By Tressa Bishop, MBA, CIC, CB Insurance
Let’s face it, no one really “likes” insurance. Well, that is except those of us who consider ourselves insurance nerds and will take any opportunity to discuss the ins and outs of policies, exclusions, claims, etc., much to the chagrin of our audience, at times. Insurance is a necessary evil. Your association’s governing documents require it, lenders require it, and our state statutes require it. Unfortunately, there is no getting away from having it. The worst possible case scenario is you have purchased insurance for your association, paid what you feel is way too much for it, and, come claim time, the carrier doesn’t end up paying what you expected them to pay.
The old saying “A little knowledge is a dangerous thing” does not necessarily apply to insurance from the layman’s perspective. While you’re not expected to become an insurance agent, you are expected to gather enough knowledge, with your agent’s expertise and guidance, to ensure your association’s assets are properly protected in case of loss. Sticking your head in the sand and hoping everything is hunky dory is not a plan. Developing an insurance process and understanding the common exclusions and limitations within many policies can help along the way.
When to Start – Well before your association’s policy expiration date (preferably shortly after renewal or mid-term).
What to Do – Review the governing documents for any information relating to Insurance. This includes the types of policies required, what coverages within those policies the Association is required to carry, deductibles (amounts allowed and who is responsible for payment/reimbursement at the time of loss), and owner insurance requirements.
Next, take out (or pull up on the computer, if you love trees) the association’s insurance policies (the actual contractual policies, not policies and procedures) and organize a document as a sort of a cheat sheet.
Basic Information to Gather – List the policy type (Property, General Liability, Association Professional Liability/Directors & Officers Liability, Fidelity and Crime, Cyber Liability, Workers’ Compensation, Umbrella/Excess Liability, Flood, etc.), carrier name, policy effective dates (start and end dates – yes, they are the same day of the month, one year apart), policy number, policy limits, policy deductibles (or retention amounts), and claims reporting information. For example:
Property: Carrier: Travelers Insurance Company
Effective Dates: 04/01/2019 – 04/01/2020
Policy Number: xxx-xxxx-xxxxx
Policy Limit: $32,705,000
Deductibles: $10,000 All Peril, 5% Wind/Hail
Claims Reporting: XYZ Agency, John Davis, 555-555-5555
Check the requirements of the governing documents for insurance against the policies to ensure there are no gaps. Also, check that the policies also comply with CCIOA (C.R.S. § 38.33.3-313). An insurance agent that specializes in HOA insurance should be doing this for you at each renewal and can assist here, if needed.
Although you aren’t expected to be an insurance agent and should be utilizing an agent who specializes in community association insurance, there are common exclusions and limitations in most policies that you should be aware of. These can lead to big headaches, and potential assessments, after a loss (note: this list is not all-inclusive, and you should consult with the association’s insurance agent for details on your association’s specific policies).
Common Exclusions or Limitations in Many Insurance Policies:
Ordinance or Law - Coverage available by endorsement when a community has building ordinances that state when a building is damaged to a specific extent (typically more than 50%), it must be completely demolished and rebuilt in accordance with current building codes rather than repaired. There is very little automatic Ordinance and Law coverage in most property policies. Most governing documents require Ordinance and Law coverage, as well as FHA and many other lenders.
Coverage A - Loss to Undamaged Portion of the Building
In some jurisdictions, ordinance or law requires that a building that is partially damaged be demolished (in other words, it becomes a total loss). Coverage A states that if such an ordinance is in place and is enforced by local authorities, the insurance policy will treat the claim as a total loss even though the building was only partially damaged.
Coverage B – Increase Demolition Cost
This pays the increased cost to demolish and clear the site of the undamaged parts of the building.
Coverage C – Increased Cost of Construction
This pays to repair or reconstruct damaged portions of the building and bring them up to current code. It also covers the cost to reconstruct or remodel undamaged portions of that building, regardless of whether demolition is required.
