Being a board member means you have a fiduciary responsibility to your homeowners association (HOA). In part, protecting the association’s interests means ensuring that you find insurance that provides the most coverage at the lowest price. However, understanding the complexities of HOA insurance isn’t easy. Chances are that your board finds it downright confusing to know what kind of coverage your HOA needs and how each type of policy works.
An insurance agent or broker who has specialized knowledge in HOA coverage and whom you can trust to steer your board in the right direction is invaluable. This expert will make sure your HOA has adequate coverage to meet your particular needs, as well as the requirements of your bylaws and declarations and Minnesota statutory regulations. Make sure the agent has experience with communities like yours and can customize your insurance to give you the most value for your money. If you need to find a reputable agent, ask your HOA management company to provide some recommendations.
For now, keep reading to learn 3 important facts about HOA insurance that boards frequently don’t realize. (Note: This information is not intended to be professional advice. Please speak to a qualified insurance agent to ensure that you have the right coverage for your association’s needs.)
- An umbrella policy has no effect on property coverage.
A frequent misunderstanding about umbrella policies is that they provide the HOA with extra property coverage. However, these policies only provide additional liability coverage – never property coverage – and only after the limits of your general or D&O liability policy have been exhausted.
Unfortunately, some boards think the umbrella policy will cover whatever their property insurance policy doesn’t, so they reduce the HOA’s property coverage in order to lower their premium costs. As a result, the association has insufficient property insurance and won’t be adequately covered if faced with significant structural loss or damage. To avoid being caught in this type of situation, make sure you have enough property insurance up front.
- D&O insurance policies are “claims made.”
Your board probably understands why your association needs directors and officers (D&O) coverage. Your decisions and actions while serving the HOA have the potential of leading to a lawsuit or allegation. With D&O insurance, board members – as well as other volunteers, committee members, the management company, the community manager, staff and even your spouses – are covered in the event of a claim.
What your board may not know is that D&O policies are “claims-made” policies. What does that mean? Typically, insurance policies (such as liability insurance) are “occurrence” policies: They cover incidents and accidents that occur during the coverage period. In contrast, D&O policies provide coverage if they are in effect at the time that a claim is made.
“Often, a claim doesn’t get filed until well after the incident happened,” says Alice Smith, insurance manager at FirstService Residential in Minnesota. “But that doesn’t matter as long as the HOA has a D&O policy in effect when it is filed. The policy will cover any past, present or future officers and board members.”
Smith stresses the importance of having a retroactive date and a clause known as a “Full Prior Acts” clause dating back to when the HOA was incorporated. “This way, you’re sure that coverage is in place as of that date regardless of when you got the policy,” she says. Smith suggests checking with your insurance agent about this and having the agent make a change to your policy if one or both of these isn’t included.
- Your building ordinance and law coverage needs to include parts A, B and C.
Standards change, and especially in older communities, it’s likely that some structures were built before current codes were in effect. Property insurance only covers the cost of rebuilding a structure to the original code, leaving you with a gap in coverage. Building ordinance and law coverage fills this gap by covering the cost of bringing your structure up to code in the event of damage or loss. But you need to have all 3 parts:
- Coverage A – Loss to the Undamaged Portion of the Building. Some local building ordinances require that you tear down and rebuild a building to code if there is more than a certain amount of damage (typically 50 % or more). With Coverage A, your HOA will be reimbursed as if the structure had incurred a total loss, even if there is only partial damage.
- Coverage B – Demolition. The cost of demolishing and removing debris from the undamaged portions of a building that’s been partially damaged is covered under this part.
- Coverage C – Increased Cost of Construction. When reconstructing an older building, your HOA may incur extra costs to meet new building codes. For example, you may need to install a fire sprinkler system if your older building was damaged by a major fire. Coverage C would reimburse you for these costs.
Although association insurance has many complex aspects, your board can rest assured knowing that you are doing right by your community if you just remember to seek the advice of an experience insurance agent. Your HOA management company can also provide the guidance and the resources you need to meet your fiduciary duties.