“Understanding Condo and HOA Insurance: Coverage Types and Key Considerations for Community Associations” – KSN attorney Michael Kreibich reviews the different types of community association insurance including property, liability, umbrella, and director/officer coverage.
While sharing best practices for board members and property managers, he also discusses how insurance coverage is impacted by legal requirements, governing documents, and more. (18 mins.)
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Episode Transcription
Bernie: You’re listening to the KSN podcast and today we’re talking about condo and HOA insurance. Welcome to the KSN podcast where you’ll hear from KSN attorneys as they share their experience and insight on legal issues surrounding community associations, collections, property tax appeals, and landlord tenant law. I’m Bernie, and today we’re joined by KSN attorney Michael Kreibich. Mike practices condominium, townhome and homeowner association law in the city of Chicago and the surrounding suburbs advising clients and property managers on how to stay on top of legal requirements across the spectrum. Welcome to the podcast, Mike.
Mike: Hey Bernie. Great to be here.
Bernie: All right, our topic today is condo and HOA insurance. We’re talking coverage types, key considerations for community associations. We know that individuals are responsible for purchasing their own insurance to protect their personal property and their dwelling, but how do associations handle insurance policy?
Mike: Well, so Bernie insurance for associations is probably one of the biggest topics we deal with. It comes up almost on a daily basis, regularly confuses issues as it relates to insurance, and that’s because of the maintenance responsibility actually sometimes being different than the insurance responsibility. So, this is a topic that we spend a lot of time on. The types of insurance that you deal with with associations, and we’re going to go through that kind of range and it’s really important for each association to know what insurance is required, what is something that they can choose to obtain but we want to walk through each of those. Importantly with insurance, they’re designed to protect the common areas. Common areas or community areas is a term of art that is specific to non-condominium associations.
So, your townhome associations in your homeowner’s associations and then you have the term common elements and common elements is a term that is specific to condominium associations and the insurance requirements are different. Some of the terminology, if you’re researching types of insurance, you’ll hear the term HO-3 type of policy, which is for non-condos, HOAs, and townhome associations. And then you’ll hear the term HO6, which is related to condominium associations. Types of things that are covered and this is a kind of generalization without digging too deep into the weeds is that your HO6 or your HO-3 covers your community areas and your common elements, and that’s for damage as it relates to weather events or if there is some type of an incident. That is what we would call, from a legal standpoint, we call that an insurable loss, which is generally the way I would talk about insurable losses as if something is not due to regular wear and tear.
So an actual incident takes place that results in an insurable loss and again, the best examples of that is to do with weather and the types of things then would be if it’s fire frozen pipes, smoke, theft, vandalism, water, wind damage, those are some examples that an association’s policy may cover. And again, the HO-3, the HO6, those are things that happen to the common elements, common areas. Something else that might be covered, and we’ll get into that a little bit more, is if somebody, you know, with a slip and falls on property that is owned or insured by the association, that’s the other common thing that happens. An injury that takes place on association insured property. There’s liability coverage in the event of a lawsuit, judgements, settlements, or other legal claims for bodily harm or property damage.
Bernie: Different types of coverage for different types of situations. Mike, how does an association determine what type of insurance they need so that way they are covered appropriately?
Mike: Sure. So, when we look at what is required of an association, there’s a few different places that I look. So, there’s a statute that governs each type of association. Those statutes have insurance requirements within them. That’s the first step. The second step, you would look at the association’s governing documents and those documents are going to set forth what are the association’s insurance responsibilities. The specific type of association insurance that the board members should consider depends on those factors. Some other factors are the size of the association, the types of amenities, and the potential association risks. When I talk about amenities, for instance, you might have a clubhouse, you might very well have a pool, some associations we represent have parks, so have playground equipment. All of these different factors need to be considered when determining what type of insurance you have and to what extent how much insurance you carry.
Bernie: So, let’s get into some of the different types of insurance that condo or HOA may have, Mike, and let’s start with property insurance first.
