Avoid a Cross-Liability Endorsement
. A Cross-Liability Endorsement effectively negates the effect of a Separation of Insureds (aka Severability of Interest) clause. (See Paragraph 39 above.) Most HOA general liability policies do not contain this endorsement, which would enable a carrier to deny defense and indemnity to an HOA, if the HOA is sued by a homeowner whose injuries were caused by the HOA’s negligence. We understand that there are some carriers that provide HOA insurance that include this endorsement, so WATCH OUT for that. An HOA could find itself paying for its own defense and have a very expensive damage claim in addition, if this provision exists in its policy.
41. Remember that the Dollar Limits are Typically the Maximum Payout Per Year, Not Per Claim
. If you are unfortunate enough to have several large claims or multiple persons seriously injured by one claim, you could exhaust your coverage.
42. Does Your Policy Obligate the Carrier to Defend?
The carrier should be obligated to defend, even if the claim is fraudulent, false, or has no basis in fact. However, this duty often goes hand in hand with the right to settle Paragraph 44) and the right to select legal counsel (see Paragraph 43).
43. Who Has the Right to Settle and to Select Defense Counsel?
Typically, the carrier has the right to settle and to select defense counsel on general liability claims.
44. Are Defense Costs Deducted from the Total Amount of Coverage?
If they are, each dollar spent on defense is one dollar less available for settlement or to pay claims. This question applies both to general liability and D&O claims. These are sometimes called “burning balance” policies. Look for a policy where the defense costs are paid in addition to (outside of) the limits of liability or purchase higher limits of liability.
45. Is There a General Liability Deductible?
Usually there isn’t a deductible, and look for policies without a deductible. However, find out if there is one and whether it applies for every claim or just once per year.
46. Name the Management Company as an “Additional Insured”
. Most policies will do this for no additional charge, if you ask. When the manager is an additional insured, the carrier will defend the manager, if the manager is sued for any claim covered under the general liability policy. If the manager can be a “named insured” or “also insured,” that would be preferable. (See Paragraph 47.)
47. Know the Limits of Coverage for an “Additional Insured”
. A “named insured” (also called an “also insured”) is preferable to an “additional insured.” A “named insured” will be covered for a claim (falling within the policy coverage), even for the named insured’s own wrongful act or omission. However, an additional insured endorsement will defend only the innocent additional insured. It will not pay a claim, and may require repayment of defense costs, if the additional insured is found to be independently liable. In other words, an additional insured still must have its own coverage for its own wrongful acts or omissions. A typical additional insured endorsement says: “This extension of coverage does not apply to liability arising out of the negligence of the additional insured, its agents or employees, unless the agent or employee is the named insured.” Also, these endorsements may not be renewed automatically when the named insured renews the policy. Thus, it is important for the additional insured to request a new additional insured certificate, when the original policy expires.
48. Obtain Medical Payments Coverage
. This is frequently included in a package policy. It enables an association to pay the medical expenses of someone injured on the property, whether due to association negligence or not, and it may help to avoid litigation.
49. Obtain “Products Liability” Coverage
. Although most associations are not in the business of providing products, they can be liable for products liability if people were to become ill from eating contaminated food at an association function, whether the association made the food or bought the food. This coverage is frequently included, but be sure that it is. It may be part of a CGL policy or package endorsement that includes “Completed Operations” coverage. (See Paragraph 50.)
50. Obtain “Completed Operations” Coverage
. Completed operations coverage provides protection for your association for any injuries or property damage arising out of any operations, products or materials resulting from activities conducted by the association, whether inside or outside the association’s development. This coverage may be part of a CGL policy or package endorsement that includes “Products Liability” coverage. (See Paragraph 49.)
51. Obtain Non-Owned Vehicles Coverage
. This coverage protects your association if a director, committee member, or other volunteer drives a vehicle not owned by your association on association business, such as an errand to a hardware store, and is at fault for causing an accident. An association can have liability for the wrongful act of its agent and a deeper pocket, if the owner’s automobile insurance is minimal and the injuries are significant. This is often included, but it is important to make sure it exists.
52. Obtain Contractual Liability Coverage
. If your association enters into any indemnification or hold harmless agreements with contractors or other parties with whom it deals, you should obtain this coverage. This should cover you if a party you have agreed to indemnify is sued and then demands that you indemnify that party. However, this will probably be a coverage under or endorsement under the general liability policy only. Thus, it may be limited solely to bodily injury and property damage claims, so it will not apply to non-monetary claims or breach of contract claims. Check the language for what is and is not insured, and ask for examples of what is and is not insured.
