Associations are required by law and by their governing document to carry certain kinds of insurance. Following are kinds of insurance commonly required.
DIRECTORS & OFFICERS INSURANCE
Directors and Officers ("D&O") Insurance protects volunteers from personal liability for decisions they make while on the board. D&O insurance is in addition to the association's general liability policy and covers board negligence, breach of fiduciary duties, etc., provided the errors or omissions were:
- within the scope of the officer or directors' duties,
- performed in good faith, and
- not willful, wanton, or grossly negligent.
Defense Costs. Typically, insurance policies cover the cost of defending against a claim, in addition to any settlement or judgment that might be levied against an association or its directors (within policy limits). Insurance carriers handle defense costs in one of the following ways:
Unlimited Defense. There is no limit on defense costs under the policy. If an association has a $1 million policy and the carrier pays $600,000 in legal fees and expert costs, the association still has $1 million available to pay for any settlement or judgment that might arise.
Wasting Policy. A "wasting policy" pays defense costs out of the policy limits. If an association has a $1 million policy and the carrier pays 600,000 defending the board, only $400,000 will be left to settle the case or pay any judgments. These policies are also known as self-liquidating, cannibalizing, self-consuming, or defense within limits policies.
D&O Exclusions
Boards should talk to their insurance broker to make sure the following are included in the policy:
- current and former directors and officers (provided the policy is "claims made" and not "occurrence" based.)
- committee members and other volunteers,
- employees
All policies contain exclusions, i.e., claims the carrier will not cover. Following are examples of common D&O exclusions:
- Insured vs. insured (the board is sued by one of its directors),
- Breach of contract (an action by members or third parties for breach of CC&Rs or breach of contract). However, some carriers will pay for associated defense costs.
- Failure to carry sufficient insurance (a lawsuit by owners against the board for its failure to have sufficient limits or its failure to purchase insurance to cover certain losses)
- Bodily injury and property damage are always excluded from D&O policies.
- Discrimination and employment practices liability are typical exclusions, but some companies still offer them. If an association has employees, the board should ask for "employment practices liability" coverage.
Personal Liability Protection
The Davis-Stirling Act protects volunteers from personal liability while on the board of directors provided the association maintained and had in effect at the time the act or omission occurred and at the time a claim is made D&O insurance of (i) at least $500,000 if the development consists of 100 or fewer separate interests or (ii) at least $1,000,000 if it has more than 100 separate interests. (Civ. Code § 5800.) EXCEPTION: The statutory protection against personal liability in excess of insurance coverage afforded to volunteer directors is not available to directors who own more than two units:
This section shall only apply to a volunteer officer or director who is a tenant of a residential separate interest in the common interest development or is an owner of no more than two separate interests and whose ownership in the common interest development consists exclusively of residential separate interests. (Civ Code § 5800(e))
Definitions. Not all policies use the same definitions. Regarding matters such as "who is an insured" and what constitutes a "wrongful act," the definition can significantly alter coverage.
Minimum Policy Limits. To avoid personal liability in excess of the association's insurance limits, boards must maintain at least minimum levels of D&O Insurance for associations with 100 or fewer separate interests and for those with more than 100. (Civ. Code § 5800(a)(4)) Additional insurance coverage can be added through umbrella policies at very reasonable costs. Also, see occurrence v. aggregate. Protections against personal liability are limited as follows:
- Exclusively Residential. Protections are for volunteer officers and directors of exclusively residential associations. (Civ. Code § 5800(a))
- No More than Two Units. Protections are unavailable for volunteer officers or directors who own more than two units. (Civ. Code § 5800(e))
Recommendation: Due to the litigious nature of California residents, boards should obtain more than just the minimum levels required by statute.
PROPERTY INSURANCE
Levels of Coverage
Property Insurance insures against physical loss or damage to buildings or other common area improvements caused by fire or other risks. The amount of insurance should equal the buildings' actual replacement cost. It is important to know the scope of insurance coverage under the association’s property damage insurance policy (commonly called the "master policy"). Generally, there are three levels of insurance for a master policy:
- "All Inclusive" or "All In" Coverage. As the common terms suggest, this is the most inclusive scope of coverage. It covers all non-personal property items within the individual owners’ units (e.g., cabinets, appliances, countertops, wall coverings, floor coverings, etc.). In addition, any upgrades made after the developer conveys the unit are also covered. Examples include changing tile countertops to granite or marble.
