As North Carolina HOA/condo attorneys, we are regularly asked “What insurance policy should our association buy?” Our answer is always the same: “Talk to your insurance professional.” That’s because while an HOA/condo attorney can assist with what insurance is required by state law and the governing documents, an insurance professional can best advise on what policies are available for purchase, differences between coverage and carriers, and cost considerations. That said, as HOA/condo attorneys, we regularly advise on what types of insurance associations need to consider, their different purposes, and things to watch out for.
WHAT TYPES OF INSURANCE SHOULD OUR ASSOCIATION HAVE?
In terms of what insurance an association must have, there are two main places to look—state law and the governing documents. There’s a difference, though, between what insurance an association MUST have and what insurance an association SHOULD have. That’s because state law and the governing documents only provide minimum types and levels of required insurance, which is very different than what insurance the association may need to protect itself and its members.
Just last year a jury in Nevada hit an association with a $20 million judgment as the result of an accident due to faulty playground equipment. The association only had $2 million in liability insurance. That’s a difference of $18 million. The association had $500,000 in its accounts. While that was in a different state with different laws and facts, recognize the types and amounts of insurance your association must have may not be sufficient for your circumstances. I once read an estimate that only about half of associations maintain insurance and only about one-quarter of those have adequate insurance. Again, talk to your insurance professional.
With that said, here are some different types of insurance that every association should consider:
Property insurance covers property owned by the association against certain listed perils, like fire and storms. For condominiums and townhomes, the association’s property policy must sometimes also cover the individual owners’ units. In the event the property described in the insurance policy is damaged or destroyed, the insurance carrier will pay up to an amount listed on the policy, usually minus any “deductible” that is set by the contract. The higher the deductible, the less money the association will receive in the event of a loss. The higher the deductible, the less the insurance is likely to cost the association each year. Insurance is all about balancing risks—the best insurance may be unaffordable, but to operate without adequate insurance is far too dangerous.
For North Carolina homeowner associations created on or after January 1, 1999, state law requires at a minimum that the association maintain property insurance on the common property in certain amounts as of “the first conveyance of a lot to a person other than a declarant.” The North Carolina Condominium Act has almost identical language for condominiums created after October 1, 1986. For stacked condominiums (or units with “horizontal boundaries”), the property insurance requirements are more specific and may even require the condominium association to cover individual units. Both the Planned Community Act and the Condominium Act even have requirements as to language that must be in the association insurance policy! And the association’s governing documents may further require property insurance on certain property, in exact amounts, covering certain losses, or with a specified deductible. As a result, any professional advising on what an association needs in the way of property insurance had better be familiar with state law, the association’s filed documents, and the association’s specific circumstances.
Liability insurance is intended to cover lawsuits that result from accidents or injuries that occur on association property or arising out of the associations activities. As with property insurance, both the Planned Community Act and the Condominium Act mandate liability insurance on the common elements in certain circumstances. However, since the statutes only require liability insurance “in reasonable amounts, covering all occurrences commonly insured against death, bodily injury and property damage,” professional guidance is likely needed on which specific policy to purchase and in what amounts.
While property insurance and liability insurance are the only policies REQUIRED by state statute, there are other several other policies that every association should consider:
Directors and Officers (usually just called “D&O”) coverage insures directors, officers, and sometimes committee members and association volunteers from personal liability in the event of a lawsuit against the association. NOTE: D&O coverage usually does not cover willful bad acts, but instead is for defending claims made as the result of board or committee actions, such as an architectural decision. Personally, I would never recommend serving on an association board of directors without there being appropriate D&O coverage. Some directors assume that an association’s obligation to indemnify will protect them in the event of a lawsuit, but indemnification provisions (1) sometimes won’t provide an attorney/legal defense for the director and (2) don’t mean much if the association has no funds with which to indemnify.
Fidelity insurance, sometimes called “employee theft” or “crime” coverage, can help in the event an association employee or volunteer steals or embezzles association monies. For associations with a professional manager, community association management companies also sometimes have such coverage on their employees. Be certain of what insurance there is and who it covers. At the end of the day, association directors are responsible for determining what insurance and in what amounts is appropriate for the association.
One bill that has been pending in the NC General Assembly for the past few years (Senate Bill 491: HOA/Condo Crime & Fidelity Insurance Policies) would require associations with certain amounts of funds as well as their management companies to maintain crime and fidelity insurance policies in certain amounts. However, that proposal has not yet been enacted into law.