53. Optional – Host Liquor Liability/Dram Shop Insurance
. If your association serves alcohol on site or alcohol is served at private functions on site, be sure there is coverage for this in the policy.
54. Optional – Garage Keeper’s Liability
. If your association provides any type of valet parking and takes “care, custody or control” of owner’s or guest’s vehicles such that they take the keys, drive the cars or park the cars, or if you charge owners or guests a fee for parking, talk to your insurance professional about the need for a garage keeper’s liability policy or endorsement. If you have an outside firm hired to act as the valets, you might be able to be covered through that firm’s insurance, but you should bring this aspect of your insurance needs to your insurance professional’s attention.
55. Optional – Umbrella and Excess Liability Coverage
. These are two types of coverage that provides additional coverage above primary liability coverage. Excess coverage applies only to increase the maximum limit of the general liability policy. An umbrella policy typically adds a higher limit of liability to all liability policies (i.e., general liability, D&O, automobile, etc.). An umbrella policy sometimes is provided through a different carrier, and it may have its own separate coverage language, or it may state that it will track the coverage (or “follows the form”) of the underlying policy. You should know which one applies. Be sure there is no gap between where the underlying policy limit ends and the umbrella takes over. There are relatively inexpensive umbrella policies available that can provide up to $15 million in total liability coverage.
56. Optional – Security Guard Liability Coverage
. If your association has any security service, this coverage can remove the exclusion for assault and battery, i.e., intentional acts that normally wouldn’t be covered under a general liability policy.
57. Obtain Sufficient CGL Coverage to Qualify for Statutory Limitations of Liability
. Where the owners own the common area as tenants-in-common, e.g., in a condominium development or community apartment project, they are eligible for a limitation of liability to protect all owners against liability for injuries arising out of their shared ownership of common area property. However, the association must carry enough general liability (or CGL) insurance. To qualify, Civil Code section 5805 requires an association with 100 or fewer separate interests to carry at least $2 million in general liability coverage, and an association with more than 100 separate interests to carry at least $3 million in general liability coverage. Civil Code section 5800 also provides a limitation of liability to protect the association’s officers and directors against liability for damages arising out of the acts or omissions of unpaid (volunteer) directors in exclusively residential developments. While insurance is just one of the requirements for obtaining the protection, an association with 100 or fewer separate interests must carry at least at least $500,000 in general liability coverage, and an association with more than 100 separate interests to carry at least $1 million in general liability coverage. To protect the directors and officers, an association must also carry at least the same minimum dollar limits of directors and officers liability coverage. (See Paragraph 74.)
Directors and Officers (D&O) Liability Coverage
58. Don’t “Cheap Out” on Your Own Coverage
. Look for and purchase the best D&O policy you can find. If you are going to be an officer or director and volunteer your time and effort for the good of the association, the least you can do for yourself, your fellow board members, and for the association as well, is to get the best D&O policy you can find. You won’t feel so good about the money you saved on the association’s insurance, if you end up as a defendant in a lawsuit and the carrier you selected denies the claim. Will your neighbors complain about paying more for a good D&O policy? Maybe, but they will complain even louder, if their assessments must be increased to defend you, because the insurance you bought failed to do so.
59. Know Who is a “Named Insured”
. Try to obtain coverage for the broadest group possible: current directors, former directors, committee members, etc. The best policies also will add your association’s manager as a “named insured” or “also insured.” (See Paragraph 47.) While adding the manager may cost an additional premium, it will more than pay for itself if you have even one lawsuit that names the manager. If the manager is not a named insured, your management contract may require your association to obtain and pay for an attorney to defend the manager. That cost could easily exceed decades of premiums. Good D&O insurance is cheaper.
60. Look For “First Dollar Defense” Rather Than a “Reimbursement Policy”
. Under a first dollar defense policy, the carrier pays the attorneys’ fees and defense costs during the case (except for any deductible). A reimbursement policy may not be obvious to the casual reader, and most carriers won’t tell you it is a reimbursement policy. Under a reimbursement policy, your association must hire and pay the attorneys’ fees and costs of the defense, your association will probably need the insurance company’s written approval to settle, and the carrier will determine whether and how much to pay when the case is over.
61. Know the Amount of the Deductibles
. Most are $1,000 or so per claim, but some are higher.
