While much of risk management for condominium associations boils down to common sense – ensure exterior surfaces and vegetation are well-maintained, utilize guidelines pertaining to the usage of grills or fire pits, and utilize procedures to ensure association funds aren’t easily stolen – there are other considerations that may not always jump out to board association members. Some of these are insurance-specific while others fall into the legal category.
Following are a few suggestions that condo association boards should consider as part of their overall risk management strategy to reduce their financial exposure.
- Ordinance or Law Coverage: Often overlooked as part of an association’s insurance program, this specific type of coverage addresses losses pertaining to the enforcement of ordinances or laws that regulate the construction, repair, and/or demolition of damaged buildings. Ordinance or law coverage contains three components: coverage for loss of the undamaged portion of a building, coverage for demolishing an undamaged portion of a building, and coverage for the increased cost of construction in order to comply with current codes. While some insurance companies include some of this coverage as an enhancement to their property coverage, what is built into it may not be enough for your association.
- Directors and Officers Liability: Condo associations can be sued for a host of reasons, including failure to maintain common areas, challenges to assessments, or an allegation against the association for breach of vendor contracts. Situations like these that stem from management decisions (or lack thereof) taken by the association board are not covered by general liability insurance; rather, these types of claims are addressed by directors and officers liability insurance.
- Employment Practices Liability: This type of insurance, often called EPL in short, is easily dismissed by associations in cases where they have no employees. However, board members can be sued by association residents as well as third parties for “wrongful acts” as defined in an EPL policy. This includes discrimination, sexual harassment, bullying or harassment of a non-sexual nature, or wrongful retaliation. Again, your general liability policy will not cover these types of claims, so it is important that you have EPL coverage in place to address this ever-growing exposure.
- Clear Bylaws / Condominium Declarations: As an agent who writes coverage for associations as well as individual unit owners, this situation can be one of the most frustrating for all parties involved. The association’s legal documents can make the process to determine how much property coverage is needed a complete nightmare. In addition, as you can imagine, this can lead to headaches when a claim affects both association-owned property as well as individual-owned property.
This fourth point is critical, as I’ve seen situations where there is overlap between what the association documents state it is required to cover from an insurance standpoint (typically in the form of “improvements and betterments”) versus what unit owners are required to cover. The clearer the language can be, the better.
For example, I previously came across a set of bylaws that I felt did a nice job of spelling out what the association is responsible for:
“Association Responsibilities: The Association is responsible for the upkeep of both Common Areas and some Limited Common Areas. Additionally, the Association is responsible for insuring the common property and buildings.”
This same set of bylaws did an outstanding job of stating what the unit owners are responsible for:
“Owner Responsibilities: Owners are responsible for everything in their unit from the walls in. This would include but is not limited to, floors, ceilings, drywall, windows, and any material covering such structures (i.e., paint, wallpaper, curtains/blinds, tile, carpeting), as well as appliances, and personal contents (furniture, clothing, etc.). Owners should obtain insurance against liability for events occurring within their homes or on their driveways or walks, as well as for losses with respect to personal property and furnishings and to improvements they installed. The recommended policy is a Home Owners 6, which is a condo unit policy.”
This type of language eliminates ambiguity and makes my job as an insurance agent that much easier because I will know precisely what my client – whether the association or a unit owner – needs to cover from an insurance standpoint.
It will also make a claim adjuster’s life easier at the time of the loss since condo association policies as well as unit-owner policies don’t get specific as to what they cover from a building/improvements and betterments standpoint – the adjuster will refer back to the association documents when a claim occurs to see who is legally on the hook to repair or replace damaged property.
For more ways to minimize the financial risk faced by your condo association, speak to a local independent insurance agent who has experience with writing coverage for these types of associations as well as an attorney who has expertise in homeowner/condo associations. As the old saying goes, an ounce of prevention is worth a pound of cure!
The information above is of a general nature and your policy and coverages provided may differ from the examples provided. Please read your policy in its entirety to determine your actual coverage available.
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