Protecting The Community With HOA Insurance

HOA Insurance

“Premises liability” is the idea that, if an injury occurs on property kept in an unsafe condition, the owner is liable for any resulting damages.  For an HOA, premises liability could arise from a slip-and-fall on an ice-covered sidewalk, a child’s injury at the community playground, or any other host of accidents that might happen within common areas.  Because most associations only collect enough assessments to perform their duties and maintain a relatively small reserve, exposure to premises liability could leave an HOA insolvent and unable to meet its obligations.  Unless, of course, the association has an insurance policy in place to cover the liability.

Are HOAs Required to Carry Insurance?

Most HOA’s, especially newer ones, are required by their declarations or bylaws to carry one or more forms of insurance.  Acquiring the necessary coverage and paying premiums is the board’s job, and board-members should take great care to ensure all obligatory coverage remains in place.  If anything goes wrong and the association does not have insurance that it’s supposed to have, board-members or officers could end up on the hook personally.

Many states have laws mandating HOA insurance.  Arizona, for example, requires coverage for physical damage to common property of at least 80% of the property’s value and general liability insurance in an amount to be determined by the board[1].  The Uniform Common Interest Ownership Act (“UCIOA”), adopted in eight states, has similar requirements and adds mandatory fidelity insurance[2].

Both Arizona and the UCIOA include the caveat that insurance must be obtained “to the extent reasonably available.[3]”  If the board decides that the otherwise required coverage is “not reasonably available,” it has a duty to inform members that no coverage is in place[4].  Along the same lines, a California HOA must notify members if a policy lapses, is cancelled, is not renewed, or undergoes any significant change to its coverage limits or deductibles[5]

What Types of Coverage Must an HOA Carry?

There are numerous types of insurance coverage which could potentially benefit an HOA, including the three forms required by the UCIOA: physical damage, general liability, and fidelity insurance.  Typically, an association purchases one “master policy” comprising the various coverages selected by the board rather than purchasing multiple policies.  The premium costs are included in the budget, and then the board pays the premiums using assessment revenue. 

Physical damage coverage protects against damage to common areas like playgrounds, fitness areas, or a community office or lobby.  In condo associations, physical damage coverage also insures shared building components such as stairs, basements, roofs, and exterior walls. Depending upon the precise language, a policy generally covers damage caused by natural disasters or storms, fire, vandalism, or negligence.  The board should analyze the policy language carefully to ensure that any reasonably likely scenarios are not excluded.  Property damage policies often exclude flood damage, for instance, so - if the development is in an area prone to flooding – the board should avoid a policy with a flood exclusion.

General liability insurance protects against the types of tort liability most people think of when they think of property insurance.  In the context of homeowners associations, this usually means premises liability, like the slip-and-fall or playground injury cases we mentioned earlier.   A liability policy is doubly valuable to an HOA because it not only covers losses resulting from the liability itself, but also includes a “duty to defend” clause obligating the insurance company to hire an attorney to defend the association if it gets sued for damages potentially covered by the policy.  Legal fees can add up quickly and sometimes exceed the settlement value of the underlying tort claim, so a liability policy with a duty to defend is vital to protecting an association’s financial integrity.

Fidelity insurance basically protects an association from dishonesty by its officers or board-members.  If an officer mishandles or embezzles HOA funds, a fidelity policy covers the loss.  Florida requires associations to maintain fidelity insurance or a bond covering any officers who control or disburse funds[6].  The policy or bond must be in an amount at least equal to the maximum amount the officer will be handling. 

Depending upon the size and complexity of the association, a board might also consider officers and directors liability insurance, which provides coverage for negligent management of the association and usually includes a duty to defend clause.  If an officer is sued for mis-managing the association – most likely by a member – the insurance covers any resulting losses and pays for the cost of defending against the suit.

Regardless of the coverages ultimately selected, it’s important to remember that insurance documents fall within an association’s record-keeping duty.  The officer or board-member responsible for securing coverage should ensure that policy documents are kept handy for at least a few years[7]

How Does HOA Insurance Help Members?

Under the common law, members of an HOA can potentially be held personally liable for damages relating to the use of common areas. UCIOA jurisdictions like Connecticut expressly exclude any premises liability of members arising “solely by reason of being a unit owner.[8]” Some states provide limited liability for members but make it contingent on the association’s carrying adequate insurance.   

In California, as long as an association has a liability policy of at least $2 million (or $3 million if it has more than 100 members), individual members are exempt from tort liability arising from their ownership interests in common areas[9].  Thus, by carrying adequate liability insurance, a California association eliminates its individual homeowners’ exposure to premises liability relating to common elements.  Even in states with no liability limitations, adequate HOA insurance protects unit owners by ensuring that sufficient funds are available in the event of a claim.

HOA insurance can also help reduce the cost of members’ own homeowners policies.  If an incident is covered by both an HOA policy and a member’s policy, the HOA policy is primary, meaning it pays first and the homeowner’s policy does not pay out unless the claim exceeds the HOA policy coverage limits[10].  This reduces the likelihood that a homeowner policy will have to pay claims, and so the insurance company might charge lower premiums if it is aware of the HOA insurance. 

Along the same lines, members can reduce their premiums by avoiding duplicate coverage.  In a condo association, for example, the association’s policy probably already covers the roof and exterior walls of the building and all common areas, so a unit owner only needs to insure his or her own dwelling area[11]. Premium savings on individual members’ policies are relative, of course, because members already pay the HOA insurance premiums through their assessments. 

Saving money on premiums by streamlining your personal policy can be a nice bonus, but the real purpose of HOA insurance is to protect against liability that jeopardizes the association’s financial position.  Accidental damage to a common facility could result in repair or replacement costs exceeding the association’s reserves and necessitating a burdensome special assessment on members.  A large tort judgment might leave the HOA insolvent and unit owners facing a judgment lien on their homes[12]. By procuring adequate coverage, an association mitigates the risk of exposure arising from unfortunate and unforeseen events for both itself and its members. 

FOOTNOTES:

[1] A.R.S. §33-1253A(1) – (2).

[2] See, e.g., Conn. Gen. Stat. §47-255

[3] Id.

[4] A.R.S. §33-1253C.

[5] Cal. Civ. Code §5810.

[6] Fla. Stat. §720.3033(5)

[7] See Fla. Stat. §720.303(4)(h) (requiring HOA to retain policy documents for at least seven years).

[8] See Conn. Gen. Stat. §47-253.

[9] Cal. Civ. Code §5805(b)

[10] See, e.g., A.R.S. §33-1253D(4)

[11] See, e.g., Fla. Stat. §718.111(11)(f).

[12] See 68 Pa. Code §3311(b)