62. Ask if There is Any Co-Insurance, and Avoid It
. If there is any co-insurance, it will operate like a health insurance policy in which the carrier pays a percentage of the judgment or settlement, and possibly defense costs as they go, except there is no cap after which the carrier pays 100%. This can become very expensive for associations whose budgets aren’t designed to pay such costs.
63. Understand the Impact of a “Claims-Made” Versus an “Occurrences” Policy
. Almost all D&O coverage is “claims-made,” though some may be “occurrences.” Understanding the differences can be confusing, but they are very important. An automobile liability policy is typical of an occurrences policy. If you have the policy today, and you’re in an accident, you’re covered. If your policy expires today, and you’re in an accident tomorrow with no policy in effect, you’re not covered. If you’re driving today without a policy, but you buy one tomorrow and then you get in an accident, you’re covered. An occurrences policy protects you if it is in effect when the accident (i.e., “the occurrence”) happens.
Claims-made policies are more complicated. If you ever once have a claims-made policy, never switch to an occurrences policy. Claims-made policies can vary, but invariably the policy must be in effect when the claim is made. Some policies may require that the policy is in effect when suit is filed. Others may require that suit be filed within some time period after the policy expires even if the claim is made during the policy period. Some policies describe a claim as being a verbal threat or demand, while others require a written threat or demand. Sometimes the policy must also have been in effect when the incident (or “occurrence”) took place. However, some policies will cover an occurrence that took place before the policy was in effect, so long as your association had no knowledge of the facts or circumstances giving rise to the claim prior to the policy period.
First, you must ask if it is a claims-made policy. If so, find out what it will cover if a claim is made after the effective date of the policy but the occurrence took place before the effective date of the policy. Also, find out if the policy will cover any suits that are filed after the policy period, if the claim is made during the policy period.
Probably the best suggestion is to get a very good D&O policy and stick with it year after year, even if you change property and general liability carriers. The differences in policies and the risk of not being covered, even though you always had a D&O policy in effect, are not worth the dollars you might save by switching carriers.
64. Know the Exclusions from D&O Coverage
. D&O insurance is essentially malpractice insurance for directors and officers. However, there are many things that it will not cover if your association or its directors are sued. Examples include coverage for non-monetary claims like suits for declaratory or injunctive relief which are very common. Other exclusions include improper payments, profits or advantages to directors; violations of ERISA (Employee Retirement Income Security Act – federal retirement statute), failure to obtain proper types and amounts of insurance (although some of the best D&O policies will limit this exclusion only to failure to obtain earthquake and/or flood insurance), violations of environmental laws, and claims by one director against another director. Know what exclusions apply, and look for policies that have fewer exclusions.
65. Find Out Whether Any Prior Acts Are Covered
. Some D&O policies require not only that the claim must be made during the policy period (or some extended reporting period after the policy expires), but also that the allegedly wrongful act or “occurrence” took place during the policy period as well. Others will cover prior acts as long as the association was not aware of any of the “facts or circumstances” giving rise to the claim. However, look for the best option, namely a policy that will cover all prior acts, as long as they did not result in a claim being made before the policy period began.
66. Look for a Policy That Covers Non-Monetary Claims
. If an owner sues seeking a court’s interpretation of who is required to repair or maintain a particular component, or seeking to order the board or association to stay off the owner’s property when an association is trying to make repairs, these are non-monetary claims. Many policies do not cover non-monetary claims, yet these may be the most common types of claim against an association.
67. Look for a Policy That Covers the Manager as a Named Insured
. (See Paragraph 59.) If the manager is a named insured, this should provide the indemnification required by law and/or the management contract even if the manager has legal liability, at least to the extent the claim is one that is covered under the terms of the policy.
68. Look for a Policy That Covers at Least the Defense of Discrimination Claims
. Because unlawful discrimination violates public policy, some states prohibit insurance that would pay for a proven discrimination loss. However, you should at least look for a policy that will provide a defense against such claims. There is a possibility that some general liability policies may cover discrimination claims. (See Paragraph 37.)
69. Look for a Policy That Covers Failure to Obtain the Proper Types or Amounts of Insurance
. Most D&O policies exclude this coverage. However, the better policies will provide coverage, though some may exclude coverage, if the allegation is a failure to obtain earthquake and/or flood insurance. (See Paragraph 64.)