Mike: Sure. So actually, I want to take one step back on that. So, there’s such a term in insurance, general liability coverage. You can Google, you can look up what general liability insurance covers and that can be broken down into a couple other things then, and that’s what you just referenced, Bernie was property insurance and that covers damage to the, again, the common areas, common elements, the buildings, the structures within the community. Going to what I said, clubhouses, playgrounds, swimming pools, parking garages, that’s property insurance and that is a component of general liability insurance. So that’s component one, property insurance. You then have liability insurance. A general liability insurance policy covers property insurance, and it covers liability insurance. The liability insurance is when you start talking about the slip and fall, any other incidents that take place on the property that could result in bodily injury or damaged property. So, property insurance and then you have liability insurance. Those are the two things or components that make up your general liability insurance policy that most associations are required by law and by the governing documents to have.
Bernie: And outside of insurance that protects the property. Mike, there’s also insurance that protects the board members.
Mike: That’s correct. So, another component or another required item under the statutes and under the governing documents is what’s called directors and officers insurance and what that does is it protects the board of directors against simple negligence, against mismanagement of funds. Really, what is it’s a backstop to the board of directors. It’s what protects them. We ran into situations where board members would ask us frequently, why do I want to serve on a board of directors when if an error is made, if something is done negligently but not willfully, that’s a big distinction as to whether or not that type of insurance is going to cover what you do. The directors’ and officers’ insurance are intended to protect the board of directors in doing their job. They have a fiduciary duty to act in a certain way and your fiduciary duty if you make an error in doing that and exercising that judgment, that’s the purpose of directors’ and officers’ insurance.
Bernie: Property insurance, director officer insurance, what other types of extra insurance would an association need, Mike?
Mike: Okay, so the other types of insurance that are available to associations, for instance an umbrella insurance policy and what an umbrella insurance policy is is really excess liability. So, anything over and above or something that might not be covered by your general liability policy is somewhere or something that might trigger your umbrella insurance policy. For instance, I personally have an umbrella insurance policy over and above what insurance I already have for my situations personally. What it is is it’s a backstop. It allows you to have coverage for things that might not be covered due to some type of exclusion in your general liability policy. An additional type of insurance that we see frequently is a worker’s compensation insurance policy. A worker’s compensation insurance policy is highly recommended for associations that have employees. So, if you have somebody who is your onsite maintenance person, could be anybody who you employ as an association, that policy would cover the association for lost wages, medical expenses, rehabilitation costs, really anything that could happen based on an injury of somebody on your property who is an employee.
Bernie: So, insurance isn’t just a good idea in some cases, like you mentioned, it’s required by law and there can be serious consequences if you fail to protect your association. Is that right?
Mike: That’s correct. So, there’s a couple things to think about here, right? So, if you talk about not having the proper insurance, you’re talking about being underinsured, you’re talking about missing coverage or violating insurance provisions outlined in the association’s documents or statute, you are opening yourself up to liability. Unfortunately, being on the legal side of this, I see the catastrophic scenario where an association obtains the wrong type of insurance. So, the declaration for example, says that the association is supposed to ensure the structures. So, when you ensure the structures, I know that that’s talking about it being a condo style policy, which is an HO6 policy. I have had over the years unfortunately, had to be involved in situations where an association has had HO-3 insurance, meaning it was a homeowner’s insurance policy where they did not insure the structures, but the governing documents required that the association ensure the structures. That resulted in a very large gaping insurance poll where the association was on the hook for massive damages and in that case that I’m thinking of was a hail damage scenario where they had hundreds of thousands of dollars’ worth of damage that was not covered by the association’s policy or the owners and the entity who was in the wrong was the association. They failed to obtain the proper insurance and it resulted in a massive special assessment that everybody then had to pay in and those are not pleasant meetings or information to have to give to clients.
