Following is a summary of the steps you need to take when the association is sued or a major loss has occurred, such as a large flood. These steps are explained in more detail below.
- NOTIFY CARRIER. Immediately notify all HOA insurance carriers of any claims or potential claims. If you notify the insurance broker by phone, follow up in writing. If you don't get an acknowledgement from the carrier that they received the claim, follow-up with the broker and make sure he/she submitted the claim.
- DOCUMENT & MITIGATE. If a flood occurred, take pictures and immediately clean-up the water to prevent mold from growing. Follow 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 but you want your association's attorney to know about the loss and take steps to protect the association in case the carrier is slow to respond or, worse, denies coverage.
"Claim" Defined. Boards should immediately report all actual and potential claims to all appropriate insurance carriers.
Potential Claims. Reporting "potential" claims preserves the association's rights to coverage without triggering higher premiums.
a. 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 . . . a homeowner feels defamed over a newsletter article and sends an email to the board threatening to sue. These are potential claims as opposed to actual claims. A lawsuit has not yet been filed but could at some point in the future. Immediately putting the carrier on notice preserves the association's rights.
b. 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 immediately report it.
Actual Claims. Reporting actual claims could result in higher premiums because they result in 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, cancel 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 important 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. If the board does not inform the carrier of a claim within a reasonable period of time, the claim could be denied. 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:
1. Occurrence Policy. An "occurrence" policy is one that provides coverage for damage or injury that occurs during the policy period regardless of when the claim is actually made (provided the claim is timely tendered once the association learns of the claim).
2. Claims-Made Policy. A "claims-made" policy, insures claims only when the claim is reported when the policy is in effect, i.e., during the policy period. The policy provides coverage only so long as the association continues to pay premiums for the policy. Once premiums stop the coverage stops.
Who Reports the Claim? For self-managed associations, a member of the board 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 management company), the task of notifying insurance is normally handled by the manager at the direction of the board. Sometimes a board will ask legal counsel to report the claim and will supply the association's attorney with their 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 using their attorney to report 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 person 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 in the event the broker forgets to put the carrier on notice and then forgets that you ever called.
Consequences of Late Reporting. The late reporting of a claim can result in the denial of coverage. Even if the carrier accepts the claim, an association can still suffer consequences--the carrier will not pay for any defense fees and costs incurred by the association prior to the date the claim is reported to the carrier.
Owners Reporting Claims. Whenever an owner fails to carry their own insurance and they suffer 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 particular carrier, the language in the policy, and the language in 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. Even if they are not defined as insureds, the Fair Claims Handling Practice Act requires that an agent, broker or carrier file any claim request submitted. The carrier can still deny coverage once it has reviewed the claim, the policy and the governing documents.
Recommendation. Rate increases are a legitimate concern but this concern is outweighed by the potential loss in coverage if the claim is not timely reported to the carrier. The safest course for boards is to immediately report all actual and potential claims to all appropriate insurance carriers.
ASSISTANCE: Associations needing legal assistance can contact us. To stay current with issues affecting community associations, subscribe to the Davis-Stirling Newsletter.