Publications
Importance of Liability Insurance Often Overlooked
The largest exposure that a condominium or homeowners’ association will ever face is in the area of personal liability or property damage. In light of this fact, it is then probably puzzling why many association boards treat the purchase of liability and property damage insurance so casually. In fact, some seem to adopt the thought "that only happens to others."
Property Damage, Liability and Directors/Officers insurance coverage can look like a covered chafing dish of leftovers if not properly reviewed. If, for example, a Board is sued for breach of fiduciary duty, is there adequate coverage? It is important that the Board understand the scope of coverage and if it proves to be inadequate for any reason, it needs to be expanded. The issue is not just adequate financial coverage however, but also the actual events and circumstances covered.
Recently, a situation arose where a Board of Directors was sued collectively and individually for a mandatory injunction to force the Board to refrain from enacting certain policies and procedures. No monetary damages were being sought. The association’s insurance carrier denied coverage of the claim and refused to hire counsel to defend the case. At first glance, the natural reaction in this case was to attack the insurance carrier. However, after a careful reading and analysis of the policy, it appeared the insurance company was correct in denying coverage. The Board of Directors was not aware of this deficiency. They had either assumed that they purchased adequate insurance coverage of misunderstood the limitations.
Because the Board had not been sued for monetary damages or loss, but rather the plaintiff sought an injunction, there was no coverage. The policy specifically excluded all cases not seeking monetary damages. Thus, the association had to fund 100 percent of the legal defense. Considering that the bulk of the costs incurred in suits against an association Board covers costs of legal defense, this has enormous consequences. Had the Board invited their insurance agent to a meeting to explain the policy’s limitations, this situation may not have occurred.
One of the biggest areas of dispute in operating an association is with regard to a loss suffered in a unit where there is interior and exterior damage (due to fire, flooding or other disastrous situations). Which insurance company has the obligation to cover the loss — the association’s insurer or that of the unit owner? These and other issues need to be answered so when claims are made, the Board can provide an informed response. The law requires the association to insure the common elements. Unit owners are required to insure the unit, additions, improvements and contents. The elements of fault are often at issue, although coverage is usually not dependent upon fault. To compound the confusion, many association master policies cover more than what is legally required by law or in the declaration.
This is why it is important for a Board to have a clear-cut policy that in the event of a loss, which entity is responsible for what damages.
Given these issues, and the potential financial to a Board and association, it is important to evaluate insurance coverage carefully. A good rule of thumb is to have the insurance professional attend one Board meeting per year to participate in a question and answer session on insurance coverage, particularly exclusions. Additionally, a checklist of questions and issues pertaining to coverage could be developed to ensure that all possible areas are covered.
Some Boards require their owners to prove that they have owners insurance to cover interior loss. After a fire, for example, an owner without personal insurance could face a loss in the area of tens of thousands of dollars.
Remember, the question that isn’t asked can have a very expensive answer!