Insuring homeowners associations (HOA) means procuring several essential coverages that, at first glance may seem simple enough, but upon closer examination requires a real understanding of the provisions and features that separate sound, comprehensive coverage from the basics. From Commercial Property to General Liability, Umbrella, Crime, Directors & Officers Liability, and Employment Practices Liability insurance, knowing what is and isn’t covered, any sub-limits involved, how and when coverage applies, among other factors, is essential in differentiating yourself in the market to your HOA clients. Let’s look inside some of the considerations of the business insurance coverages an HOA should be carrying.
Which Types of HOA Insurance Are Needed?
Commercial Property: The HOA should be insured, at a minimum, for the value of the property as required by the governing documents, which is typically full replacement cost. In addition, there are three different Building Ordinance Coverages, typically labeled A, B, and C, that should be a part of the Property insurance.
- Loss to the Undamaged Portion of the Building (Coverage A) indemnifies a property owner for the undamaged portion of the building even if there was no direct damage to it. Be sure to provide a limit under Coverage A that equals 100% of the replacement cost value, to the extent possible. For example, if half of a building burns down, Property coverage will replace the half of the building that is damaged. However, many cities and counties around the country have ordinances that require the HOA to demolish the remaining 50% (or less) and rebuild as a whole. Since the unburned portion of the building is undamaged, the property insurance section does not provide coverage unless Building Ordinance Coverage A is included.
- Coverage B, Demolition, is an important component of full coverage because of the expense involved in demolishing a building.
- Increased Cost of Construction (Coverage C) provides coverage for building code upgrades (local ordinances) and/or increased cost of construction. For example, if a building was burned down and the local ordinance requires that the reconstructed building include updated fire sprinklers and a hard-wired fire alarm system, this coverage would respond. When setting the Coverage C limit, consider the age of the building, general compliance with ordinances and building codes, and the potential cost of loss in the event that code upgrades would need to be made as a result of a total loss.
Back up of Sewers & Drains coverage should also be included as part of the Property coverage. For example, laundry soap can build up in common areas causing a back-up and possible property damage.
The Davis-Stirling Act statute protects owners from individual liability, provided the HOA maintains at least minimum levels of insurance as follows: $2 million for associations with 100 or fewer separate interests; and $3 million for associations with more than 100 separate interests. But this may not be enough. Although owners are not directly liable for a loss exceeding insurance limits, they are indirectly. Assuming a $4 million judgment against an HOA, owners would be responsible for a special assessment to make up the difference between the $2 million policy and the $4 million judgment. Determining the appropriate levels of insurance for associations is critical, including providing an Umbrella policy to extend coverage after the primary, underlying limits are exhausted.
In addition, be sure management is included as an additional insured on the policy, and there is no exclusion for assault and battery.
This coverage is designed to protect HOAs from the actions of dishonest employees. Be sure unpaid volunteers are also covered for the costs associated with crimes such as embezzlement, check fraud, vendor fraud, forgery, and other means of theft. Note that in California, recent legislation was passed “to protect owners in a [HOA] from fraudulent activity by those entrusted with the management of the [HOA’s] finances.” The new bill significantly increases the financial review requirements of HOA boards of directors, limits the ability for automatic transfer of funds without board approval, and also imposes a requirement for the HOA to purchase and maintain a fidelity bond.
Provides coverage defense (expenses) and indemnity (awards and settlements) for wrongful acts and allegations against the board of directors as well as the association. The defense of a single uncovered D&O claim can cost the association thousands or tens of thousands of dollars. It’s important that the HOA not only carries this coverage but that defense coverage is outside the limits of the policy. Also be sure to look at who is covered. Some policies do not cover past directors, community managers, developers on the board, volunteers, or actions between individual board members. In addition, look at the exclusions within the policy. Some policies exclude defense of breach of contract; defense of failure to maintain or obtain insurance; discrimination claims; non-monetary claims; emotional distress damages; defamation, wrongful eviction; invasion of right of privacy; challenges to elections; or challenges to architectural review committee decisions.
Employment Practices Liability Insurance
This coverage can be included with D&O coverage, providing coverage against claims made by board members or volunteers alleging discrimination (sex, race, age or disability), wrongful termination, harassment or other employment-related issues. The policies cover directors and officers, management personnel, and employees themselves. Common exclusions are for bodily injury, property damage, and intentional/ dishonest acts.
Securing HOA Insurance
Boards have a fiduciary obligation to manage the association and, with that responsibility, comes the purchasing of insurance that is in its best interest; in other words, the insurance program should address a board’s specific risk profile. Working with Distinguished, a national insurance program manager, provides you with a competitive edge with access to custom-tailored coverages and programs specifically designed for HOAs. An easy-to-use online portal allows you to submit business and receive quotes on-demand and bind coverage. No matter how big or small your HOA account is, we have a home for you to protect your insureds against property and liability losses. Coverage is through our top-rated insurer partner, Great American Insurance Company.