Bernie: It’s interesting cause I was on the other side of that as an owner in an association where we did have a catastrophe where there was a car that went into a fountain area and just like you’d mentioned before, due to under insurance, we did have to look at our reserves in order to cover that stop gap where we didn’t have enough insurance to cover a new lining for the pond, fountain maintenance, the landscaping work that had to be done. So, I think there are day-to-day practical issues that are not always necessarily a catastrophe or something like you said, or something like a car running into a fountain. It can be just as simple as hail and not having enough coverage to deal with the implications of having a ton of dents in a clubhouse roof.
Mike: And this kind of goes back, kind of dovetailing this, this kind of goes back to just like anything else, insurance is one of the single biggest things that we, from a legal standpoint, deal with. And at the end of the day, it’s something that the association is better to be out in front of, to be knowledgeable about. If you think about it, working with professionals, having a very good insurance broker and insurance agent, working with legal to make sure that they have the proper insurance in place, management can be involved in that as well. Professional management deals with insurance companies and insurance policies all day, every day. It’s a team situation where you get together with your professionals to make sure you have the proper coverage and we’ll also point out there’s scenarios where insurance brokers or insurance agents get it wrong and recommend the wrong policy cause I’ve seen that happen a couple of times where an insurance broker has written an inadequate policy and that starts another fight. Now you’re battling with your insurance company or your broker because you didn’t get the proper insurance based on what the documents required. Again, it comes back to, one of the top couple things that boards have to deal with is making sure they have proper insurance. It’s also one of the biggest expenditures for associations, right? So, your snow and your landscaping, where you spend your money, your insurance is a very high-ticket item that you spend a lot of money on. You want to make sure that that money is being spent on the appropriate thing so that when something happens, you actually are covered.
Bernie: KSN is committed to educating our clients and the community. As a service to our current and prospective clients, we’ve authored and compiled a number of educational resources for condo, HOA board members, property managers, landlords, and real estate professionals. If you visit ksnlaw.com/education, you’ll be able to review our educational resources, including articles, legal updates, booklets, podcasts, laws and ordinances and more. You can also sign up for the KSN newsletter where over 30,000 peers receive free industry news, legal updates and details on our upcoming events.
Bernie: And going back to something you mentioned, because every association is unique, board members are volunteers, they’re doing the best they can with the information they have, like you mentioned, it’s a team effort, leaning on the professionals, the people who know the industry and in recent events, a big impact on the condominium community association industry was the tower collapse in Surfside Florida and that caused a higher scrutiny on a lot of issues involving community associations and particularly insurance coverage, right?
Mike: You’re absolutely right. So, you just hit it on the head. The Surfside collapse in Florida absolutely put a spotlight on a number of things. It put a spotlight on financing, which is a separate discussion, but it put an even bigger spotlight on insurance because that was a catastrophic scenario, right? A building collapse, that God willing is a very rare scenario but what it did for the entire industry nationwide was force us all to look at proper insurance, making sure that you have everything lined up to cover yourself because the lenders Fannie Mae, Freddie Mac, based on that outcome, they are highly scrutinizing all of what an association is doing as it relates to their reserves, their insurance. They want to make sure that if they are lending to any owner in an association or if the association is taking loans, they want to make sure that they’re properly backstop, that the association’s board are doing the right things and insurance is one of the big parts of that.
Bernie: So, you mentioned earlier, Mike, how you look at the law that’s out there that’ll determine insurance coverage requirements, but you also look at governing documents and again, every association is unique, so those governing documents are unique. You’re working with hundreds of associations, which means hundreds of board members, hundreds of property managers. When you’re looking at what those governing documents should entail, what do you look at?
