This article originally appeared in the
February 2021 issue of Condo Media Magazine.
Having the right insurance coverage in place for your community association is critically important. While virtually every community association board member, property manager and unit owner would agree with this statement, many would also admit that the path to ensuring that the “right” coverage is in place can sometimes seem daunting. The purpose of this article is to highlight some common pitfalls that association leaders often encounter during the insurance procurement process, and help provide some common-sense advice in order to help avoid them.
As Benjamin Franklin once aptly said, “an ounce of prevention is worth a pound of cure.” Nowhere is this statement more accurate than in the insurance industry, where proper up-front planning can most often be the difference between a smooth, or horrific, claim experience. The below list is a non-exhaustive overview of key considerations when approaching the process of structuring and buying insurance for any community association.
Pitfall Number One: Inattention to Condo Documents
What do condo documents have to do with your insurance program? In just two words, “a lot!”
The “insurance” section of any community association’s governing documents often serve as a roadmap to understanding what coverage needs to be addressed by the association’s master insurance program, vs. that which individual unit owners must bring to the table themselves. For example, who is responsible for covering real property located within the interior of each unit is something that is typically addressed within this documentation, and it’s very important to refer to this language in order to ensure the most seamless possible interaction between the association’s master policy and an affected unit owner’s homeowners’ policy. Where the common property ends and personal property begins may seem like a very straight-forward question, but in the event of a claim, having the wrong insurance in place can make it much more complicated than necessary.
Pitfall Number Two: Improper or Insufficient Communication
“If a tree falls in a forest and no one is around to hear it, does it make a sound?” The author is reminded of this old adage when considering the topic of communication when it comes to community association insurance coverage.
If a board of trustees and/or its trusted property manager dutifully review the insurance section of their condo documents to ensure that the master insurance program is structured properly, that’s only half the battle – information about the insurance program then needs to be communicated to unit owners, along with clarification surrounding their responsibilities, as well. Once a proper master insurance program is placed on behalf of the condo association to address its responsibilities, it’s very important to then make sure that key insurance-related details are communicated to unit owners, along with a friendly reminder that they should be addressing their responsibilities, as well.
For example, most associations either require or strongly encourage their unit owners to purchase an HO-6 (condo unit owners’) policy; without knowledge of what’s covered by the master insurance program as required in the condo documents, it is very difficult for unit owners (or their personal insurance agents) to confidently structure proper coverage to protect their personal interests. A disconnect on this topic can lead to painful uncovered claims for in-unit property, often as a result of a unit owner’s misunderstanding about their responsibilities when it comes to insuring property that’s fixed to the condo building’s structure (this is just one example).
Pitfall Number Three: Paying Insufficient Attention to the Details of Property Insurance
All too often, those responsible for procuring property insurance on behalf of a community association ask too few questions about their insurance coverage, and specifically the property section of the master policy. If the only two questions that are addressed when procuring property insurance are, “what’s the limit?” and, “what’s the price?”, the process is being handled incorrectly.
When it comes to property insurance (and most areas of insurance in general), “the devil is in the details.” Below is a non-exhaustive list of items that should be specifically addressed when placing insurance coverage for any association:
What are the Building Limits, and are they adequate in the event of a total loss?
The most common (and appropriate) valuation that should be considered when placing building and property limits is “Replacement Cost,” which should represent the cost to repair or rebuild (replace) your property in the event of a covered loss. Association board members and managers should work with a qualified insurance professional to ensure they are setting limits that are adequate to cover the association’s interests in the event of a total loss situation. While insurance carriers often charge based on the property limits used, associations must resist the temptation to underinsure to save money; in the event of a covered claim, being underinsured may result in very avoidable out-of-pocket costs and/or assessments.
What about sub-limits or optional coverage areas?
Some of the most important coverage that a community association can purchase for its property are optional, and it’s extremely important to consider what types and amounts of these optional coverage areas are necessary in each specific situation. Coverage for damage caused by earthquake, flood, water or sewer backup and/or equipment breakdown often must be purchased by specific request/addition. Additionally, “ordinance or law” coverage, which is critically important to many associations throughout New England, is often an optional coverage area; ordinance or law limits address the cost to comply with updates to building code (i.e. improvements resulting from code requirements) in the event of a covered claim.
What is going on with deductibles?
Deductibles may seem like a very straightforward consideration, however some of the most common mistakes in condo insurance involve misunderstandings surrounding this topic. There are many different types of deductibles that may impact an association’s property policy, and it’s possible (even probable) that a single property policy features different deductibles for different causes of loss. For example, an “all other peril” deductible will generally address what most view to be the most commonly considered claims, such as a fire, water damage from a pipe burst or other plumbing issue, etc. That said, if optional coverage areas such as earthquake or flood are selected, these limits typically come along with separate deductibles that apply specifically to these hazards. If your property is close to the coast, a specific (and higher) deductible may apply with respect to wind/hail, named storm or hurricane-related damage. Finally, many carriers will often offer “per unit” deductibles as a way to control master policy claims (and the resultant annual cost); these types of deductibles can be a powerful tool if used correctly (i.e. in conjunction with properly structured HO-6 unit owners’ policies), however if used incorrectly, can result in some painful and expensive situations.
Pitfall Number Four: Paying Insufficient Attention to Areas of Coverage OTHER THAN Property
It’s natural for those who handle an association’s insurance program to focus on property insurance – after all, the property itself often represents one of the unit owners’ largest personal investments. That said, it’s also important to consider other areas of insurance that round out any properly structured master insurance program. Other areas of coverage that an association should be sure to discuss with its broker include the following:
- General Liability
- Auto Liability
- Workers’ Compensation & Employers’ Liability
- Umbrella Liability
- Employee Dishonesty/Fidelity Bond
- Management Liability (Directors’ & Officers’ Liability and Employment Practices Liability)
Each of these coverage areas addresses a different set of risk exposures to the association, and failure to adequately address the need for coverage can result in inconvenient situations.
Pitfall Number Five: Misunderstanding the Process
Those who do not have much experience with the process of procuring insurance for a community association very often overlook, or improperly weight, key considerations that dramatically impact the process’ outcome. For example, while price is obviously a very important factor to consider when buying insurance, if it’s the only factor, the likelihood of encountering problems with coverage increases. The aforementioned optional coverage areas come at an additional premium charge; if the only thing that board members or association management are considering at renewal time is the “bottom line” without delving into the details of coverage, it’s possible that the utility of that low price will subsequently be outweighed by the pain of an uncovered or inadequately covered claim. Association management should find a reputable insurance broker who is knowledgeable and experienced in the area of community association insurance, and then work with that broker to collaboratively structure coverage that is tailor-made for the specific community.
“I’m planning on experiencing an insurance claim this year,” said nobody, ever. While the process of buying insurance may not be the most exciting thing on an association manager’s “to do” list, it is undeniable that paying proper attention to this process pays dividends in those unexpected scenarios that result in claims.
Gregory G. Pierce, CPA, LIA, Senior Vice President, NorthStar Insurance Services, Inc.