What to know about HOA board member insurance

What is HOA board member insurance?

One of your main responsibilities as a board member is protecting the interests of your homeowners association (HOA). Securing the right insurance to cover your community’s needs while maintaining cost efficiency is an important part of this fiduciary duty.

That isn’t an easy task given how multifaceted HOA board member insurance can be. You have to understand what each type of policy covers, determine the appropriate coverage levels, and figure out how to get the best price without putting your community at risk. Failing to secure adequate insurance can leave board members and the association vulnerable to costly legal battles, unexpected financial losses, and even personal liability.

Having a trustworthy insurance agent or broker with expertise in community associations can make all the difference, according to Sean Kent, senior vice president of insurance at FirstService Financial. “It’s always best to choose an insurance agent or broker with a successful track record in community association insurance,” he says. “They will know how to tailor a cost-effective program that offers sufficient coverage and meets your community’s needs.”

A professional who understands HOAs can determine whether your coverage meets any requirements specified in your bylaws and declarations, as well as any Missouri statutory regulations. If you need to find a reputable agent, ask your HOA management company to provide some recommendations.

To better understand the complexities of HOA board member insurance, let’s explore the essential elements of coverage that boards often overlook.

This article is for general informational purposes only and does not constitute legal advice. Laws and regulations frequently change and may be subject to local variations. Boards should consult qualified legal counsel and work closely with their property management partner for advice specific to their Missouri HOA.
 

What does HOA board member insurance cover?

Board members can be held personally liable for decisions they make while performing their duties. In many cases, even your committee members, other HOA volunteers, spouses, your staff members, your community manager, or your management company could be named in a suit. Directors and officers (D&O) insurance is designed to provide protection against these risks.

Unlike general liability insurance, which is an “occurrence-based” policy, your D&O insurance is “claims-made”. This means that a policy must be active at the time a claim is filed, regardless of when the alleged incident took place. This is an important distinction because claims may not be filed until long after an incident has occurred. But if the D&O policy is in effect when the claim is filed, any past, present, or future officers and board members may be covered.

To help maintain full protection, verify that your policy includes a retroactive date and a “Full Prior Acts” clause dated back to when the HOA was incorporated. This means that there is coverage from the inception of the association no matter when you obtain the policy. Review your policy at least once per year to confirm continued protection for past, present, and future board members.

Watch Now: For more information, watch our webinar "Understanding Insurance".
 

Types of HOA board member insurance

If your community is more than a few years old, its original construction may not comply with updated building codes. In the event of significant structural damage, you could be required to rebuild according to current legal standards. However, your property insurance might only cover rebuilding to the original specifications. To avoid financial exposure, it’s important to understand all three components of building ordinance and law coverage:

• Coverage A – Loss to the Undamaged Portion of the Building. In some jurisdictions, if damage affects more than a specific percentage of your building (generally 50% or more), local building ordinances may require complete demolition and reconstruction according to current codes. Coverage A reimburses you for a total loss even when the building only incurred partial damage.
   
• Coverage B – Demolition. Coverage B provides reimbursement for demolition and debris removal related to the undamaged portions of a structure.
   
• Coverage C – Increased Cost of Construction. Meeting new codes when you rebuild an older structure can result in additional costs to your HOA. Coverage C reimburses these costs. For example, if a major fire damages your building, modern safety codes might require the installation of a fire sprinkler system, which could be covered under this policy.

Without proper coverage, your HOA could struggle to comply with mandatory construction requirements, leading to costly out-of-pocket expenses that may strain your association’s financial reserves.
 

How to make sure board members are covered

Many HOAs misunderstand the purpose of an umbrella policy. Here’s what it actually does: Once you exhaust the limits of your D&O or general liability insurance, the umbrella policy kicks in to give you additional liability coverage. Some insurance brokers will even offer umbrella policies developed specifically for HOAs. “These tailored programs are excellent solutions for associations to buy extra liability coverage at low cost,” says Kent.

However, an umbrella policy does not provide extra coverage if you exhaust the limit of your property coverage. Boards that don’t understand this may try to save money by reducing the HOA’s property insurance coverage. They mistakenly assume that the umbrella policy will cover any structural damage or loss not covered by their property insurance. This can be a costly mistake if severe damage occurs and the property insurance limit has already been exhausted.
 

Working with the right insurance professionals

HOA board member insurance can feel complex, but an insurance broker or agent who is familiar with the needs of your association can help clarify the details and tailor coverage to meet your specific needs and your budget. Partnering with an HOA management company that understands the nuances of insurance can be invaluable in selecting the right provider.

FS Insurance Brokers, our affiliated insurance brokerage, leverages the size of our property portfolio and historical claims and loss data to negotiate policies that can result in lower annual premiums with better terms and coverage limits. Their team has co-brokered over 3,200 placements for our clients, saving them over $5.5 million in annual insurance premiums.

To learn how FirstService Residential can support your community's vision, contact a member of our team.