HOAs and condominium associations can be sued for accidents on HOA property and director negligence or misconduct. In addition, HOAs must cover the cost of vandalism and property damage to common property.
Directors and officers, trustees, employees and even volunteer board members can be held personally liable for decisions and actions taken by a community association. Insuring your homeowners association (HOA) against the many risks associations face is critical.
Luckily, HOA insurance (aka community association insurance) covers many of these risks. It protects the association, its board members and its employees against significant financial losses. An independent agent specializing in HOA insurance can create a plan for your community association.
Homeowners and condominium associations and their respective boards face legal liabilities, such as:
- Injuries sustained in common areas
- Property damage to common areas and buildings
- Housing discrimination
- Employment discrimination
- Architectural disputes
- Inadequate reserves
- Negligence and misconduct
- Stopgaps when state immunity laws fall short
Start with the basics
Knowing your HOA’s structure and legal requirements will help you determine the extent of your risk. For example, are all residents required to join the HOA? Does the HOA have the authority to charge monthly fees and make assessments? Who maintains those funds? What enforcement powers does the HOA have?
HOAs and condo associations are governed by their articles of incorporation and bylaws, but they also have covenants, conditions and restrictions (CCRs) that their members must comply with. It’s helpful to make a list of all of the risks you know your association faces. Pay close attention to the following:
The property you must maintain. If it’s a condominium community, the HOA is responsible for the building that houses each unit and the common areas. Common areas include the lobby, fitness center, parking lots, commissary and other businesses within the building, as well as outdoor spaces. Some communities may have playgrounds, swimming pools, tennis courts, golf courses, clubhouses, private roads, airfields, streetlights and sidewalks. The more amenities your community has, the more liability you incur.
Your HOA’s CCRs. Some HOAs place strict conditions on the use and maintenance of members’ units or homes. These can include the color and style of the exterior, whether a unit can be rented, if pets are allowed and the height of fences. Does your HOA assess fees or place liens on homeowners’ property if they violate your covenants? Do you have the power to foreclose on a delinquent member? Make sure you’ve got enough liability coverage to handle a discrimination claim.
The fiduciary responsibilities of your HOA. Does the HOA have a formal budgeting process? Does it have a reserve fund? Are the HOA’s finances audited? Who has the authority to write checks and spend money? You’ll need to cover your losses for employee crimes and board mismanagement.
The management of your HOA. Is the HOA run by volunteers, or do you have a management company? Do you have guidelines to ensure proper board conduct, identify conflicts of interest and resolve complaints? Does the board seek outside advice on accounting, legal and insurance matters? You’ll need coverage for things like mismanagement and fraud.
General liability insurance helps pay for bodily injuries and medical expenses if someone is hurt in an incident covered under your insurance policy. For example, someone might slip and fall on your walkway, or their car might be hit by a falling branch from one of your trees. If you’re sued, your general liability insurance will also help with your legal expenses and settlement costs.
In addition, general liability insurance covers advertising injury, libel and slander, copyright infringement and using another’s advertising idea. It can also be written to cover injuries caused by mobile equipment your workers use on your premises. Mobile equipment is equipment that is primarily used for something other than transportation. It includes drivable machines like backhoes, forklifts and snowcats. General liability responds if your worker injures a third party, like a resident or guest, while operating a mobile machine.
Liability policies are written with a maximum payout amount, known as a “policy limit.” Your application for coverage will be evaluated based on several factors, like the number of members in your association, the location, the property type, the property’s age and condition (including recent inspection records), the association’s claims history and other risk liabilities. Your application may require an inspection by the insurance carrier and documentation of your risk management and governance programs.
Property insurance covers the HOA against fires, theft, vandalism, burst pipes, lightning, windstorms and other perils named in your policy.
Remember that mobile equipment like cherry pickers, mobile lifts, Bobcats, Gators and other utility vehicles are not considered automobiles. Liability for damage caused by their use typically falls under general liability insurance. However, if someone drives one of these vehicles on a public road and gets in a wreck, your general liability insurance will not respond. Ask your agent about coverage for physical damage to your equipment on your premises.
If your HOA has commercial vehicles, you’ll need commercial auto coverage. Ensure everyone who drives these vehicles is named on your auto policy. (More on this later.)
Earthquakes, floods and sewer backup
Some HOAs purchase additional insurance for floods and earthquakes, which are not covered under standard property insurance. Many commercial property policies exclude sewer and drain backups, as well as equipment breakdowns. Talk to your agent or broker about coverage for these risks. You can add coverage to your property policy or buy a stand-alone policy, depending on your insurer.