70. Who has the Right to Select Defense Counsel?
It is nice if your association is authorized to choose, but it rarely occurs, except in a reimbursement policy, and reimbursement policies are not desirable. (See Paragraph 60.)
71. Who has the Right to Agree to Settle the Case?
Is this entirely in the hands of the carrier, or does it need the Board’s permission.
72. Are Defense Costs Deducted From the Total Amount of Coverage?
This question applies to both D&O claims and general liability claims. (See Paragraph 44.) If they are deducted, each dollar spent on defense is one dollar less available for settlement or to pay claims. These are sometimes called “burning balance” policies. Look for a policy where the defense costs are paid in addition to (outside of) the limits of liability or purchase higher limits of liability.
73. Do You Need to Obtain an Extended Reporting Period or Overlapping Coverage?
If you switch policies, you need to know how much the new and the old policy will cover of claims that do not arise or do not become lawsuits until the new policy period. You should strive to obtain written confirmation of this information. If there are circumstances that occurred under the prior policy that haven’t given rise to a claim, or if there is a claim that hasn’t resulted in litigation, you must know if the new policy will cover it. If it will not, you need to try to obtain or purchase an extended reporting period (aka “tail coverage”). This doesn’t provide new coverage, but allows you to have the old policy cover claims or lawsuits in which the occurrence took place in the prior policy, but the claim or lawsuit does not arise until the new policy period. Some carriers will not offer it, even for a fee. If so, you may need to consider not switching, or carrying duplicate policies for some period of time during the transition.
74. Obtain Sufficient D&O Coverage to Qualify for Statutory Limitations of Liability
. Civil Code section 5800 provides a limitation of liability to protect an association’s officers and directors against liability for damages arising out of the acts or omissions of unpaid (volunteer) directors in exclusively residential developments. While insurance is just one of the requirements for obtaining the protection, an association with 100 or fewer separate interests must carry at least $500,000 in directors and officers liability coverage, and an association with more than 100 separate interests must carry at least $1 million in directors and officers coverage. An association must also carry at least the same minimum dollar limits of general liability (or CGL) coverage. (See Paragraph 57.)
Fidelity Bond/Dishonesty Coverage/Crime Coverage
75. Obtain a Fidelity Bond or Dishonesty or Crime Coverage
. Most governing documents require fidelity coverage in a specified amount. While the documents may call for a “fidelity bond,” it is almost always provided by an insurance policy, not a bond in the normal sense. Often it is included in a package policy with property and general liability coverage, though it can be a stand-alone policy, but be sure to obtain it and in the required amounts. Since the amount required by the governing documents is often based on your association’s reserves and annual assessments, be sure to increase the coverage periodically as needed. The typical governing document requirement is three times the amount of monthly assessments (or an estimate of the maximum amount of operating cash on hand) plus the amount of your reserve fund, but some documents may vary.
76. Scope of Fidelity Policy Coverage
. The typical fidelity policy protects the HOA (1) against the loss of cash and other items of value, (2) due to criminal or dishonest acts, (3) by an employee, where “employee,” is typically defined as someone compensated by wages, salary or commissions. Board members are typically uncompensated volunteers, and off-site management companies are usually independent contractors, so if the policy covers only “employees” as defined above, there is no coverage for losses due to the acts of board members or non-employee managers. The HOA should have a policy that defines officers, directors and managers as “employees” for purposes of fidelity coverage or have an endorsement to that effect, or losses due to their dishonest acts are not covered. Sometimes to get the coverage for the people who should be covered, the HOA and the management company may need to show that it has adequate financial controls in place to reduce the risk of loss.
77. Does the Manager’s Fidelity Coverage Provide HOA Protection?
Probably not for several reasons. The manager’s fidelity coverage protects the management company from theft of the manager’s own funds. It does not even protect the management company against loss of the HOA’s funds, unless the manager’s policy directly covers or has an endorsement protecting against the loss of third party funds. Even where there is coverage for the loss of the HOA’s funds, the protection runs to the management company itself; it does not directly protect the HOA. If the manager’s policy covers loss of HOA funds, but the coverage amount is small in relation to the funds that someone embezzles, the fidelity policy may not cover all the losses. Also, unless the owners of the management company are compensated by wages, salary or commissions, such as payment from profits or a partnership draw, the owners are not employees, and their own dishonesty losses would not be covered under the company’s policy. For all these reasons, it is a good idea to have the management company added as an additional insured on the Association’s policy. It is better to have coverage under the HOA’s policy, even if someone in the management company is responsible for the loss, than to rely on the management company’s fidelity coverage and find that it is too small or does not cover the person responsible for the loss.
