Four Lesser-Known Facts About HOA Liability Insurance

Community association insurance is a critical component of managing homeowners associations (HOAs). Every community’s bylaws and declarations usually demand some level of insurance coverage, and Board members hold a fiduciary responsibility to safeguard the interests of their HOA and homeowners. Additionally, there's the ongoing challenge of finding affordable insurance solutions. However, caution is crucial—insurance policies vary greatly, and ignoring critical areas of coverage can result in costly oversights.

So, what types and amounts of community insurance does an association need? The journey begins by engaging with a reliable insurance broker or agent. If one isn’t already in place, seek recommendations from professionals, colleagues, or property management companies known for partnering with seasoned insurance providers.

The intricacy of association insurance can lead to misunderstandings about policy terms and coverage among Board members. Even so, a trusted insurance agent can help find clarity. In the meantime, here are four aspects of insurance that may not be widely known. Remember, this information is not a substitute for professional advice—always consult your insurance agent to ensure suitable coverage for your association and Board.

1. Directors and Officers insurance policies are claims-made

HOAs are often required to carry Directors and Officers (D&O) insurance to protect Board members and officers from financial and non-financial claims or complaints. Although these individuals are volunteers, their decisions have significant impacts on their associations and fellow homeowners. D&O insurance offers a safety net to Board members, officers, their spouses, committee members, volunteers, staff, and even property managers against any legal actions arising from their decisions tied to the association.

While many associations secure D&O policies, not all realize these are "claims-made" rather than "occurrence" policies. The distinction is important: occurrence policies cover events during the policy period, whereas claims-made policies cover claims made while the policy is active, irrespective of when the incident occurred. Claims are not always filed immediately; they might occur long after the fact, sometimes just before the statute of limitations ends. If there's a D&O policy active when a claim is lodged, it covers current and past officers' and Board members' actions, irrespective of when the acts took place.

An effective insurance broker could add a retroactive date or a Full Prior Acts clause to your D&O policy. Ideally, this should date back to the association's inception, providing coverage from that point onwards, even if the policy is acquired later. If your policy lacks these features, request such a modification from your broker.

2. Umbrella policies only cover liability

Some associations might mistakenly believe that umbrella policies enhance both property and liability insurance coverage. This assumption is only partly correct.

Firstly, property insurance safeguards the community's physical assets, such as buildings, clubhouses, and recreational facilities, but not the interior of individual units. Liability insurance, however, addresses third-party claims involving bodily injury or property damage.

Within community association insurance, umbrella policies enhance general liability and sometimes D&O liability coverage by providing an additional layer that kicks in when standard liability limits are reached. Insurance brokers often offer umbrella programs specifically designed for community associations, which offer cost-effective solutions for extra liability coverage. However, these umbrella policies strictly augment liability coverage and do not extend to property insurance. Securing adequate property insurance from the beginning is critical, as umbrella policies will not cover property claims. An insurance broker experienced with associations can help ensure that your coverage meets both legal requirements and the community's needs.

3. The importance of having building ordinance & law coverage – parts A, B, and C

Associations may incorrectly assume that property insurance covers all on-site structural damage or loss. If a community's buildings are outdated, damage repair costs might only cover rebuilding to their original state. The older the structures, the more significant the potential cost difference due to modern code requirements.

The solution is building ordinance and law coverage. This covers the costs of rebuilding older structures to meet current safety standards and codes, which might include updating electrical, plumbing, or HVAC systems.

To ensure comprehensive coverage, both parts A, B, and C should be in place. Here’s a breakdown:

- Coverage A handles loss to undamaged building portions. If local regulations demand a structure be entirely rebuilt after suffering significant damage, Coverage A compensates the association fully.

- Coverage B covers demolition costs for unaffected building parts and debris removal.

- Coverage C pays for additional costs incurred from updating structures to comply with modern codes, like installing necessary safety measures.

Experiences have shown associations dealing with costly repairs without proper ordinance and law coverage can face challenges rebuilding after major damage. With the right coverage, these pitfalls are avoidable.

4. All associations need workers’ compensation coverage

Some associations believe that without employees, there’s no need for workers' compensation insurance. However, this is not accurate. Workers' comp insurance is crucial for protection against claims if contracted workers or occasional laborers, lacking personal insurance, incur injuries on-site. This coverage is vital, so always secure insurance certificates from any vendors or contractors in advance. Workers' compensation policies can also be adjusted to include volunteer injuries. Professional management contracts frequently require associations to maintain workers' compensation policies as a key precaution.

Despite potential complications, understanding community insurance and working with a knowledgeable broker can equip your association with the necessary policies to mitigate risks and protect against liabilities.