- "Single Entity" or "Walls In" Coverage. This is a standard scope of coverage. All non-personal property items within the owners’ units (see those listed in 1.) are covered. However, unlike the "All In" policy, the owners’ upgrades are not covered.
- "Bare Walls" Coverage. "Fixed" items within the units (e.g., cabinets, appliances, countertops, wall coverings, floor coverings, etc.) are typically not covered, nor are any upgrades made by owners. Instead, the master policy covers replacement up to the drywall. This form of insurance is less expensive for associations to carry because coverage is limited, i.e., the association has no duty to insure inside an owner's unit beyond the unfinished surfaces of perimeter walls, ceilings, and floors, i.e., "bare" walls. If there is a flood or fire in one or more units, the association's insurance does not pay for improvements to the unit, such as fixtures, appliances, interior partitions, wall coverings, floor coverings, cabinetry, etc. Instead, the owner is responsible for carrying his own insurance to cover these items. If an association reduces the scope of coverage under its master policy to bare walls, owners must carry their own insurance to meet lending guidelines. Associations that amend CC&Rs to allow for a “bare walls” scope of coverage should also have the CC&Rs require owners to carry their own insurance.
Personal Property. Under each scope of coverage described above, the association’s master policy does not cover owners’/tenants’ personal property, such as clothing, computers, televisions, furniture, etc.
Water Intrusion. In the case of water intrusion, there must be a "sudden and accidental" discharge of water. Long-term, slow drip leaks may not be deemed a loss under the insurance policy. (See Water Damage Checklist)
Related Requirements
CC&R Requirements. Before switching from full coverage to bare walls, associations must first review their CC&Rs to see if they are obligated to carry "All-In" insurance, which requires replacement of a unit to the condition it was in at the time of the loss, including all improvements made to the unit from the date of its original construction. If so, the association will need to amend its CC&Rs to allow for bare walls coverage.
FHA Requirements. Another consideration before an association switches to bare walls coverage is whether FHA guidelines require more comprehensive insurance before the association can be certified for FHA loans.
Additional Coverage
Boards and managers should talk to the association's insurance broker about the following coverage:
- Building Ordinance. This endorsement covers any increased construction costs following a covered loss that may result from changes to building codes. Most city and county building codes require compliance with current building codes whenever 50% or more of a building is repaired. The requirement will apply regardless of the source of the damage--flood, fire, earthquake, etc. The older the building, the more costly the code upgrades for plumbing, electrical, elevators, fire sprinklers, seismic stability, etc. The costs can be substantial and result in significant special assessments on the membership if a "Building Ordinance" endorsement is not part of the association's insurance. NOTE: Condominium associations need building ordinance coverage to comply with Fannie Mae's requirements.
- Demolition and Debris Removal. This important endorsement covers demolition and debris removal costs. Following a major fire, debris will need to be removed and disposed of. Undamaged portions of structures will likely need to be demolished and removed as well. Once the site has been cleaned, construction can begin. If the association's insurance policy does not cover this expense, the membership will bear it through a special assessment.
- Maintenance Fees Receivable. This coverage covers the loss from unpaid or uncollected assessments resulting from a covered property loss.
- Boiler and Machinery. An endorsement for boilers covers the loss or damage to or resulting from boilers, pressure vessels, and pressure pipes. It also covers mechanical breakdown of items such as elevators, sump pumps, and pool equipment.
- Garage Keepers Liability. This is for associations with vehicles in their care, custody, and control. It is most common for highrise buildings.
California Fair Plan
The California Fair Plan is the insurance of last resort and should only be purchased if nothing else is available. It is administered through California's Department of Insurance. Coverage is limited, narrow, and expensive. 
Wildfire Devastation & Insurance Fallout
COMMERCIAL GENERAL LIABILITY
Commercial General Liability ("CGL") insurance covers (i) damages sustained in the common areas (such as slips and falls), (ii) property damage caused by fire or other covered risks to other common area improvements, and (iii) libel, slander, and copyright.
