Community Insurance - Four Key Points You Should Know

Posted on Monday February 06, 2017

It’s crucial that Minnesota community association Boards have a clear understanding of the community insurance policy in place at their association. All associations will have different requirements for their homeowner association insurance coverage as laid out in their bylaws and declarations, and Board members have a fiduciary responsibility to protect the best interest of their HOA and its owners. In addition to this upholding duty, associations are also under pressure to find the least expensive homeowner association insurance options available. But there is a caveat – like most things, community insurance is a buyer beware situation – not all policies are created equal, and if you overlook certain types of coverage, it could end up costing the association more than anticipated.

What kind of insurance does your Minnesota association need and how much should it cost? The first item the Board should do is to find a trusted insurance broker or agent. If the association doesn’t currently have one, ask for professional referrals or reach out to your property management company who will have strong relationships with experienced brokers. FirstService Residential Minnesota’s Insurance Coordinator is Alicia Smith who may be contacted regarding questions for your Minnesota insurance renewal.

“It’s always best to choose an insurance agent or broker with a successful track record in community association insurance – they can tailor a cost-effective program that ensures adequate coverage and meets your community’s needs,” says Sean Kent, Vice President of FS Insurance Brokers.

Homeowner association insurance can be complicated, and consequently, Board members may be confused on which policies their association needs and whether those policies with provide adequate coverage.  It’s important to work closely with your property management company, who should have an in-house dedicated insurance coordinator, to help the Board understand all differences between the policies.

Meanwhile, we put together a few facts about community insurance. Disclaimer, this is not intended to replace professional advice from an experienced and qualified agent; we recommend Boards always work with an insurance agent to ensure proper coverage for their association.

1.  Directors and Officers insurance policies are claims-made.  

Associations are typically required to carry insurance that protects their Board members and officers from potential exposure to monetary and non-monetary complaints and claims. This type of coverage is called Directors and Officers (D&O) insurance. Board members and officers are volunteers at the head of the association, their decisions impact the lives of the association and its homeowners. D&O policies not only cover Board members and officers, but also their spouses, on-site staff, volunteers, committee members, and managing agent from allegations or lawsuits that may result from decisions the Board.

Understand that not everyone comes forward right after an incident, sometimes people wait and file at a later date, or even wait until the day before the Minnesota statute of limitations expires. So long as an association has a D&O policy in place when the claim is filed, it covers the action of its officers and Board members – past, present and future – from previous and future acts. This is what makes D&O policies fall in the “claims-made” category of insurance. The usually only cover claims that are made while the insurance policy is in place, regardless of when the incident actually happened.

A good insurance broker will add a retroactive date and/or Full Prior Acts clause to your association’s D&O policy – and date it back to when the association was first incorporated. Adding a retroactive date will provide coverage for all incidents from that date forward, even if the policy is purchased at a later date.

2.  Umbrella policies cover liability only.

Do not assume that the community association’s umbrella policy will provide an added level of coverage for both property insurance and liability insurance – it’s not always one in the same.

First of all, property insurance covers the community’s tangible assets, such as residential buildings and their contents. However, they don’t include –inside the walls of individual units, or common amenities such as tennis courts, green spaces, clubhouses, sidewalks, swimming pools, trees and landscaping, etc. Secondly, liability insurance covers “blood, guts and broken stuff”, which includes third-party claims arising from alleged bodily injury or property damage to members of the public.

Umbrella policies are in addition to general liability and D&O liability policies; in other industries, they don’t always cover D&O. These policies provide an extra level of coverage, filling in liability gaps when the primary liability limits have been exhausted. Some insurance brokers actually offer umbrella programs developed specifically for community associations.

Do not make the mistake of assuming umbrella policies provide additional coverage for property insurance, because they don’t. Umbrella policies only provide additional coverage for liability policies. Sometimes associations think they can save money by purchasing a basic level of property insurance coverage and assume the umbrella policy will cover larger claims – unfortunately, not the case. It is very important to get adequate property insurance coverage from the start. Boards should also make sure their insurance broker has association experience so they can check to make sure the coverage complies with your association’s governing documents and is sufficient to meet your needs as well.

3.  Purchasing building ordinance & law coverage – parts A, B and C.

Associations should not assume that their property insurance will automatically cover all damages or loss to on-site structures. Within older Twin Cities’ communities, the structures may not be up to current building codes and if any of these buildings sustain complete or partial damage, your property insurance will only cover the costs of rebuilding them to the original standards. Therefore, it stands to reason that older buildings have greater exposure for loss caused by the requirement to meet updated building codes.

If your community is on the older side, the solution is to consider purchasing building ordinance and law coverage. This coverage may be important when an older building is damaged and requires reconstruction. If the building was built according to obsolete safety standards, it must not only be repaired, but also be brought up to current city building codes. This would include replacing and upgrading older electrical, plumbing and/or HVAC systems, new engineering and design, or installing sprinklers and other fire safety measures.

The cost of rebuilding to comply with current building codes is almost always going to be higher than the cost of rebuilding to the outdated standards – though there may be exceptions – and this is where building ordinance and law coverage comes into play. However, what many associations do not realize is the only way to ensure complete coverage is to have all three parts – A, B and C:

Coverage A – Loss to the Undamaged Portion of the Building. Some local building ordinances require that buildings sustaining a specified percentage of damage (typically 50%) be demolished and rebuilt to meet current codes. So even though a building may only be partially damaged, Coverage A treats the claim as a total loss and pays the association accordingly.

Coverage B – Demolition.  Continuing the scenario above, Coverage B covers the costs of demolishing the undamaged portions of the building and hauling away the debris.

Coverage C – Increased Cost of Construction. If building codes have changed since the time the building was originally constructed, Coverage C pays for the increased costs of bringing the reconstructed building up to current codes – for example, installing a fire sprinkler system throughout the building after a major fire.

4. Every homeowner association needs workers’ compensation.

It’s a common misconception that associations without regular employees do not need workers’ compensation insurance.

“Just because an association doesn’t have payroll doesn’t mean they don’t have exposure,” said Kent. Having a worker’s compensation policy covers an association in the instance that a casual laborer or hired contractor is injured on the job and does not carry their own insurance. We would never recommend an association hire a contractor without obtaining proof of proper insurance prior to any work commencing; however, it happens frequently.

Additionally, most workers compensation policies can be endorsed to include coverage for volunteers injured on site.  Property management contracts will almost always require that the association purchases workers’ compensation insurance.

Board members may be confused by their community insurance and find the information to be complicated, but having the right policies in place can protect you and your association from risk and exposure. Take the time to go over the association’s policies with your insurance agent often and be sure to ask questions when they arise. 

For additional information about community association insurance, visit FirstService Insurance Brokers or contact us to learn how we can serve your community association.

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