Property insurance, by definition, is a guarantee of compensation for a specific loss or damage to physical property or equipment. Within that broad and simplified explanation there is room for multiple interpretations—and more than enough confusion to go around. An all-volunteer association board of directors may be intimidated just thinking about what constitutes adequate coverage, reasonable costs, and possible liabilities. Most board members are not insurance professionals, so it's even more crucial that they recognize and understand some basic insurance terms and concepts, despite the challenge that may present.
Fortunately, there are experts in the field of insurance willing to share their knowledge and guide a motivated board, around the learning curve to a comfortable understanding of the best and most affordable options available in today’s market.
A Little History
The insurance industry is not a new business. As a matter of fact, the practice of spreading risk around to relive the burden on individuals dates back to the earliest Chinese and Babylonian societies. Property insurance as we know it today can be traced back to 1666 in England; the first insurance company in Colonial America dates back to 1732. By 1752, Benjamin Franklin had standardized the practice of property insurance. However, the U.S. government did not mandate any form of insurance until the passage of the Social Security Act in 1935. After World War II, VA home loans were underwritten by the federal government to include an insurance clause as a means of protecting the banks and lending institutions against avoidable losses.
Where Does Responsibility Lie?
John Bickley III is a principal with the law firm of Chicago-based Kovitz Shifrin Nesbit. Bickley is a former Assistant Attorney General for the state of Illinois, and has practiced law since 1978. His primary advice for board members in any community association or HOA is to review their specific governing documents to determine their community's obligation to insure, versus the obligation of individual residents to cover their own property. “A mistake in this regard may ultimately result in liability for the individual board members,” he says.
George W. Keys, principal of Keys Claims Consultants in Naples, Florida, echoes the same advice. Keys is a current board member of The Florida Association of Public Insurance Adjustors (FAPIA), and has served twice as president for the organization. He cites common property versus unit owner’s responsibility to insure as the number-one issue to be determined.
Alex M. Seaman is senior vice president with HUB International Northeast, an insurer located in New York City, and Caesar Mistretta is a new business producer for HUB International Northeast, working out of the group's New Jersey office. Both concur with Bickley and Keys. “It is critical that all unit owners obtain personal homeowners insurance,” says Seaman.
Seaman and Mistretta cite the HO-6 policy for coverage for individual unit owners. The policy includes coverage 'from the walls in' to include coverage for loss of use, and additional living expenses, and personal liability in the event of negligent or unintentional damage to another person’s property.
Jon Moller, an insurance agent in the Fort Lauderdale, Florida office of Brown & Brown Insurance, also lists the HO-6 as one of his top ten terms boards need to know and understand.
Moller, along with Brown & Brown Senior Vice President Joe Knapp, both urge individual property owners and boards alike to get familiar with HO-6 policies, understanding what is covered and knowing what the deductibles/limits are. Some states under their own community association acts require that unit owners purchase insurance covering their personal liability and compensatory damages to another unit.
Coordinating & Understanding Coverage
Once a board has a firm grasp of what areas need to fall under a master policy—and which areas fall to the unit owner or shareholder—it will be easier to coordinate adequate, affordable coverage for the property.
Moller and Knapp point out two different methods insurance companies use to determine value and how losses will be paid. “Insurers consider replacement cost of a property item to be the cost to replace it with a new property of like kind,” explains Moller. “Actual cash value is replacement cost minus the accumulated depreciation for age and condition,” Knapp says.
According to Moller, “If the documents require the HOA to insure the property as a whole and to replacement cost, it is imperative a proper replacement cost valuation be performed by a licensed professional to ensure adequate coverage and compliance with the HOA documents.” Loss of operating income must also be considered.
Deductibles & Exclusions
Another common insurance term is the deductible—that portion of loss borne by the association before the insurer is liable for payment. “Typically the lower the deductible, the higher the premium,” says Keys. If they feel comfortable with a large expense in the event a loss occurs, a board may opt for a high deductible to keep operating costs down. Of course, a potential downside of this approach is that a catastrophic event would likely result in significant out- of- pocket expenses for everybody the association. “These out-of- pocket costs are usually the result of premium shopping, underinsurance, and co-insurance penalties,” says Keys.
