5 Tips for Choosing the Right HOA Insurance

Homeowners associations are creatures of budget. The primary purpose of a budget is to provide certainty and avoid surprises as the board complies with its obligation to protect, preserve, and enhance the association assets. 

More often than not, board members primarily focus on price when purchasing insurance. However, price is only relevant if the options presented substantially provide the same coverage – apples for apples; or there are never any claims.

The reality is most boards never make the ultimate insurance decision, because they defer this task to their community association manager. It is one thing to defer the insurance leg work to the community association manager, however, it is another thing for the community association manager to make the insurance purchase and maintenance decisions on their own. Focusing primarily on the point-of-sale premium should be the last decision.  The key obligation is to determine whether the insurance proposal is proper coverage to protect, preserve, and enhance the association assets. 

More often than not, the management agreement with the association requires that the association unilaterally indemnify the management company and the for claims arising out of services provided.

Focusing on price in the insurance decision process is counter-intuitive to this duty. Where in the governing documents does it provide that the board has a duty to save the association money when purchasing insurance? Nowhere. Rather, the duty is to determine what insurance will best protect the association assets.

Boards are authorized to seek counsel from professionals when an issue is beyond the knowledge of the average board member. Insurance is one of those issues. Moreover, why wouldn’t a board always seek counsel from a community association professional?  Boards are always looking for cheaper anything.  Why not obtain counsel from a community association insurance professional who does not charge.   

The cost of insurance is not the same as the point-of-sale premium. The cost of insurance is the total amount the association incurs at the time of a loss or claim plus the value of peace of mind that the association receives during the claims process. If the board makes sure they purchase most comprehensive coverage for the association, the cost of insurance will be a good deal. However, if the focus is the point-of-sale price as opposed to coverage, there is a very possible that the cost of insurance could be significantly higher than the price, because the association will be self-insured for the coverage that was sacrificed for the cheaper price.

Caveat: More important for associations than “point-of-sale insurance premiums” is not being surprised by uncovered claims.

Many management agreements expressly provide that the community association managers assume the task of purchasing and maintaining the association’s insurance program. In other situations, management companies take on this role voluntarily and may involve preferred insurance business partners in the process.

This practice is not necessarily a problem. However, there are a number of traps for the unwary, including who is ultimately responsible for any errors in the purchase and maintenance of insurance. The individuals that should be most concerned are the management company owner and boards.

Indemnification

Most management agreements have an indemnity provision that states if the community association manager is sued for something he or she did or on behalf of the association, the insured needs to provide the community association manager defense and indemnity. The association must be able to fund that obligation. Many community association managers and boards assume that this can be funded by the association’s Directors and Officers (D&O) policy where the community association manager is almost certain to be added as an additional insured or are included in the policy definition of insured. As a result, the funding of the obligation owed the community association manager is by the associations assets, special assessments or a loan.

It is also important that the management company or community association manager understand the indemnity provisions of your state. Not all states will allow indemnification for someone’s active negligence, and many if they do allow indemnity for active negligence, that provision must be expressly set forth in the agreement, and in some states follow a certain formula.

D&O Policy

Most boards, management companies, and community association managers assume that since the management company is working on behalf of the association, and since it is an additional insured on the D&O policy, that the community association manager is covered and that is how the insurance claim against the community association manager, for whom the association agreed to provide defense and indemnity will be funded.

Unfortunately, virtually every D&O policy on the market excludes coverage for claims by the association against the management company or community association manager. Even worse, there are some D&O policies where the management company or community association manager is not covered under a policy.

Professional Liability Insurance

Virtually all community association manager professional liability insurance “expressly excludes” any claims arising out of insurance claims. This should make sense, because a professional liability policy is intended to cover the professional from its industry professional services. Community association managers are not licensed insurance professionals.

Conflict of Interest

Some management companies or community association manager have their own preferred insurance professional who in turn has its own preferred insurance carrier. There are also some where the insurance is a division, affiliate or subsidiary of a management company. These may in fact provide the best products to protect the association’s assets. However, there are two key requirements. First, any such relationships must be expressly disclosed to the association board. Second, under this scenario, the management company or community association manager must still conduct its due diligence as to the best available coverage, and not just the best price.

Business Good Will

There are “good will” issues that can arise from insurance coverage. The management agreement often has a unilateral indemnity agreement flowing from the association to the management company or community association manager. Theoretically, if the community association manager does not purchase and maintain the appropriate coverage, it is still protected because the association must defend and indemnity the management company or community association manager. Who will tell the board that we the management company are being sued, but you have to defend us. As long as the management company is not concerned about losing the client, there is no problem.

An association’s insurance must be a high priority for management company CEOs, executives, and homeowners.  Management companies spend so much time making sure they are additional insureds on the association insurance policies, but they do not make sure the association’s policy is as effective as it should be. The management company and the community association manager’s coverage are only as good as the associations.

Key Take Aways

• Community association insurance professionals do not charge to meet, counsel, or present information to your board. The insurance professional, not the community association manager is the licensed insurance expert.
• Boards should work with community association insurance professionals for two reasons.  First, boards owe a fiduciary duty to the association and relying on a licensed community association insurance professional.  By doing so, the board develops a strong defense to a strong business judgment defense.  Second, the counsel is free.
• Community association managers should never sign an application on behalf of an association.  The association does not pay the management company or the community association manager.
• Always make the board review the application, make any changes they need, and have the appropriate board member sign the application.
• Not all insurance coverage is equal.

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