Reporting Claims
Boards should immediately report all actual and potential claims to all appropriate insurance carriers. Following is a summary of the steps you need to take when the association is sued or a significant loss has occurred, such as a large flood.
- Note the Date. If served with a lawsuit, notify the carrier and the association's legal counsel of the name of the person served and the date, since it starts a 30-day clock for legal counsel to respond to the lawsuit.
- Notify the Carrier. Immediately notify all HOA insurance carriers and the association's legal counsel of any claims or potential claims. If you inform the insurance broker by phone, follow up in writing. If you don't receive an acknowledgment from the carrier that they received the claim, follow up with the broker to make sure they submitted it. If a lawsuit was served, provide a copy of the complaint and information about who was served and when.
- Document and Mitigate. If a flood occurs, take pictures and immediately clean up the water to prevent mold from growing. Follow the steps in your water damage checklist.
- Notify Counsel. Immediately notify legal counsel of the injury, water damage, lawsuit, etc. The carrier will appoint an adjuster for property damage claims and a law firm to handle litigation. Still, you want your association's attorney to know about the loss and take steps to protect the association if the carrier is slow to respond or denies coverage.
When Should Claims be Reported? Most policies require the insured to report a claim as soon as "reasonably practicable." This means days, not months. Timely notice is essential so the insurance carrier has an opportunity to (i) appoint defense counsel, (ii) investigate the claim while the evidence is fresh and witnesses can be interviewed (re slip and fall, water damage, etc.), and (iii) explore settlement. The claim could be denied if the board fails to inform the carrier of the claim within a reasonable period. Boards should also be aware that insurance carriers are not responsible for pre-tender attorney fees and costs.
Which Carriers to Notify. Which insurance companies to notify will depend on the type of policies purchased by the association:
- Occurrence Policy. An "occurrence" policy provides coverage for damage or injury that occurs during the policy period, regardless of when the claim is made (provided the claim is timely tendered once the association learns of the claim).
- Claims-Made Policy. A "claims-made" policy insures claims only when the claim is reported while the policy is in effect, i.e., during the policy period. The policy provides coverage only so long as the association continues to pay the premiums. Once premiums stop, the coverage stops.
Who Reports the Claim? For self-managed associations, a board member reports or "tenders" the claim to the insurance carrier via the association's insurance agent/broker. If the association has a manager (either onsite or through a management company), the manager typically handles notifying insurance at the board's direction. Sometimes, a board will ask legal counsel to report the claim and supply the association's attorney with the insurance agent's contact information. Using legal counsel to report the claim does not give the association any special priority with the insurance carrier. Hence, most associations avoid the expense of having their attorney file a claim. Most assign that task to management.
To Whom Is the Claim Reported? The association's insurance policy should provide reporting information, i.e., a point of contact designated by the carrier to receive claims. Most often, boards report a claim to the association's insurance agent or broker.
Always Report in Writing. Boards can report claims by phone, letter, or fax. However, notices of claims and potential claims should be done in writing so the board has a paper trail if the broker forgets to put the carrier on notice and then forgets that you ever called.
Consequences of Late Reporting. Late reporting of a claim can result in coverage being denied. Even if the carrier accepts the claim, an association can still suffer consequences: the carrier will not pay any defense fees or costs incurred by the association before the claim is reported to the carrier.
Members Filing Claims. Whenever an owner fails to carry insurance and suffers a loss, they invariably demand that a claim be filed with the association's insurance. The safest course for the association is to report the claim. Whether the carrier accepts or rejects the claim depends on the carrier, the policy language, and the association's governing documents. HOA CC&Rs and insurance policies often define individual owners as insureds, which means they have a right to tender a claim.
Insurance Claim Defined
Potential Claims. Reporting "potential" claims preserves the association's coverage rights without triggering higher premiums.
- Defined. What is a potential claim? A visitor slips and falls on one of the association's sidewalks, a resident writes a letter to the board threatening to sue over a roof leak, or a homeowner feels defamed over a newsletter article and sends an email to the board threatening to sue. These are potential claims, not actual claims. A lawsuit has not yet been filed, but could be in the future. Immediately putting the carrier on notice preserves the association's rights.
In an unpublished case, an owner emailed the HOA about excessive noise from his upstairs neighbor. The board took steps to address the situation. However, the situation escalated, and the Owner's attorney sent a demand letter to the HOA. The day after receiving the demand letter, the board made a claim on its insurance policy. The insurance company refused to defend the association in the lawsuit. The HOA filed this suit in federal court, alleging breach of contract and breach of the implied covenant of good faith and fair dealing. The insurance company argued that the claim was rightfully denied because the homeowner's emails constituted a “demand” received by the HOA before the policy’s effective date. The court did not agree, finding that the member’s email did not sufficiently communicate to the HOA that it was making a demand. Since the policy did not define what constituted a “demand,” the court used the plain meaning of the word, supported by case law. The email failed to insist on a specific course of action based on an asserted right, identify potential claims against the HOA, express a clear intent or threat to commence suit, or provide an ultimatum that constituted a demand. Thus, the court granted the HOA’s motion for summary judgment, which ruled the insurance company breached its duty to defend the HOA in the underlying suit. (Del Mar Woods v. Phila. Indem. Ins. Co.)
