3 Insurance Facts Every HOA Board Should Know
That isn’t an easy task given how complex HOA insurance can be. You have to understand what each type of policy covers. You have to make sure you have the right amount of coverage. And you have to figure out how to get the best price without putting your community at risk.
Having a trustworthy insurance agent or broker with specialized knowledge can make all the difference, according to Sean Kent, vice president of insurance distribution 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 ensures adequate coverage and meets your community’s needs.”
In addition, someone who understands HOAs will make sure 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.
In the meantime, you can learn the truth about 3 important aspects of HOA insurance that boards often misunderstand. (Please note that the information in this article is not intended to replace professional advice. Get in touch with a qualified insurance broker to ensure that your coverage meets your HOA’s needs.)
1. Your HOA needs to have all 3 parts of building ordinance and law coverage.
If your community is more than a few years old, your structures may have been built according to older codes. However, in the event of significant structural damage, you could be required to rebuild according to current standards. What you may not realize is that your property insurance will only provide coverage to rebuild to the original standards. To make up for this gap, you’ll need to obtain parts A, B and C of building ordinance and law coverage:
- Coverage A – Loss to the Undamaged Portion of the Building. In some areas, if damage affects more than a specific percentage of your building (generally 50% or more), the local building ordinances will require that you tear it down and rebuild 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 was the cause of your building’s damage, you may have to install a fire sprinkler system as part of the reconstruction.
2. Your directors and officers liability insurance is a “claims-made” policy.
Board members may be targeted in a lawsuit or allegation because of the actions or decisions they have made. In fact, 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 protects all of them from liability.
Unlike your general liability insurance, which is an “occurrence” policy, your D&O insurance is a “claims-made” policy. This means that instead of covering accidents or incidents that occur during the coverage period, the D&O policy provides coverage if it is in effect when the claim is made. 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 will be covered.
Be sure to have a retroactive date and a “Full Prior Acts” clause dated back to when the HOA was incorporated. This ensures that there is coverage from the inception of the association no matter when you obtain the policy. If your current D&O policy doesn’t have these stipulations, make sure your insurance agent adds them to your coverage.
3. An umbrella policy only gives you additional liability coverage.
Many HOAs misunderstand the purpose of an umbrella policy. Here’s what it 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 solution for associations to buy extra liability coverage at low cost,” says Kent.
What an umbrella policy does not give you, though, is 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. Regrettably, this misguided approach can leave an association unable to rebuild in the event of severe damage or loss. The lesson is that you must maintain adequate property insurance even when you have an umbrella policy.
HOA insurance may not always be easy to understand, but an insurance broker or agent who is familiar with the needs of associations can cut through its complexities to provide you with coverage that meets your needs and your budget. A good HOA management company will be able to guide you in finding someone who has your association’s best interests at heart.