78. Time of Loss or Discovery of Loss and its Effect on Fidelity Coverage?
Fidelity policies may be “Loss Sustained,” “Loss Discovered,” or a “Loss Sustained / Loss Discovered” Combination.” A Loss Sustained policy covers only if a policy was in effect at the time of the loss. The problem is proving when that loss actually occurred, especially if there is no paper trail to show the time of loss. A Loss Discovered policy covers only if a policy was in effect at the time the loss was discovered or within some period of time after the policy period, such as one year prior to the date of the policy. A Loss Sustained/Loss Discovered policy includes both types, usually with a caveat that there must have been some form of fidelity coverage in effect from the time of the loss to the time of its discovery.
79. Other Pitfalls of Fidelity Coverage
. (1) Once an HOA (or management company) discovers a theft by an employee (or any other person whose dishonest acts are covered by the policy), that person is no longer considered “covered” by the policy from any later theft by the same person. Only the thefts up to the time of discovery are covered. If you suspect theft, immediately contact your insurance agent or broker and your legal counsel for advice on what to do. (2) If the fidelity policy is contained within a standard property loss policy, there is probably a smaller specified maximum coverage that the fidelity policy will provide compared to the total coverage under the policy. There may be $10 million in coverage if there were a fire and significantly less than that for the fidelity portion of the policy. Be sure to check the declarations page for the amount of fidelity protection.
80. Obtain “Owned Vehicles” Coverage, Where Applicable
. If your association owns any vehicles (cars, trucks, motorized carts, motorcycles, boats, etc.), you will need a separate vehicle owner’s policy, just like any other motor vehicle owner.
81. Is Worker’s Compensation Coverage Needed?
If an association has any employees, it is mandatory to have such coverage. Also, if your association hires contractors who have employees, and a contractor fails to carry worker’s compensation insurance, the association may need such coverage in case there is a claim that determines that your association is the employer. Finally, even if your association doesn’t need such coverage for employees, it may wish to consider carrying it to cover volunteers who are injured while providing services, even running errands, on behalf of your association. To do this, they need to inform the worker’s compensation carrier that they have adopted a resolution similar to the following:
“Resolved, that each member of the Board of Directors, and each person performing voluntary service at the express request of the Board, shall be deemed an employee under Section 3363.6 of the Labor Code.”
You should discuss these options with a worker’s compensation carrier. Only certain carriers offer worker’s compensation insurance.
82. Should You Consider Employment Practices Liability (EPL) Coverage?
Most general liability (CGL) insurance and directors and officers (D&O) liability insurance exclude coverage for claims by employees that arise out of the employment relationship. Such claims may include claims for wrongful termination, age or sex discrimination, sexual harassment, etc. If your association has employees and wants coverage for employee claims (other than for bodily injuries on the job that must be covered under worker’s compensation), you can consider purchasing EPL insurance. The primary drawbacks are that, like many other types of coverage, the employer may have no right to pick its own attorney, and the defense counsel appointed by the insurance company, may have little knowledge or experience in employment law. Note that some of the better D&O policies include EPL coverage as part of the D&O policy.
83. Builder’s Risk Insurance or Course of Construction (“COC”) Insurance?
These terms are synonymous. This is a not a policy that an association typically would buy for itself, but rather would be a policy that an association would require a contractor to obtain that is building new improvements or reconstructing buildings. These are property policies intended to insure that portion of the contractor’s work that has been completed at any given point in time. The policies are intended to cover 0% of the construction or reconstruction cost at the beginning and 100% at the conclusion.
The author appreciates the assistance of Dick Parrent of Driver Alliant Insurance Services, an independent insurance broker in San Diego, for providing information and input on this manual.
For other definitions of insurance terminology, see internet-based insurance glossaries such as: www.ambest.com/resource/glossary.html or www.coverageglossary.com or do a web search for “Insurance Glossary.”
A.M. Best: A company which rates insurance companies based on financial strength, i.e., its ability to pay claims, and its financial size. See www.ambest.com.
Actual Cash Value (ACV) Coverage: ACV pays the insured only for depreciated value (effectively the garage-sale value of personal property or the value of real property improvements after depreciation for age).