- Written vs. Oral. A verbal threat, "You will hear from my lawyer!" is not considered significant enough to report to the association's insurance carriers. Most policies require that written threats of legal action be reported. Accordingly, whenever an association receives a written threat of legal action, it should report it immediately.
Actual Claims. Reporting actual claims could result in higher premiums because they involve the assignment of legal counsel, discovery expenses, court costs, and related expenses. Depending on the number and size of the claims, carriers may try to recoup their expenses by increasing their insurance premiums or, if they believe the association is too high-risk, canceling coverage.
Reservation of Rights Letter
Insurance Duty to Defend. An insurance carrier's duty to defend is much broader than its indemnity obligations. Depending on the claim, the carrier may readily agree to defend the association but may not agree to pay any judgment against the association. Once the association submits a claim, the insurance carrier will evaluate it to determine whether the policy covers it. When that is done, the carrier will issue one of the following letters:
- Covered Claim. The claim is covered under the policy. The carrier then appoints a law firm to defend the association. If the claim ultimately goes to trial and a judgment is entered against the association, the carrier will pay the judgment (up to its policy limits).
- Denial of Coverage. The policy does not cover the claim. For example, the insurance policy covers negligence claims, but the association is sued for breach of contract.
- Reservation of Rights. The carrier may agree to defend the association but may refuse to pay any judgments if the matter goes to trial and the association loses. This happens most often when coverage of the underlying claim is questionable.
Negative Letter. If the carrier issues a "denial of coverage" or a "reservation of rights" letter, the board of directors should have the association's legal counsel review the letter and the association's insurance policy to determine if he/she agrees with the carrier's position. If legal counsel disagrees, the board may wish to dispute the carrier's position and make further coverage demands. It may cause the insurance carrier to revise its position.
Cumis Counsel
"Cumis counsel" refers to an independent attorney appointed to represent the association or board members in cases of a conflict of interest with the association's insurance company. Instead of insurance-appointed counsel, the association or its directors could retain counsel of their choosing, as provided in Civil Code § 2860(a). The term originated in the San Diego Federal Credit Union v. Cumis Insurance Society, Inc. case.
Conflict of Interest. A conflict of interest often arises when the insurance carrier agrees to defend under a "reservation of rights." When that happens, a conflict of interest exists between the insurer's and the association's economic and litigation interests. If the conflict is significant, the insurer's traditional right to select counsel and control the defense is lost. As a result, the association may choose independent counsel and control the defense, but the insurer must pay the defense costs. Section 2860 of California's Code of Civil Procedure provides:
(a) If the provisions of a policy of insurance impose a duty to defend upon an insurer and a conflict of interest arises, which creates a duty on the part of the insurer to provide independent counsel to the insured, the insurer shall provide independent counsel to represent the insured unless, at the time the insured is informed that a possible conflict may arise or does exist, the insured expressly waives, in writing, the right to independent counsel. An insurance contract may contain a provision that sets forth the method of selecting counsel consistent with this section.
(b) For purposes of this section, a conflict of interest does not exist as to allegations or facts in the litigation for which the insurer denies coverage; however, when an insurer reserves its rights on a given issue, and the outcome of that coverage issue can be controlled by counsel first retained by the insurer for the defense of the claim, a conflict of interest may exist. No conflict of interest shall be deemed to exist as to allegations of punitive damages or be deemed to exist solely because an insured is sued for an amount in excess of the insurance policy limits.
Settling Claims
Economics of Settling. Insurance companies don't look at who's right or wrong--they look at the economics, i.e., the cost of taking a case to trial versus the cost of settling. Not only are trials costly, but there is also the risk of losing. A loss could burden the insurance company with damage awards and plaintiff's attorneys' fees. To avoid the risk, insurance carriers like to settle. Accordingly, except for certain malpractice policies, the average insurance policy for associations allows the carrier to do what it thinks is best regarding settlement.
D&O Hammer Clause. If the association's insurance policy allows the board to have a say in settling the case, the policy likely has a "hammer clause." If it does, boards must carefully weigh the pros and cons of continuing the litigation. In the event a board refuses to settle and takes a case to trial and loses, the association, not the insurance company, pays the difference between the rejected settlement offer and (i) any additional legal fees incurred by the carrier, plus (ii) any judgment against the association, plus (iii) any award of legal fees against the association.
ASSISTANCE: Associations needing legal assistance can contact us. To stay current with community association issues, subscribe to the Davis-Stirling Newsletter.