Are you an insurance expert? Unless you sell it, the answer is probably “no.” But if you’re a member of your HOA’s Board of Directors, it’s a really smart idea to have a basic understanding of the policy that protects your association from liability.
In fact, Andrew Lester, president of FirstService Financial, believes that for Board members, this knowledge is critical. “If you have a fundamental understanding of insurance policies and the decision-making process, you are empowered to ask the professionals the right questions,” he explains. “Insurance policies can be complicated for laypeople, so make sure your broker provides a thorough explanation in terms you understand so you can make the right business decision for your association.”
To get you started, here is a basic overview of insurance coverage:
1. First party vs. Third party Insurance.
There are two kinds of coverage, first party and third party. First Party coverage protects your association against losses, resulting, for example, from a fire or flood. Third Party coverage protects your association from litigation brought forth by another person or entity. An example might be if a resident trips on an uneven sidewalk in your community and decides to sue you for their injuries.
2. What is an insurance “package”?
Every association’s insurance needs are different, so its insurance package can include various lines of coverage, such as property, crime, commercial auto, general liability, umbrella, directors and officers and workers compensation. Sound like a lot? Not to worry – a trustworthy insurance broker can help you navigate the best package to meet your needs.
3. What should your property coverage include?
Your association’s property coverage should include all buildings, as well as structures (bridges, gazebos fences, etc.), miscellaneous property (indoor/outdoor furnishings, art, trees, etc.), and extra expenses to cover the costs of running the association in the event of a significant property loss.
You should also understand that most property coverage has common exclusions, such as flood, earthquake, war, nuclear hazard, pollution and wear and tear. It is always important to read all policies carefully to be sure you understand what’s included – and what’s not.
4. How your loss is valued.
If your association suffers a loss, there are several ways your insurance company can place a value on it. Replacement cost allows for recovery based on the value of the item, regardless of depreciation. Guaranteed replacement allows replacement with no limit. Actual cash value is another type, as are blanket coverage and “agreed value.” Each type of valuation has its own risks and rewards, so it’s important to understand the differences before you decide.
5. How your policy defines “unit”.
Different policies define a “unit” differently, so it’s key to be familiar with what your association documents require the association to cover – and what your policy actually does cover. “Bare walls” units include coverage for common and limited common elements, excluding property within an unfinished interior surface. “Original specifications” units include all common and property areas initially installed according to the association’s original plans. “All in” pretty much encompasses everything, including upgrades made at an owner’s expense.
6. Legal requirements.
Depending on your state or your individual circumstances, you may be required to provide insurance for your association that falls within some pretty rigid parameters. Look at state statutes, governing documents, governmental regulations, secondary market and lender requirements and your contractual obligations to see what applies to you. Of course, nothing beats a good dose of sound business judgment as a guiding principal as well.
7. The value of crime coverage.
“Employee Dishonesty” coverage or a “Fidelity Bond” indemnifies the association for loss of money, securities or property due to criminal behavior. A typical policy will cover the association’s Board of directors and staff, but it should be broadened to include associates of the property management company as well.
8. What general liability covers.
This coverage protects you against suits brought against the association in the event of an alleged bodily injury – even if the association was negligent. Be sure to seek a “comprehensive general form,” as this will protect all activities, even those operations conducted by the association off premises. This coverage should also include contracts, advertising, medical payments, liquor liability and possibly more – ask your insurance agent explain all of the available options so you can tailor a plan that’s right for your community.
9. Commercial auto.
Let’s not forget the nuances of commercial auto coverage. First-party auto coverage usually covers basics like collision-only or comprehensive coverage. Third-party coverage goes a step further and covers vehicles not owned by the association (such as cars owned by Board members that are used to conduct association business).
10. Directors & Officers.
Are you covered if a resident files a suit alleging that a Director mismanaged the association, or cost the association money due to an error? To protect Board members, it’s wise to have a Directors & Officers Liability policy in place. Insurance carriers often add many exclusions to the policies they offer, so be sure to review your policy to ensure it’s right for you.
11. Workers Compensation.
Even if your state doesn’t require workers comp coverage, it’s a good idea in many cases – and if you have direct employees, it’s essential. Even if you have no staff, this type of coverage is prudent to have in case your subcontractors or vendors are under-insured.
12. The value of umbrella liability.
This type of policy provides an extra measure of coverage beyond general or primary liability and the other types of coverages we’ve highlighted. Basically, its value is in providing additional coverage when other policies’ limits have been met. Umbrella liability prevents individual homeowners from being assessed for portions of lawsuits if the associations’ other coverage can’t cover settlements.
Did this list make you want to take a closer look at your association’s insurance coverage? Hopefully, it made you want to ask questions to be sure you have the best insurance coverage to meet your needs. Start with this basic knowledge and talk to your trusted insurance advisor or property management company to help you make your best choice. For more valuable tip, contact FirstService Residential
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