Publications
Associations and Insurance
Written by Robert B. Kogen for Pioneer Press
October, 2000
I recently received a letter from a reader regarding the amount of insurance that his Association should obtain. The letter did not classify whether his Association was a Condominium Association or a Townhome/Homeowners Association, which is not subject to the Illinois Condominium Property Act. In addition, he did not mention whether his Association had amenities such as a swimming pool or lake. All of the above must be taken into consideration when determining the amount of insurance an Association must have.
The first step is to determine the types of insurance that are necessary for the Association. There are generally five types of insurance to consider:
1. Casualty Insurance - This is insurance that will restore the common areas and homes in the event of a casualty such as fire or storm. If you live in a Condominium Association, it is the responsibility of the Board to insure both the common elements and the units for the full insurable replacement value. This requirement is clearly set forth in the Illinois Condominium Property Act. In determining what amenities to insure, the Board should review the Association's Declaration as it generally states what type of policy the Association should have.
If you live in a non-Condominium Association (a Townhome or Homeowners Association), the Association's insurance responsibilities may vary. In some Associations it is necessary for the Board to insure only the common areas. In these types of Associations, it is the owner's responsibility to insure their dwelling unit and all personal property therein. If you live in such an Association, it is wise for the Board to make certain that all owners have adequate insurance to cover the building being rebuilt in the event of a hazard. This can be done by requiring each owner to submit to the Board a copy of their certificate of insurance on a yearly basis. Other Townhomes and Homeowners Associations require the Association to not only insure the common areas, but also the buildings, for their full insurable replacement value. The Board must review the Declaration to determine if the Board or the owners are required to insure the buildings.
2. Liability Insurance - This insurance will protect the Association in the event an owner, resident or guest is injured on the property. In our society today where people tend to be "sue happy", this insurance is a must. This insurance should be purchased by the Board on behalf of the Association.
3. Directors and Officers/Errors and Omissions - Directors and Officers insurance, which may also be known as Errors and Omissions Insurance, is to protect the Board from any lawsuits that may arise due to a mistake of judgment. I have seen countless claims against Board members for breach of fiduciary duty because the Board has made an unpopular decision. Although the Board members that act in good faith are indemnified by the Association, it is smart practice to have an insurance policy to pay the Association's attorney's fees and any judgment that may arise from the claim.
4. Worker's Compensation Insurance - This insurance protects the Association if an employee of the Association is hurt on Association property while performing services for the Association. Generally, when Associations needs work performed, they hire an independent contractor. Although the Association may consider this person performing the work an independent contractor, there is a very fine line under Illinois law as to the classification of independent contractors versus employees. Courts in Illinois tend to bend over backwards to find uninsured contractors to be employees, rather than an independent contractors so that there is insurance to cover them. While Associations should request a certificate of insurance from the contractor, there are times when the type of work does not attract an insured contractor. As you can see, it is wise to have such a policy in place.
5. Fidelity Bond - A Fidelity Bond will protect the Association if the manager or Board members embezzle Association funds. If you reside in a Condominium Association, the Illinois Condominium Property Act requires that all Associations of thirty units or more have such a Fidelity Bond in place. If you live in a Condominium Association with less than thirty units, or a non-Condominium Association, you should consult your Declaration to see if such a bond is required. Even if it is not, all Board members should consider -- and in my opinion obtain -- such a bond.
Now that you know the types of insurance to consider, the next question is how much is necessary. I generally do not give advice as to how much insurance an Association should have. I recommend that each Association have its insurance agent attend one Board meeting per year to discuss its insurance needs. Obtaining appropriate insurance is one of the most important jobs of a Board of Directors, and the Board can only fulfill its fiduciary obligation by consulting with an insurance expert.