What Your HOA Needs to Know About Community Insurance

Be honest: How much do you know about community association insurance? Although your bylaws and declarations include requirements to provide community association insurance coverage, most board members don’t know as much about it as they should.
 
Your fiduciary duty to protect the best interest of your homeowners association (HOA) and owners probably means that finding affordable association insurance is a primary concern for your board. But here’s the ultimate two-part question: What type of association insurance coverage do you need? And how much coverage should you obtain? Remember that not all policies are alike, so it’s important to compare them. You want to make sure that you don’t neglect necessary coverage, or you could end up paying more in the long run.
 
First thing’s first, finding and working with a trusted insurance broker or agent is key. If you don’t have one, start by asking for referrals from professionals, other board members or a good HOA management company that can connect you with experienced insurance providers. Be sure to choose an insurance agent or broker with a successful track record in association insurance. An agent who understands HOAs should be able to customize a cost-effective program that provides the right coverage and meets your community’s needs.
 
Without a doubt, association insurance is dynamic and complex. Therefore, it is understandable that board members may be confused about the different types of policies and what they cover. This is why it is so important to have a good agent who can help point you in the right direction. In the meantime, you may want to check out these four insurance facts. Please be advised that this is not intended as professional advice. It’s always best to consult with your insurance agent to ensure proper coverage for your association and board.
 
Your Directors and Officers insurance is a claims-made policy.
Typically, HOAs need to have Directors and Officers (D&O) insurance, which protects board members from exposure to monetary and non-monetary complaints and claims. Although they work as volunteers, their actions can affect the HOA as well as other residents. D&O insurance provides protection for the board—along with committee members, volunteers, staff members, the association manager, the management company and even board members’ spouses—from any allegations or lawsuits that are the result of decisions they make while in service to the HOA.

What many HOAs may not realize, however, is that D&O insurance policies are “claims-made” not “occurrence” policies. Why should that matter? An occurrence policy provides coverage for accidents or incidents that occur during the policy period. This is how most liability insurance works. On the other hand, D&O policies, which are claims-made policies, cover claims that are made while the policy is in force, regardless of when the incident or conduct may have taken place.
 
“People don’t always come forward right after an incident occurs—sometimes they wait and file a claim at a much later date, sometimes right before their state’s statute of limitations expires,” says Jamie George, Insurance Product Manager for the West/Texas regions of FS Insurance Brokers. She explains that if 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. 

George points out that you should make sure your insurance broker adds a retroactive date and/or a “Full Prior Acts” clause to your D&O policy, preferably dating back to when the HOA was incorporated. This way, you will have coverage for all incidents from that date forward, even if you obtained the policy at a later date. If your current D&O policy doesn’t already include one or both of these, ask your broker to change it.
 
Your umbrella policy does not add coverage to your property insurance.
Some HOAs are under the impression that they get added coverage for both their liability and property insurance with an umbrella policy. This is not entirely true.
 
An umbrella policy that is part of your association insurance will supplement your general liability and D&O liability policies, but not your property policy. It goes into effect when your primary liability limits have been exhausted to fill any liability gaps. Some insurance brokers even offer umbrella programs that have been developed specifically for HOAs. 
 
Some associations mistakenly believe they can save money by purchasing a basic level of property insurance coverage because their umbrella policy will cover larger claims anyway, but this is not the case. Therefore, it is critical that your HOA has adequate property insurance coverage right from the start. Make sure that your insurance broker has HOA experience so you are certain that you are getting coverage that sufficiently meets your needs and complies with your governing documents. 

It is important to have all three parts (A, B and C) of building ordinance and law coverage.
Another mistake that many HOAs make is to assume that their property insurance will fully cover damage or loss to their structures. However, this is not the case if the structures do not meet current building codes, which is often the case in older communities. If these buildings sustain complete or partial damage, property insurance will only cover the costs of rebuilding them to the original standards.
 
Building ordinance and law coverage, which covers the higher costs of rebuilding to comply with current codes, can address this gap. But you need to have all three parts—A, B and C—to ensure complete coverage: 

• Coverage A—Loss to the Undamaged Portion of the Building. In some cases, local building ordinances require that a building that has sustained a specific amount of damage (usually 50 percent) be demolished and rebuilt to meet current codes. Coverage A treats the claim as a total loss, even when the building only sustained partial damage, and pays the HOA accordingly.
• Coverage B—Demolition. Coverage B covers the costs of demolishing the undamaged portions of a partially damaged building and hauling away the debris.
• Coverage C—Increased Cost of Construction. Coverage C covers the increased costs of reconstructing an older building that has been damaged to meet current codes. Examples of this might include, installation of a fire sprinkler system in an older building that has been damaged by a major fire.

As you can see, you face serious risks if you do not have appropriate coverage. Even though association insurance for your community may be somewhat complex, having the right coverage and the right insurance broker is crucial for protecting you and your HOA. For more information about how a community management company can help you find the right insurance, contact FirstService Residential, the leading community management company in Texas.