Insure Against Risk
Associations have insurance-related duties, including purchasing and maintaining policies against various risks. What to insure and at what levels are determined by the association's governing documents, statute, and prudent business judgment. The following are common types of insurance carried by associations:
- Directors & Officers
- Commercial General Liability
- Property Damage
- Fidelity Bond & Cyber Crime
- Umbrella Policies
- Workers Compensation
- Earthquake
Seek Professional Guidance
Because board members are not experts in insurance coverage, they need to consult experienced insurance agents/brokers who specialize in insuring common interest developments. The agent needs a copy of the association's governing documents so he/she can determine (i) the types of insurance required by the documents, (ii) whether "bare walls" or "all-in" coverage is required, (iii) whether "occurrence" or "claims made" is best, (iv) whether admitted or non-admitted carriers should be used, and (v) the appropriate levels of insurance needed.
Insurance Endorsements. An insurance endorsement (also called a "rider") is a provision added to, excluding, or modifying coverage in an insurance policy. Common endorsements include:
- Blanket Coverage: eliminates separate schedules for buildings and structures.
- Contingent Liability: coverage for the responsibility of others imposed by law or contract.
- Demolition Endorsement: covers the cost of tearing down a structure and removing the debris after a major loss.
- Employment Practices Liability (EPL): covers lawsuits filed against the association by employees.
- Landscape Coverage: includes theft, vehicle damage, and wind damage.
- Replacement Cost: pays 100% of the cost of reconstruction, including code upgrades.
- Waiver of Subrogation: waives the right to pursue recovery of damages from a unit owner.
Insurance Exclusions. Exclusions are perils, losses, and property not covered by the policy, such as wear and tear to the association's common areas or mold. Excluded perils might also include perils that could cause extensive damage, such as flood, earth movement, and nuclear radiation. Some of the common exclusions under CGL & D&O policies include:
- Breach of contract
- Election challenges
- Dishonesty, criminal acts, fraud
- Embezzlement (HOA can be covered by fidelity insurance, but not the embezzler)
- Discrimination
- Sexual misconduct
- Employment claims (HOA can be covered by EPL insurance)
- Underinsured or failure to insure
- Punitive damages, fines, penalties
- Injunctive relief
Admitted Carriers Defined
Some governing documents require that boards obtain insurance only from admitted carriers.
Admitted Carriers. An "admitted carrier" is an insurance company that has submitted its insurance rates to California's Department of Insurance for approval. Once approved, the carriers must use those rates equally with all customers. The Department also reviews the carrier's investments and reserves to ensure they are adequate. Admitted carriers are backed by the California Insurance Guarantee Association (CIGA). If the carrier goes bankrupt, the CIGA covers claims up to the insured's policy limit or $500,000, whichever is lower.
Non-Admitted Carriers. Non-admitted carriers are licensed to do business in California. They are required to go through an approval process with California's Department of Insurance to ensure their financial soundness. They are not required to have their rates approved by the Department and can price their insurance to meet perceived risk. This allows them to insure high-risk clients who might otherwise be uninsurable by admitted carriers.
Annual Disclosures
As required by Civil Code § 5300(b)(9), associations are required to annually distribute not less than 30 days nor more than 90 days preceding the beginning of the association's fiscal year a summary of the association's property, general liability, and earthquake and flood and fidelity insurance policies, that includes all of the following information about each policy:
1. Name of the insurer
2. Type of insurance
3. Policy limits
4. Amount of deductible, if any
Notice of Changes. The association shall, as soon as reasonably practicable, notify its members by Individual Notice (Civ. Code § 4040) if any of the policies have lapsed, been canceled, and are not immediately renewed, restored, or replaced, or if there is a significant change, such as a reduction in coverage or limits or an increase in the deductible, as to any of those policies. If the association receives any notice of nonrenewal of a policy and if replacement coverage will not be in effect by the date the existing coverage lapses, the association must immediately notify its members. (Civ. Code § 5810)
Required Language. The summary of insurance distributed to the membership must contain, in at least 10-point boldface type, the statement found in Civil Code § 5300(b)(9).
Records Inspection. Insurance policies should be made available for inspection and copying. Although insurance policies are not mentioned in the inspection provisions of the Davis-Stirling Act, they likely fall under the category of executed contracts not otherwise privileged under law. (Civ. Code § 5200(a)(4))
ASSISTANCE: Associations needing legal assistance can contact us. To stay current with community association issues, subscribe to the Davis-Stirling Newsletter.