Additional Insured: An endorsement to one party’s insurance policy that provides coverage to a party who is not the primary or “named insured” on the policy. Often the additional insured endorsement will not protect the additional insured, if the additional insured has any actual negligence or liability to the party asserting the claim. There is often confusion about this term, and there does not seem to be a consensus about what it really provides. Be sure to read the actual additional insured endorsement carefully.
Admitted Carrier: A carrier who is authorized to issue insurance in the State of California and whose clients will be covered by the California Insurance Guarantee Fund, if the carrier becomes insolvent.
Advertising Injury: Advertising injury is a statement that causes another person or business to incur a loss due to defamation (i.e., libel or slander), some violation of privacy rights, and the like. It is often provided as part of a general liability form.
Agreed Amount Endorsement: An endorsement in which the carrier agrees that it will not exercise the “co-insurance” clause. In other words, the carrier will not penalize the insured party, if the insured party does not insure in an amount equal to 100% of the value (actual cash value or replacement cost) of the insured property.
All Risk Coverage: A policy insuring against property damage caused by every type of loss imaginable, unless the type of loss is excluded. Typical exclusions include construction defects, earthquakes and floods.
Bodily Injury (BI): Coverage typically provided under a general liability policy for physical injuries to the body of someone other than the insured party caused by the acts or omissions of the insured party and its agents.
Boiler and Machinery Coverage: Coverage for the repairs of boilers, HVAC systems, pumps, fans, or other mechanical equipment that is damaged due to a failure in the equipment itself. This usually is a special endorsement that must be purchased separately in additional to a standard property policy.
Builder’s Risk Insurance: They are policies that an association might require a contractor to obtain who is building new improvements or reconstructing buildings. It is a special type of property coverage intended to insure that portion of the contractor’s work that has been completed at any given point in time.
Building Code Upgrade Coverage: See “Ordinance and Law Coverage.”
Burning Balance Policy: A policy in which the legal fees and costs incurred to defend the insured party are deducted from the total amount of coverage. Thus, the amount available to pay claims is reduced for every dollar expended in defense costs.
Claims-Made Policy: A policy which defends the insured party only if the claim is made and tendered to the carrier during the policy period (or an extended reporting period), sometimes even if the occurrence giving rise to the claim occurred before the policy period began. This is in contrast to an “occurrences” policy.
Co-Insurance: A sharing of the risk between the carrier and the insured party (often unintentionally), so that each bears some percentage of each loss.
Combined Single Limit Coverage: A liability policy in which bodily injury to one person, bodily injury to multiple persons and property damage all have the same dollar limits of coverage.
Commercial General Liability: A liability policy for a commercial entity, including a community association. It is often abbreviated as “CGL.”
Completed Operations Coverage: Coverage for claims that arise out of work performed on behalf of the insured party by subcontractors.
Contractual Liability Coverage: Coverage to protect the insured party against “hold harmless” agreements that the insured party has entered. A standard commercial general liability policy usually covers such risks, but it is usually subject to certain exclusions. Also called “contractually assumed liability” coverage.
Course of Construction Insurance: See Builder’s Risk Insurance.
Cross-Liability Endorsement or the Equivalent: Most HOA policies normally do not contain this endorsement which would have the effect of denying coverage to one insured party (like an association) if it is sued by another insured party (like a homeowner) for injuries allegedly due to the acts or omissions of the association.
D&O Policy: See “Directors and Officers Liability Policy.”
Defense Policy: A policy that will not only indemnify the insured party, but will provide a defense as well. This is in contrast to a “reimbursement” policy. Also see “First Dollar Defense.”
Directors and Officers Liability Policy: Essentially a “malpractice” policy for the directors and officers as well as the association. It is needed to cover claims other than bodily injury or property damage.
Employment Practices Liability (EPL) Coverage: Coverage for a community association or other employer for claims alleging wrongful acts by the employer, such as sexual harassment, wrongful discharge, discrimination, etc.
Extended Reporting Period: A time period, usually no more than a month or two, after the expiration of a claims-made policy period during time when a claim can still be made and accepted as if it had been made while the policy was still in effect. When the policy is not renewed, it is sometime possible to purchase an even longer extended reporting period, referred to as “Tail Coverage.” In either case, the right to report a claim applies only if the facts and circumstances that gave rise to the claim occurred before the claims-made policy expired, not during the extended reporting period.
Fire and Extended Coverage: See “Named Perils Coverage.”