Different states have different ways to contain catastrophic losses. It is extremely important to determine if there are exclusions to coverage, such as windstorms, or ground water, and of course coverage needs will vary based a community's geographic location and climate. While it's a rare South Florida property that will feel the need for boiler insurance for an HOA suffering through a New Jersey winter, it's absolutely crucial. Hurricane coverage? Not so much, although Superstorm Sandy in 2012 did much to dispel that notion.
Flood insurance will be desirable—and probably mandatory—for any waterfront property in any market, and as mentioned above hurricanes are not confined to the southernmost states.
Property insurance must be personalized to protect the property it is designed for. Knowing who is responsible for coverage, what deductibles must be met, and if any exclusions apply is only the beginning of board’s education on insurance. Experts in the field have much more to offer in both explanation and coverage.
Knowing the terms and type of coverage available is valuable knowledge for a board of directors in order to choose the best options for their particular needs.
There are policies besides workers compensation which cover employment issues. The most common example is Employment Practices Liability Insurance (EPLI). This type of insurance covers wrongful acts arising from the employment process. The most frequent types of claims covered under EPLI policies include wrongful termination, discrimination, sexual harassment, and retaliation.
In addition, these policies cover claims from a variety of other types of inappropriate workplace conduct, including (but not limited to) employment-related defamation, invasion of privacy, failure to promote, deprivation of a career opportunity and negligent evaluation. The policies cover directors and officers, management personnel, and employees themselves. Common exclusions are for bodily injury, property damage, and intentional/dishonest acts. While EPLI is available as stand-alone coverage, it is frequently sold to communities as part of a management liability package.
According to insurance pros, Host Liquor Liability is another insurance term boards should be familiar with. This type of insurance covers exposure for serving liquor to clients, or employees at company functions—something to think about if your building or association makes its community room or clubhouse available for parties or other functions where alcohol may be served.
The potential for exposure exists online too. Modern technology and online management systems might create a cyber-risk or the possibility of a breach of security. Seaman and Mistretta caution clients on the financial and reputational damage possible when a system is compromised—and say that there are optional coverage products to account for those risks as well.
It seems there is a policy for everything from cocktails, to cyber space, to catastrophes—since acts of terror are insurable under the Terrorism Risk Insurance Act (TRIA). It is easy to see how a board of directors could miss an important point, or become so concerned with covering all possible risk, the property would be insurance poor. When all is said and done there are directors and officers insurance policies to offer protection for board members in the event of a lawsuit relative to defense cost, judgments, and settlements. “D&O insurance covers the board members against legal action brought against them directly, including claims for 'wrongful acts' and the cost associated with rectifying,” states Seaman. “With proper D&O in place, board members can concentrate on their duties to the best of their abilities.”
Fidelity insurance provides coverage if someone in control of the association’s funds embezzles or otherwise misuses those funds. There is even a formula to help set the recommended coverage amount. “The rule of thumb,” says Bickley, “is the amount of fidelity coverage should be equal to the amount contained in the capital reserve account plus three months of assessments.”
The experts agree community associations must have property insurance with replacement cost determined by a licensed appraisal professional, general liability insurance, D&O coverage, crime and fidelity coverage, and equipment coverage. Additionally coverage for environmental or pollution liability, and cyber liabilities are also recommended. The guidance of a reputable, insurance broker can help find a balance for affordable, sensible coverage.
Most brokers and agencies will provide educational meetings and/or seminars for associations to better understand all the options available and help a board determine a good fit. The consequences of not being aware of insurance basics may include gaps in coverage, over- paying, over or under insuring, and incorrect policy forms. Umbrella policies are also favored as a way to add an additional layer of security for community associations and HOAs alike.
Properties and property insurance change over time; policies should be revisited and reviewed annually, and/or at policy renewal times. Rely on the experts in the insurance field for guidance, and be sure to take any improvements to the property, or increased values into consideration, and be sure of any exclusions. Finally be sure all replacement costs are aligned with the selected coverage, and check to see if any new codes, statutes, or laws have been put into place since the last update.