Though an absolutely vital aspect of any homeowners association’s (HOA) management, insurance is frequently overlooked. Often reviewed only as a budget line item, most communities do not take the time each year to reevaluate the changing needs of the community when it comes to insurance. Ensuring the community is properly covered against risk is not just often a requirement of the governing documents, but also can protect the future of the HOA and the investment of all homeowners. Though it may seem similar to your typical homeowner’s insurance, there are types of insurance that are important to protect the community that are unique to the needs of HOAs and their assets.
Property insurance is one of the common forms of insurance. This type of insurance is one that will cover the association’s property such as buildings, equipment, and building’s contents – keeping in mind that this insurance is only covering what the governing documents deem to be to the responsibility of the homeowners association. For example, if the patios are considered the responsibility of the HOA to maintain per the covenants, conditions and restrictions (CC&Rs) for the community, then the patios would be covered under the property insurance should a claim need to be filed. Also found in the community’s governing documents is a requirement for the kind of insurance coverage the HOA needs to maintain and the minimum policy limits. Property insurance is the most basic and vital for a community to have and maintain for the protection of the HOA and its assets. The cost for this type of insurance coverage varies from community to community but the premium will most likely depend on the number of assets being covered and the claim limits. Most HOAs will have a $1,000,000/$2,000,000 policy, meaning the total policy limit cannot exceed $2 million for the year with each payout not exceeding $1 million though some communities may want higher policies due to their assets or size.
Liability Insurance & Umbrella Liability
Similar to property insurance coverage, this is a very ubiquitous type of insurance as it relates to incidents that may occur on the community’s property. Typical claims for liability insurance are slip-and-fall, libel, or slander to name a few. These kinds of claims are different than the property claims that relate to objects and can cover a multitude of risks for the HOA which is why this type of insurance is one of the most vital for a community to carry as well. Much like any insurance, the cost of this coverage will be dependent on the types and payouts of previous claims. It is important to keep in mind when choosing an insurance policy for the HOA that cost is reviewed on a competitive basis and that corners are not cut. This is also why umbrella policies are added to expand coverage for communities with more risk. Umbrella policies are usually not as expensive as the general liability policy but can add far more coverage for the HOA. Insurance is not something a community should be stingy about.
Directors and Officers Insurance (D&O)
This type of insurance may be more unfamiliar to the general public. Directors and Officers insurance, commonly referred to as D&O insurance, is to protect the board of directors, committee members, and management from claims or lawsuits alleging that they have failed to perform their required duties as delineated in the governing documents. In short, this protects the board from being sued by homeowners for decisions or actions made as long as they were properly performing their duties and acting in good faith. The key to D&O insurance is the idea of “acting in good faith”. This means that the directors or committee members were not discriminatory, performed uniform enforcement, and upheld their required fiduciary duty to do what is best for the community as a whole and not for the gain of one person or the board of directors. As long as the board and committee members stay true to these principles, any claims or lawsuits alleging misconduct or failure to properly perform their duties will be covered under the directors’ and officers’ insurance carried by the community.
Commonly referred to as “crime bonds”, this insurance usually only protects against fraudulent or dishonest acts. Typically the board of directors and management company are listed as the persons on the policy, so in effect, this type of insurance protects the HOA if there are any acts against the community’s cash assets or money such as embezzlement. However, fidelity bonds do not cover from theft occurring from outside parties or mismanagement of the community funds, like overspending. The kind of coverage needed is typically found in the HOA’s governing documents but the average requirement to insure is three times the total monthly assessment or dues for the HOA including the reserve funding.
When an employee is injured on the job, worker’s compensation insurance comes into play. Many may find it questionable as to why an HOA would need this type of insurance if they do not have employees of their own, as many HOAs are managed by professional management companies who hire their own employees. However, the reason to carry worker’s compensation insurance is more for any worker performing a job onsite at the HOA, such as landscaping companies, painters, or roofers for example. Though communities should be properly vetting to ensure that any vendors hired are carrying ample insurance to cover any injuries or claims, some vendors may knowingly or unintentionally let the insurance they have a lapse, which places the HOA at risk. If this occurs, the community may be liable to a large payout. To avoid any concern of this and to keep the HOA fully protected, it is always recommended by insurance professionals that the community carries a minimum as it only costs the HOA approximately $650 a year to obtain and can mitigate risks far larger in monetary value.
Understanding what kinds of insurance coverage your community needs don’t just assist with budgeting, but can save the HOA millions of dollars in possible lawsuits or claims. Though each community has different needs for insurance based on size and assets, all HOAs need to be properly insured. This not only protects the HOA from losing money but in term, proper insurance protects all homeowners within the HOA and their largest asset – their home.