First Dollar Defense: A policy in which the carrier hires an attorney to defend the insured party and which pays all defense costs from the date the claim is tendered to the carrier. This is in contrast to a reimbursement policy.
Fixture: An item of moveable property that becomes attached to a building, such as cabinets, carpeting, floor coverings, plumbing fixtures, built-in appliances, attached lighting, etc.
Guaranteed Replacement Cost Endorsement: An endorsement in which the carrier guarantees that it will replace the property damaged, even if it exceeds the limit of coverage purchased. Compare with “agreed amount endorsement.”
Host Liquor Liability: Coverage protecting the insured party against claims for bodily injury or property damage arising out of a social host who serves alcoholic beverages to social guests, as opposed to a vendor who sells alcoholic beverages as part of the vendor’s business.
Indemnity Policy: A liability policy that will pay out damages on behalf of an insured party up to the maximum limits of the policy per person or per occurrence.
Inflation Protection Coverage: Coverage in a property policy that automatically boosts the coverage limits annually to adjust for the effects of inflation and increased cost of construction.
Loss Assessment Coverage: Coverage in an owner’s policy that will pay an owner’s proportionate share of an association assessment that is levied to pay for a loss for which there is insufficient insurance to pay the entire claim. Some policies include $1,000 of coverage automatically for a peril that is insured under the owner’s policy, such as fire, but may not cover for an uninsured peril like earthquake or flood. Loss assessment coverage for earthquake or flood may require a special endorsement. Some owner’s carriers allow loss assessment coverage to be increased to as much as $50,000 for that owner at an extra cost, although the extra cost is generally not expensive.
Loss Payable Clause: When there is a loss, the policy should pay the funds just to your association or an insurance trustee based on a governing document requirement to rebuild the damaged property. However, the owners and their lenders should also be named as insured parties under the property portion of the policy.
Medical Payments Coverage: Coverage in a commercial general liability policy that will reimburse a party who is injured on the insured party’s property for the injured party’s medical expenses without regard to whether the insured party had any fault or liability for the injury. The belief is that by paying such claims, a lawsuit and larger claims might be avoided.
Named Perils Coverage: A policy insuring against property damage caused only by the perils that are specifically named, such as fire, lightning, wind, hail, aircraft, riot, vehicles, explosion, smoke, vandalism and malicious mischief. If the cause of loss isn’t specifically named, the loss isn’t covered.
Named Insured: Each person or entity that is identified as the insured party on any policy. For example, on a good directors and officers liability policy, the “named insured” may include the association, current officers and directors, former officers and directors, the community manager, committee members, and other volunteers.
Non-Monetary Claims: Claims that seek relief other than money. Typically these are either an injunction to order another party to take or refrain from taking certain actions, or for declaratory relief in which the court interprets the rights of the parties under a contract, covenant or other written document.
Non-Owned Vehicles Coverage: Coverage that insures a party for injuries that are caused by the driver of a vehicle that the insured party does not own, but which was being used to conduct business on behalf of an insured party. For example, if an association president drives his or her own car to the hardware store to pick up something for the association and causes injury to another person or property, the non-owned vehicle coverage will protect the association if it is sued.
Occurrences Policy: An insurance policy that provides coverage only if the event (“occurrence”) triggering a liability occurs during the policy period. This is in contrast to a “claim-made” policy.
Ordinance and Law Coverage. Also called “Building Ordinance coverage,” this coverage is in addition to the coverage provided by a standard property policy. A standard property policy will usually not cover certain types of losses that were not due to the original cause of loss. These additional losses may occur if there is an ordinance or law that requires tearing down the undamaged portion of a building, if the loss exceeds a certain percentage of the cost of rebuilding the entire building (often 50%). The typical property policy will not pay for either (1) the loss due to demolishing the undamaged portion of the building or (2) the cost incurred to demolish the undamaged portion. The standard policy also will not pay for the cost of rebuilding either the undamaged or the damaged portion of the building in a manner that will meet current building codes that were not required when the building was originally constructed or any subsequent modifications. Ordinance and Law coverage is needed to pay those additional costs.
Per Building Deductible: The deductible is applied to each building that is damaged, so if five buildings are damaged by fire, the association will effectively have to pay five times the deductible amount.
Per Occurrence Deductible: Just one deductible is subtracted from the total insured loss regardless of how many buildings are damaged. However, there may be a separate deductible for the real property and any personal (moveable property not attached to a building).