HOA master policies
Rather than purchasing separate policies for general liability and property insurance, many HOAs secure an HOA master policy. Master policies combine general liability and property insurance.
A master policy covers all of the property owned by the members of the association, which includes structures and common areas. Members of the association are issued certificates of insurance as evidence of coverage under the master policy.
Condo master policies cover your buildings and can be written as either “bare-walls” or “all-in” policies. Bare-walls (or “studs-out”) policies cover the structure of the building and anything owned collectively by the HOA. However, they don’t cover the interiors of units. All-in coverage is more comprehensive. It covers the fixtures in each unit and any improvements or additions made to the condo building. Condo owners must individually insure their units from the “walls in” by purchasing what’s called an HO-6 insurance policy.
Educate your condo owner-members on property liabilities
Some HOAs require member-owners to maintain a minimum amount of insurance on their units. This strategy helps mitigate losses if a property claim extends beyond a single unit. If a water leak on the fifth floor causes damage to all the floors below, there will be some recourse to recover damages. And if a unit owner’s home is destroyed by fire, they’ll have resources to rebuild, keeping property values stable.
Some condo owners mistakenly rely on their HOA’s master policy for their coverage. It’s in your HOA’s best interest to host an insurance information session to educate your condo owners on all things insurance.
Talk to your agent about these frequently overlooked liabilities
Your liabilities may go beyond a standard master HOA policy. Check with your insurance agent to clarify your liability for the following frequently overlooked liabilities.
Workers’ compensation insurance
Workers’ comp covers HOA employees injured on the job. Depending on your association’s operations, consider volunteers and temporary employees as part of your protection package. Temp services or gig workers could sue you for injuries. Make sure you understand the insurance coverages of anyone you employ for services, including contractors and their subcontracted employees. Ask your lawyer to review any new or renewing work contracts.
Commercial auto insurance
Auto insurance is important for any association transporting guests or offering valet services. Tell your agent if you use golf carts to transport residents, guests and employees. You might have to adjust your auto or liability coverage depending on how your state treats golf carts.
Understanding how your employees use their own vehicles at work is also critical. If your employees drive their cars for work-related reasons, even errands, you’ll need hired and non-owned auto (HNOA) coverage if they get in an accident. You can add HNOA to your commercial auto policy.
Fidelity bonds are used like insurance to protect your HOA against employee and board member theft and fraud. If your association offers its employees a managed pension, a 401(k) or another retirement plan, the Employee Retirement Income Security Act (ERISA) requires you to have fidelity bond coverage. You’ll be covered if a trustee or employee pilfers your retirement funds.
Employment practices liability insurance
Employment practices liability insurance covers the HOA if an employee sues for discrimination, harassment, wrongful termination, failure to promote or another employment-related cause.
Directors and officers insurance
Directors and officers (D&O) insurance covers the association and its board members. HOA leaders have a fiduciary duty to the association, which means they must make informed decisions in the best interest of the HOA that are within their scope of authority. In the event of a claim, D&O helps pay your legal costs and any judgments against you.
There are three parts of D&O coverage that you can customize. Think of a D&O policy as a first-come, first-served payout. If it reaches its coverage limit before every board member is named in a lawsuit, they’ll be without coverage. Educate your board members on your association’s D&O policy. That way, they’ll understand their liabilities and can choose to buy additional coverage independently. People can also purchase personal D&O policies.
Some state legislation provides conditional legal immunity for association board members, but you shouldn’t rely on that. It may not stand up to a complex, rigorous lawsuit.
Commercial crime insurance
Commercial crime insurance (aka business crime or employee theft insurance) covers employee theft, like credit card forgery, computer fraud and theft, and the disappearance or destruction of property. A general liability policy will not cover your losses for acts committed by or involving an employee.
Cyber liability insurance
Cyber insurance responds when your HOA is involved in a cyberattack. Remember that cybercriminals hack computer networks for all sorts of reasons, not just for immediate financial gain. They do it for sport, information and political reasons (aka “hacktivists”).
Even if you don’t store financial information on each member, you could be held accountable if the personal information of members or employees is leaked. For starters, you might be required to pay for free credit monitoring services, which can cost between $10 and $40 per individual per month. You may experience negative press. Additionally, you’ll need to rebuild your network and data. Hackers often return to try their attack again, so you’ll need to spend on reinforcing your cybersecurity.
A cyberattack can be extraordinarily complex and costly. Cyber insurance can help offset some of those costs.
Plan for your planned community
Clear and fair HOAs are critical to the governance, planning, maintenance and improvement of planned communities. Protect the assets of your community, your members and your board.
Give us a call today to discuss your insurance needs!