Ruoff Decision. In 1992, every owner in a 152-unit condominium complex was sued after Ms. Ruoff suffered catastrophic injuries from falling down defective common area stairs. Her husband argued that each owner was liable because they jointly owned the stairs. The court of appeals agreed and held every member jointly and severally liable for her injuries, the cost of which significantly exceeded the $1 million limit in the association's insurance policy. (Ruoff v. Harbor Creek) The case sent a chill through the industry, and the Legislature added Civil Code 1365.7 (now Civil Code § 5805) to protect owners from individual liability. The protection is provided regardless of the association's corporate status. To receive protection, associations must maintain at least minimum levels of insurance as follows:
- $2 million for associations with 100 or fewer separate interests
- $3 million for associations with more than 100 separate interests
Minimum Levels of Insurance. Meeting minimum insurance levels, however, may not be enough. Even though owners are not directly liable for a loss exceeding insurance limits, they are indirectly liable. Assuming a $4 million judgment against an association, owners would be responsible for a special assessment to make up the difference between the $2 million policy and the $4 million judgment. Accordingly, boards should talk to their insurance brokers to determine appropriate levels of insurance for their associations. A $5, $10, or $15 million umbrella policy is inexpensive and common for associations to purchase. In addition, homeowners should individually purchase loss assessment coverage if the association levies a special assessment to cover uninsured losses.
Occurrence Form. CGL policies are "Occurrence Form" rather than "Claims Made." This means the event leading to the claim must occur during the policy period. Accordingly, associations must keep an accurate record of their insurance policies until all statutes of limitations for potential claims have expired. To be safe, expired insurance policies should be kept for at least seven years.
Occurrence vs. Aggregate. Boards of directors must consider an important difference between occurrence requirements and aggregate amounts. See "Occurrence vs. Aggregate" for more information.
Reporting Requirements. Actual and potential claims must be reported to the association's carrier in a timely manner, or the association risks losing coverage.
UMBRELLA POLICY
An umbrella policy is an additional layer of insurance above the primary policy. It provides excess coverage once the underlying policy has been exhausted. For example, if an association has a $2 million general liability policy and settles a claim for $3 million, the primary policy pays $2 million, and the umbrella pays the remaining $1 million.
Broader Coverage. In addition to providing excess coverage, umbrellas often fill gaps in the primary general liability policy. They are usually broader in their coverage and, in most cases, but not all, extend to the D&O issues as well as the employer's liability portion of the association's workers' compensation coverage.
Inexpensive. Umbrella policies are not very expensive. Accordingly, associations should seriously consider purchasing umbrella policies.
GROUP INSURANCE
Defined. In a "shared umbrella" program (also known as group or pooled insurance), unaffiliated entities are grouped under a single insurance policy to reduce costs. An example is CIBA insurance. Typically, a management company might obtain a single group policy covering all the associations in its portfolio. It means the insurance policy is not in each association's name. Instead, associations in the pool are made additional insureds. There are two types of shared umbrella programs:
- Shared-Limit Umbrella. Under a shared limit umbrella, everyone in the program shares the insurance policy's limits.
- Shared-Policy Umbrella. In this program, all associations share one policy, but the policy's limits apply on a "per location" basis.
Potential Problems. Shared or group insurance can offer lower premiums, but there are trade-offs that raise concerns.
- Additional Insureds. Because participants in group programs are "additional insureds" rather than the "First Named Insured," they receive a certificate of insurance rather than an actual complete insurance policy. That makes notification an issue since an entity other than the association is the First Named Insured. This means that the association may not be notified if the policy lapses due to the non-payment of premiums or if the carrier cancels or modifies the coverage. Another potential problem is that if the management company holds the insurance in its name and the association changes management, the association could unexpectedly lose coverage.
- Limits Exhausted. Under the shared-limit plan, if one association makes a claim that exhausts the policy limits, all other associations in the program have no coverage. Policies are written assuming no single disaster will impact them all. Since no board member knows precisely how many associations are sharing the limit (and the value of each of those properties), it’s impossible to adequately assess whether the shared limit is sufficient to cover a significant loss impacting multiple locations.
- Payouts Limited. In the shared policy plan, policy language often limits the number of payouts per policy year. That could leave participants without coverage.
Recommendation: The risks described above do not necessarily mean the policies should be avoided; rather, boards should be aware of them and consult their insurance agent to make an informed decision before taking on those risks.
ASSISTANCE: Associations needing legal assistance can contact us. To stay current with community association issues, subscribe to the Davis-Stirling Newsletter.