Separate Insurance
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SEPARATE POLICIES FOR BUILDINGS

QUESTION: I own one of 40 units in a condo association. The units are attached four or five in a group, called "pods." Our board voted to set up insurance with different companies for each pod. They did this with no notice. I don't understand the reasoning behind this action.

ANSWER: Red flags went up as I read your question. Unless your governing documents support individual policies on each pod, your association may be at risk. Moreover, your HOA may be at risk even if your governing documents allow for this unusual practice.

Incomplete Coverage
. Different policies with different carriers increases the administrative burden for the HOA and the risk of gaps in coverage. What about D&O, Crime and Workers' Compensation coverage? Is each pod maintaining each of these important auxiliary coverages? If there is a catastrophic fire in a neighboring pod and someone failed to maintain proper coverage, all 40 owners would still have an obligation to repair the damage. That means large special assessments for everyone.

Lawsuits. Who is the "insured?" Who receives the claim payments? The pod owners? The board? If someone is injured or suffers property damage in one of the pods, the plaintiff will not sue just the pod where the loss occurred; the association as a whole will be sued (that's how the system works). Since there is no master policy, who defends the association? Will each pod's insurance respond? I expect they will--with a firm denial of coverage. Moreover, to protect owners from individually being named in the lawsuit, does each pod carry the $2 million minimum limit required by Civil Code §5805?

Lost Economies of Scale. Your association will likely lose economies of scale by insuring buildings separately. With a master policy on all 40 units, the premium would be less on a per unit basis. Most carriers apply a "multiple unit discount" which would be lost using the pod scheme.

Additionally, you lose the benefit of having building coverage written on a "blanket" basis, i.e., the ability to apply the aggregated building limits to any covered loss, as opposed to the much smaller limit maintained on each building or structure. That means greater exposure for all members.

Ultra Vires Act? If your documents don't allow for individual policies on each pod, the board may have exceeded its authority and acted contrary to the CC&Rs. In a worst case scenario, your directors could be personally at risk if there is a catastrophic loss which is denied because of the unorthodox pod insurance arrangement.

RECOMMENDATION: Your board should contact an insurance agent who specializes in homeowner associations and get a second opinion about how best to insure your development. Make sure the agent reads the insurance provisions in your CC&Rs. Associations needing legal assistance can contact us. To stay current with issues affecting community associations, subscribe to the Davis-Stirling Newsletter.

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