OTHER POSSIBLE INSURANCE
Most association directors don’t think much beyond purchasing property, liability, D&O, and fidelity insurance. However, depending on the particular circumstances, other insurance may be appropriate or even necessary. And even within “standard” policies, there are several specific issues that associations should consider.
Flood insurance may be required if parts of the association are in a FEMA-designated flood zone. The NC Court of Appeals recently considered the issue of flood insurance in Porter v. Beaverdam Run Condominium Association. In that case, 5 of 66 condominium units were located in a flood zone, but the condominium association’s board of directors decided against flood insurance on the basis of cost and risk considerations. Without getting into all the details here, the Court of Appeals held that the risk of flood would be included within the statutory language of “risks of direct physical loss commonly insured against.” Further, only a condominium association—and not individual unit owners—can purchase flood insurance in a condominium. In that case and with those facts, the Court held that if the insurance was reasonably available, the association had an obligation to purchase flood insurance for its buildings located in a flood zone.
Worker’s Compensation Insurance
Workers comp insurance is intended to cover personal injury to employees, and possibly even association volunteers. Several years ago, there was a bit of a ruckus as to whether NC HOAs and condos had to purchase workers compensation insurance in all instances. Based on law changes at the time, the end result was likely that while most community associations are small enough that worker’s compensation insurance is not required, it is possible that full-time or seasonal employees could lead to a requirement for such insurance. And since worker’s comp insurance provides additional protection for employees and possibly even directors and volunteers, it is coverage worth discussing with your insurance professional.
OTHER INSURANCE CONSIDERATIONS
Insurance coverage is complicated, which is why the advice of professionals is usually needed. Without knowing anything about a specific situation, these are some insurance concerns that we’ve seen in the past and may be worth considering:
- For property insurance, what is the value of the insured property? Both the Planned Community Act and the Condominium Act require minimum coverage levels based on a percentage of the property’s replacement cost. But what is the replacement cost? Many insurers offer a “stated value” policy, in which the insurer pays a stated value, which may no longer be accurate. A “guaranteed replacement” policy obligates the insurer to pay the actual cost of replacement and may provide better protection. An “insurable replacement cost appraisal” may be necessary to properly value the association’s common property, and such appraisals should be updated every few years. While that might seem an unnecessary expense, in an association with a lot of property the cost of a new appraisal will be far less than the association being underinsured. At a minimum, your agent should be able to recommend appropriate amounts of insurance.
- Should the deductible be high or low? An insurance deductible not covered by the carrier may fall on either the association or on the owner, depending on the type of association, the governing documents, and the specific claim. Depending on who is responsible for the deductible and whether or not it can be charged back to a particular owner, the association may need to balance the level of deductible versus the cost of the insurance policy.
- Insurance policy language matters! As to condos, insurance requirements can vary significantly by the age of the condominium and whether the units are stacked or side-by-side. Master policies may include “bare walls coverage” (covering the structure and common area furnishings), “single entity coverage” (providing more extensive coverage on built-in fixtures in units), or “all-in coverage” (covering most everything except for certain items in units). The benefits and costs of each should be discussed with an insurance professional.
- In condominiums and townhomes, the documents sometimes require that owners purchase insurance covering their units. Even if not required, such insurance should be considered. In condos, unit insurance (sometimes called an “HO-6” or “walls-in” policy) can cover the interior, personal property, rental for displacement, certain improvements, and possibly the deductible “gap” in the association’s coverage. Just as with master policies, unit policies vary and the benefits and costs of each should be discussed with an insurance professional.
- An Ordinance or Law endorsement protects an association in the event that governmental ordinances have changed and increased the cost of repairs. For example, imagine an older association building with no sprinkler system burns to the ground, and current construction codes require the installation of sprinklers. Those additional costs might not be covered without Ordinance or Law coverage.
- Demolition Coverage is just what it sounds like. Some policies will cover reconstruction, but not demolition, unless there is special coverage. If this seems like unnecessary coverage, the demolition on a large building could cost millions of dollars!
- Sewer back-up issues are not covered on most standard policies. As a result, Sewer Drain Back-Up Coverage should be considered.
