Insurance brokers are one of an HOA’s most important vendors, yet they are often ignored until claims arise. This mistake can be costly.
Insurance is a contract in which the insurer accepts a fee (“premium”) and in return agrees to pay for certain incidents of damage (property insurance) or claims of liability (casualty insurance). Because insurance is a contract, it is critical to understand the contract’s limitations. Here are six questions to carefully consider.
- Is there a deductible, and how much is it? The deductible must be paid by the insured HOA before the insurance company pays the first dollar of damage reimbursement. Also, what are the limits of the insurance? Is there enough insurance to cover the amount of the damage?
- What are the exclusions in the insurance contract, where the insurer states that it will not pay on certain kinds of damage incidents? Mold, mildew, or dry rot damage are commonly excluded. It is important to understand the exclusions, as there is contractually no insurance for the items excluded from the insurance policy.
- How much of the HOA property is covered by the insurance for damage to the property? Does it cover all the buildings and improvements? One HOA discovered to its shock during the wildfires two years ago that its asphalt streets, heavily damaged by the conflagration, were not included in the definition of “covered property.” Pay close attention to which elements of the property are covered by the insurance.
- How much insurance does the HOA have? Particularly with a condominium association, in which the HOA is normally responsible to rebuild the structures, it is important to review the valuation of the property. If the HOA has a stated value of the structures at $5 million but the actual repair cost is $10 million, where will the HOA find the additional millions to restore the property? Talk to your insurance broker annually to review the valuation of the insured elements of the HOA complex, and make sure there is enough insurance to cover a catastrophic loss.
- Does the property damage insurance include guaranteed replacement cost or building upgrades required by more recent building code updates? These factors can prove to be vital issues especially in older buildings.
- Does the insurance policy match the association CC&Rs? Often boards are upset because the insurer pays on a property damage claim where the HOA has no liability. However, with property damage insurance, the insurer insures any damage occurring to “covered property.” The insurer responsibility to pay a property damage claim has nothing to do with the CC&Rs but everything to do with what the insurance policy covers.
In condominium, stock cooperative, or attached planned development properties, the CC&Rs do not always match the insurance regarding what is covered within residences. Some HOAs have CC&Rs requiring the HOA only to restore walls, floors, and ceilings to a condition ready for finishes and fixtures (a “bare walls” approach) but its insurance covers all the common area and the units (“walls-in”). Conversely, if due to insurance costs the HOA prefers a “bare walls” insurance approach, make sure the CC&Rs do not require a “walls-in” responsibility for the HOA.
Talk to the HOA insurance broker annually to keep on top of the property insurance coverage.
[Next week- Liability and specialized insurance]
Kelly G. Richardson Esq., CCAL, is a Fellow of the College of Community Association Lawyers and a Partner of Richardson | Ober | DeNichilo LLP, a California law firm known for community association advice. Submit questions to Kelly@rodllp.com. Past columns at www.HOAHomefront.com. All rights reserved®.