Understanding Your Association’s Insurance

Diving into the complexities of insurance is essential, especially if you're part of an HOA's Board of Directors. It's crucial to have a foundational grasp of your association’s insurance policy to safeguard it against liabilities.

Insurance Types

Insurance comes in two main forms: first party and third party. First party insurance offers protection against direct losses your association might suffer from incidents like fires or floods. In contrast, third party insurance shields the association from lawsuits filed by others, such as if someone gets injured on your property and decides to sue.

Insurance Packages

The insurance needs of associations vary significantly, leading to unique insurance packages. These packages might include lines like property, crime, commercial auto, general liability, umbrella, directors and officers, and workers compensation. Though this may sound overwhelming, an experienced insurance broker can guide you toward the right package tailored to your needs.

Property Coverage Essentials

Property coverage for your association should encompass buildings, structures (such as bridges and gazebos), miscellaneous property (like furniture, art, and trees), and cover extra expenses necessitated by major property losses. It's important to note that most property coverage has exclusions like floods, earthquakes, war, nuclear hazards, pollution, and wear and tear. Carefully review your policies to understand what is and isn’t covered.

Valuation of Losses

In the event of a loss, insurers use various methods to assign value. Replacement cost allows recovery based on current values without considering depreciation, while guaranteed replacement offers limitless replacement costs. Actual cash value, blanket coverage, and “agreed value” are also valuation types, each with unique advantages and risks. Knowing the distinctions is key before making decisions.

Defining a “Unit”

Policies might define a "unit" differently, so it's vital to align the coverage with what your association documents necessitate. “Bare walls” units cover common elements, excluding interiors. “Original specifications” units include areas initially included in the original plans. “All in” units cover everything, even owner-made upgrades.

Legal Obligations

Legal requirements for insurance vary based on state laws and specific circumstances. Review state statutes, governing documents, and lender requirements to understand what is mandatory for your association. Applying a solid sense of business judgment is also a valuable strategy.

Crime Coverage Significance

Also known as “Employee Dishonesty” coverage or a “Fidelity Bond,” this protects the association from losses caused by criminal behavior. Coverage typically extends to the Board and staff, but it should also include the property management company’s associates.

General Liability Coverage

General liability insurance protects against claims of bodily injury, even if negligence is involved. Opt for a “comprehensive general form” for protection across all activities, including those off premises. This should cover contracts, advertising, medical payments, and potentially more. Consult your insurance agent to customize your community’s plan.

Commercial Auto Coverage Nuances

Commercial auto coverage is another critical aspect. First-party auto coverage typically includes collision or comprehensive coverage, while third-party coverage extends to vehicles not owned by the association but used for association activities.

Directors & Officers Insurance

Having Directors & Officers Liability insurance is crucial to protect Board members from lawsuits alleging mismanagement or financial errors. Insurance policies often contain exclusions, so be sure to review them thoroughly to ensure adequate protection.

Workers Compensation Coverage

Even if not required by your state, workers compensation coverage is advisable, especially if your association employs staff. It’s also wise to have this coverage to protect against under-insured subcontractors or vendors.

The Importance of Umbrella Liability

Umbrella liability offers a layer of extra coverage beyond what general or primary liability policies provide. It covers situations where other policies reach their limits, preventing homeowners from bearing parts of lawsuit settlements that exceed the association's regular coverage.

This guide encourages a deeper examination of your association’s insurance. For clarifications or enhancements, consult with your trusted insurance advisor or property management firm to ensure your association's coverage is both comprehensive and suitable for its needs.