- Condo associations that wish to meet FHA or Fannie Mae financing guidelines may have additional requirements, such as minimum property insurance limits and general liability insurance on the common elements, fidelity/crime insurance in specific amounts if there are 20 or more units, and flood insurance if the association is located in a 100 year flood plain. Like North Carolina’s statutory requirements, just because an association meets the FHA or Fannie Mae minimums doesn’t mean the association has enough insurance for the community.
- Not all D&O coverage is made equal! Some directors and officers policies only cover monetary loss, but claims against associations can be broader than that. For instance, what about a lawsuit by an owner asking for a court order to build a house that the association has denied due to architectural guidelines? Some policies won’t cover such non-monetary claims. The policy should provide a broad “duty to defend.” D&O policies should also be written to cover breach of contract, Fair Housing claims, and libel and slander. While some D&O polices include most everything, which is preferable, that can also be much more expensive.
- As to liability insurance, the amounts actually available may vary depending on whether attorneys’ fees are treated “inside the limits” of the policy, which means that attorney’s fees are deducted from the policy limits. So if you incur $500,000 in legal fees defending a $5 million claim, the $5 million in coverage is actually $4,500,000. “Inside the limits” policies are also called “wasting” policies, as they can waste away depending on the cost of litigation.
- Other coverage or endorsements might also be appropriate, including Discrimination Coverage (to protect against FHA claims), Comprehensive Equipment Coverage (to protect against sudden and accidental mechanical breakdowns), or Employment Benefits and Employment Practices Liability coverage (for associations with employees).
- Don’t forget your umbrella! Regardless of other insurance the association may have, an umbrella policy can often fill gaps, cover other things, and at greater limits, often for minimal cost. A standalone umbrella policy for an association generally covers over the liability and stand-alone D&O coverage.
WHAT AMOUNT OF INSURANCE SHOULD OUR ASSOCIATION BUY?
The simple answer—“As much as it can afford . . .”
The reason that’s also the right answer is that associations simply can’t prepare and defend against every loss. Fires occur. Storms happen. Someone (possibly a child) will enter the pool or pond when they should not. Insurance is all about risk management and exposure to loss. However, the directors in an association have to approach the association’s risk differently than they might approach their personal situation.
Let’s say I have a new car. I can buy the best insurance (that costs the most) which will reimburse me for bad things that could happen to my car. Or, I might buy less expensive insurance and save premium costs over years by assuming nothing bad is going to happen to my car. With the cheaper policy I’ve personally taken on the risk—and will pay out of pocket—for any loss to the car. However, in an association, directors aren’t looking after their own personal property, they’re looking after the association’s property (and possibly all the owners’ properties). As noted in this recent blog on NC HOA/Condo Directors — Duties, Standards of Conduct, and Liability, directors are usually considered fiduciaries and must manage the association and its business in the best interests of the association as a whole. While better and more insurance will increase expenses, in a larger association it may cost the owners only dollars a year to have millions more in coverage, which could make a significant difference when (not “if”) a loss occurs.
If there’s one theme you should take from all this insurance talk, it’s that every association has different insurance needs. That’s because insurance requirements vary as to type of association, the age and size of the association, what activities the association engages in, what property it owns, etc. Due to all these considerations, any association wishing to evaluate its insurance should talk to a professional who focuses on association issues.
A good place to start is your association attorney, who can advise on what types of insurance are required by law and the association’s governing documents. If you don’t currently have legal representation, you may want to seek out an attorney who regularly practices community association law. You might start with the list of Fellows of the College of Community Association Lawyers (CCAL). CCAL was established by the Community Associations Institute (CAI) in 1993, with membership consisting of attorneys who have distinguished themselves through contributions to the practice of community association law. A directory of CCAL attorneys can be found at https://www.caionline.org/Advocacy/LegalArena/CCAL/Pages/default.aspx (left side, “CCAL Directory”). You may also wish to take a look at the list of attorneys that are CAI Service Providers.
To get advice on what policies are available and differences in coverage, carriers, and costs, you should talk with an insurance professional who regularly works with homeowner and condominium associations. CAI presents the “Community Insurance and Risk Management Specialist” (CIRMS) designation to insurance agents who have demonstrated a high level of competency within the community association risk management profession. In order to locate a CIRMS insurance professional, visit CAI’s Directory of Credentialed Professionals and search for the “CIRMS” designation. While there is no guarantee that a specific agent will be perfect for your situation, you will more likely find the best match by seeking out a professional who regularly advises on community association insurance.
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