Personal Injury (PI) Coverage: Coverage that is typically provided under many, but not all, most general liability policies. These indemnify the insured party against claims that the insured party caused a personal injury to someone. Personal injury coverage is not the same as bodily injury coverage. Personal injuries may include wrongful acts such as slander, libel, false imprisonment, advertising injury, wrongful eviction, trespass, and invasion of the right of privacy.
Personal Property: Property that is individually owned and usually moveable. It ceases to be personal property when it is attached to a building or to land.
Products and Completed Operations Coverage: This coverage insures a commercial policyholder against liability for property damage or bodily injury due to negligence caused by a business entity that occurs somewhere other than on the business’s own property and that arises from its own activities or the products it makes or sells. HOAs often request this coverage from building contractors who construct or reconstruct portions of the HOA property to provide protection against property damage or bodily injury that occurs after the construction has been completed due to the construction itself or a defect or failure in the construction.
Property Damage (PD) Coverage: Coverage typically provided under a general liability policy for physical damage to the real or personal property of someone other than the insured party caused by the acts or omissions of the insured party and its agents.
Primary and Non-Contributory Coverage: This is language that is often found in the “other insurance” clause of an insurance contract. The “other insurance” clause specifies how another policy with overlapping coverage will be treated in terms of a duty to pay all or part of a claim. The “primary” language treats an association’s policy as the primary policy, and it must pay first, if owners and the association have overlapping coverage. The “non-contributory” language means that the primary policy will not look to an owner’s overlapping policy to contribute anything toward payment on the loss, and that the primary must pay in full to the maximum covered under the policy before any overlapping coverage will be required to pay.
Prior Acts Coverage: Coverage that may be included under a “claims made” policy that will protect the insured party, not only against claims that are made during the policy period, but also against claims in which the wrongful conduct giving rise to the injury occurred prior to the policy period. However, such coverage is generally available only where the insured party was not aware of any “facts or circumstances that might give rise to the claim.”
Products Liability Coverage: Coverage that protects an insured party against injuries to third parties that arise out of the use or consumption of a product. In the community association context, perhaps the most likely use for products liability coverage would be to illness, incapacity or death arising out of serving tainted food at an association function.
Real Property: Land and any improvements to land such as buildings, and any fixtures attached to the building.
Reimbursement Policy: A policy in which the insured party, rather than the carrier, hires and pays for its own attorney to defend itself. The policy will reimburse the insured party for all defense costs determined to be covered only when the case is over. This is in contrast to a first dollar defense policy.
Replacement Cost (RC) Coverage: Coverage that pays full replacement cost, even if the property was worth less due to age or depreciation.
Severability of Interest Clause: When there are multiple parties who are named insureds on a policy, this is a provision that each one will be treated as if each were the only insured party and as if each were separately insured. It prevents the insurance company from denying a claim, for example, if the association were sued for the negligence by an owner who is also insured against liability on the policy, but is injured or damaged due to the alleged negligence of the Association. Contrast this with “Cross-liability Endorsement” which has the opposite effect.
Subrogation Clause: An insurance contract provision that entitles the insurance company to step into the shoes of the party it insures after it has paid out on a property damage or bodily injury claim. It allows the insurance company to sue the party who was responsible for causing the property damage or bodily injury.
Surplus Lines: A carrier that is not an “Admitted Carrier” in the state. They are generally used on higher risks that an Admitted Carrier is unwilling to write. Also, if the Surplus Lines carrier becomes bankrupt, the California Insurance Guarantee fund will not pay any claims.
Umbrella and Excess Liability Coverage: These are two types of coverage that provides additional coverage above primary liability coverage. Excess coverage applies only to increase the maximum limit of the general liability policy. An umbrella policy typically adds a higher limit of liability to all liability policies (i.e., general liability, D&O, automobile, etc.).
Worker’s Compensation Coverage: Coverage that California and other states require any employer to carry to cover the medical expenses of employees and compensation payments to employees who are temporarily or permanently disabled due to an illness or injury that occurs on the job.
DISCLAIMER: The contents provided herein are the suggestions and opinions of Epsten, APC on general legal issues involving California community associations and common interest developments. This content is for educational purposes only, is not intended for commercial use and may not be relied upon in addressing any specific legal issues. Specific policies and procedures that your association, management company and/or law firm have developed may differ and may fully satisfy all applicable laws. Copyright 2023 by EPSTEN, APC, unless otherwise indicated. These materials may not be reproduced or distributed without express permission of Epsten, APC.