In an condominium associations and some planned developments, common areas are owned by homeowners, each of whom owns an undivided fractional interest, yet the common areas are insured by an entity (the association) that does not have an ownership interest in the common areas.
Insurable Interest. An insurable interest can be established either through direct ownership or contractually, such as a lease or an easement. For associations, an insurable interest is established in the CC&Rs, which obligates the board of directors to insure the common areas. It can sometimes require insurance of structures which are owned by members individually (as with townhouses).
Insurance Trustee. In addition, governing documents often make the board an insurance trustee. As such, it can negotiate and settle claims and receive and distribute insurance proceeds. Depending on the nature of the claim, the board can be authorized to develop bid criteria for repairs, receive proposals from qualified contractors, and award contracts for repairs and reconstruction.
#1. Insure Against Risk. Associations have duties related to insurance that include purchasing and maintaining insurance policies against a variety of risks. What to insure and at what levels are determined by the association's governing documents, statute, and prudent business judgment. Following are common types of insurance carried by associations:
#2. Seek Professional Guidance. Because board members are not experts in insurance coverage, they need to consult experienced insurance agents/brokers who specialize in providing insurance to 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.
#3. Tender Claims. Whenever there is a claim or potential claim against the association (someone slipped and fell on the property, a pipe burst and flooded units and the common areas, etc.), the board should immediately report or "tender" a claim to its insurance carriers.
#4. Annually Disclose. Associations have a duty to annually disclose to their members a summary of the association's property, general liability, and earthquake and flood and fidelity insurance policies.
ASSISTANCE: Associations needing legal assistance can contact us. To stay current with issues affecting community associations, subscribe to the Davis-Stirling Newsletter.