Mike: So, you have your initial set of governing documents and one of the things I deal with, and we touched on it already, is again, the difference between who ensures the structure and who doesn’t. That is all going to be outlined in the governing documents, and we say governing documents, that’s the declaration, bylaws, rules and regulations, but the declaration and bylaws are recorded covenants against the property. Those documents absolutely are the roadmap for coverage. They will sometimes state in there how they determine coverage and what amounts of coverage are required. Each one of those, there’s no one size fits all. You have statutory guidance that tells you this is what your association should have. Then you take the next step down to look at the governing documents to see how exactly that association has decided how they’re going to be covered into what amounts. I look at many of these a day, and I can tell you that there is no one size fits all. Every association and every developer declarant who forms the association deals with it differently. And KSN does a lot of amendments to clarify, to sometimes shift the burden. A great example is townhome associations, right?
So, they have shared roofs. This is the world’s best example, in my opinion, to talk about the different types of policies. An association could very well have been set up, a townhome association with shared roofs where each individual is responsible for ensuring their structure. My personal opinion, and I believe shared by a number of my colleagues, is that it’s more appropriate that that would be insured like a condo style, because you want the association to have control over the insurance of the structure for uniformity. If there was a catastrophic loss, for instance, a fire that burned a couple of different units, if you did not have the HO-3 insurance, meaning the homeowner’s type, where the association ensures the structure, you would have a myriad of different insurance companies out there coming out to adjust that loss. You would have potentially different contractors out there, even though the two units touch each other, you would have these two insurance companies trying to draw a line and decide where their responsibility ends and when the next insurance company kicks in. One of the things that we’ve seen too is sometimes one of those people in that loss will not have insurance period or not have enough insurance. You now have a gaping hole in the middle of your building because there was not enough insurance or no insurance, and that’s the catastrophic scenario.
Bernie: So, lots of moving parts, different types of insurance, different types of coverage. You have the law, industry standards and practices. Again, board members are not professionals, but leaning on professionals who understand this will serve them best to make good decisions for their community, for their associations. Because again, we’re talking about maintenance issues, financial stability, all of the things that make the association maintain its property values and like you were saying, working with attorneys, working with insurance professionals, clearing up vague language that can lead to confusion. That’s what you’re there to do to help community associations with these types of insurance issues.
Mike: 100%. insurance is one of the big ones that when it rears its ugly head, it’s usually too late and that’s why it’s so important that you get ahead of this particular topic, you work with the professionals, your attorney, again, you said it, your professional management because they are intertwined and they have experience and you may be experiencing a loss for the first time, but your professionals have dealt with it many times. So, we have unfortunately had to deal with them and you want to make sure you lean on the professionals, your team, the people who are there to support you, to help you ensure that if and when something happens, an insurable loss, that you are properly protected.
Bernie: That was KSN attorney, Michael Kreibich. Do not hesitate to contact our law firm if your condominium homeowner, or townhome community association has questions regarding insurance coverage, insurance provisions in your governing documents, legal requirements, or other legal concerns. KSN is an experienced legal resource ready to provide you with quality advice and exceptional service. We look forward to demonstrating how we’ve earned the trust of thousands of clients since 1983. If you’d like to reach Mike or any of KSN’s experienced attorneys, please call 855-537-0500. You can also visit ksnlaw.com and complete the contact form to send us a message. Thanks for listening.
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Please note the material contained on the KSN Podcast is for informational purposes only and does not constitute legal advice. No attorney-client relationship is established by your review or receipt of the information contained on the KSN Podcast. You should not act on the information discussed on the KSN Podcast without first obtaining legal advice from an attorney duly licensed to practice law in your State. While KSN has made every effort to include up-to-date information on The KSN podcast, the law can change quickly. Accordingly, please understand that information discussed on the podcast may not yet reflect the most recent legal developments. Material is not guaranteed to be correct, complete, or up to date. KSN reserves the right to revise or update the information and statements of law discussed on the podcast at any time, without notice, and disclaims any liability for your use of information or statements of law discussed on the podcast, or the performance of the podcast generally. The KSN Podcast may be considered advertising in some jurisdictions under applicable law/s and/or ethical rules/regulations. © 2023 Kovitz Shifrin Nesbit, A Professional Corporation.