Coverage A should be included up to the Building limit. Some policies will show the dollar amount, but many will show “Included” as the limit for this coverage.
Coverage B – 10% to 20% of the Building limit (general range, age of building, number of stories, etc. should be taken into consideration when setting this limit).
Coverage C – 10% to 20% of the Building limit (general range, age of building, number of units per building, number of stories, etc. should be taken into consideration when setting this limit).
Debris Removal - This is the amount the carrier will pay following a covered loss to remove the damaged property from the site. Common amount included in most policies is 25% of covered loss plus a small amount ($10,000 or $25,000). Since the percentage amount is included within the building limit, if there is a total loss, there may only be the additional small amount since the building limit would be used up replacing the building. An additional amount should be added to the policy in case of a large or total loss to the community.
Sewer/Drain Backup – This coverage is for the resulting damage to covered property from a water or sewer backup event, including sump pump failure. Many policies include a small amount of coverage, usually $25,000 or less. Depending upon the type of interior unit coverage on the policy (All Inclusive or Original Construction, for example – usually driven by the governing documents), this limit may not be adequate.
Limit Guidelines: $50,000-$100,000 per occurrence. Higher limits should be considered depending upon the number of units per building that may be affected in one loss situation, as well as the type of interior unit coverage the policy has.
Flood – Excluded in most property policies, this coverage may be required by lenders based on the association’s location. When it is not required, an association may want to consider adding coverage since it covers water damage to covered property that does not originate on association property. This includes surface water, mudflow, and water under the ground surface.
Limit Guidelines: When required by lenders, the coverage limit should match the limit on Property policy. When not required, it is usually purchased through the property carrier. They will usually determine how much they are willing to offer (typical amounts are $1,000,000 to $5,000,000).
Earthquake – This coverage is used to provide protection for loss due to earth movement including earthquake shocks and volcanic eruption. It is available by endorsement or as a monoline separate policy. Note that is does not cover subsidence or earth movement.
Limit Guidelines: When purchased through the property carrier, they will usually determine how much they are willing to offer (typical amounts are $1,000,000 to $5,000,000).
Equipment/Mechanical Breakdown – This coverage is for loss caused by mechanical or electrical equipment breakdown, including damage to the equipment, damage to the other property of the insured, and damage to the property of others as specified in the policy form.
Many only think of this coverage for associations that have elevators, pools, or boilers, but the coverage includes damage due to electrical arcing, which is an exclusion on most property policies.
Limit Guidelines: Coverage limit should match the limit on Property policy, including the Business Income limit and Business Personal Property. It is often shown as “Included” when purchasing the coverage from the Property carrier.
The only time people really care about insurance is when they have to write a check for the premium and when they have to file a claim after a loss occurs. To make the claims process as smooth as possible from the start, be sure you are aware of the duties required under each policy.
Compliance with Policy Duties and Terms:
Each policy has a list of duties that the insured agrees to perform. Not performing these duties can have serious repercussions on any future claim. Some of the most common duties are:
- Prompt reporting of claims to the insurance company
- Cooperation with the investigation of the claim and reasonable requests from the insurer
- Allowing the insurer to inspect damaged and undamaged property
- Examination of books and records
- Submission of Proof of Loss (usually required within a specific timeline from the date requested by the insurer)
- Examination under oath
- Filing a claim: often these involve a specific timeline to report a claim or require that claims are reported within a “reasonable time”
- Proof of Loss: many policies require this within 60 days from the date requested by the insurer
- Legal action deadline: Can vary for each policy
By preparing beforehand and documenting the policy requirements for reporting claims, you can save time and possibly future headaches. Consult with your association’s insurance agent while setting up your insurance process.
Acknowledgements: Peter O’Brien – Solutia Consultants, Jonah Hunt – Orten Cavanagh & Holmes, LLC
The information in this article does not constitute insurance guidance for any specific association. The terms, conditions, exclusions, and endorsements of policies will apply. Every policy and every claim is different.