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.
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