This very disturbing occurrence is not due to any sinister plot but rather;
1) Most agents don’t specialize at insuring condo associations and don’t really know how to properly insure an association
2) Many agents do not take the time to truly understand D&O insurance because it is not a big moneymaker like property and general liability
3) Agents with big captives like State Farm & Allstate etc. can only write their own D&O products no matter how inadequate they are for the client’s needs
4) Some agents try to make things “easier and more convenient” for the board by placing all insurance with one carrier, not understanding the limitations of the contract just sold
5) Some associations may try to save a few pennies by choosing an endorsement over a stand-alone policy costing just a little more money

Now that you know how insufficient coverage gets written in the first place, let me go over some specific holes in coverage that exist in a typical D&O add-on or endorsement.

HOLE #1 – Matters of Insurance Are Excluded
This exclusion is on each and every one of the Directors and Officers endorsements I’ve read. It’s important because it means that if the board gets sued for having failed to purchase enough coverage or the right coverage for the association, the board is not protected and will need to provide its own defense and settlement. The reason that this exclusion exists on the endorsement is because a carrier does not want to end up covering property or liability claims that it just got done denying on the property or G/L portion of the policy.

Here’s an example of how this happens.   For instance, the sewer backs up into one of the units causing $30,000 in damage.  It turns out that the policy either didn’t offer the coverage or it was left off to make the premium cheaper, and now there is a $30,000 uncovered claim. The unit owner that has sustained the damage sues the association for having failed to purchase necessary coverage. The company that just denied the sewer claim will now deny the defense for the lawsuit because matters of insurance are excluded.

Another common issue that comes up is that the unit interiors have been insured incorrectly, and now coverage is denied because of it. As a result, the board gets sued for failing to procure the correct insurance; once again the insurance company will deny the claim because of matters of insurance. Believe me these types lawsuits happen more often than you think.  In my experience, I’ve found that unit interior coverage errors occur quite frequently, in large part because most insurance agents either don’t know how or simply don’t take the time to read the association’s CC&Rs.

HOLE #2 – Property Manager Excluded
Many of the Directors & Officers endorsements that are added-on will only cover those people that are part of the primary named insured.  A property management company is neither an employee nor a member of the board and therefore is not part of the primary name insured.  When the property management company gets added on as an additional insured they are only added to the general liability coverage which does not extend to the D&O coverage.  I know of one of these endorsements that will allow you to add the property manager to the contract, however, the additional premium they charge makes the endorsement more expensive than a superior stand-alone contract would be.

Now you may wonder why a property manager needs to be part of an association’s policy in the first place. Well there are two good reasons;
First- The actions of the property manager could possibly trigger a suit against the board.  For example, a member asks for all of the minutes for the past three years, and the property manager makes a mistake redacting the minutes and accidentally leaves in an owner’s name in one spot on the minutes.  The board and the property manager get sued for failing to comply with privacy laws.  The manager will get their defense from their E&O insurance but the board will be left providing their own defense because the property manager is not an insured under the endorsement, therefore there is no coverage
Second- It’s in your contract with your property manager. Most association management companies require that you name them to your insurance for all forms of liability coverage. D&O endorsements don’t enable you to properly comply with these contracts.  If you and the management company don’t catch this error then you could be in for a nasty surprise later. All it takes is for the board to get sued with the management company getting named as well. Then, guess who has to pay for the property manager’s defense? You and the association get the privilege of footing the bill.

If you are a property manager you need to be worried about this as well. Many E&O carriers make you warrant that you have been added to the D&O coverage of all your associations. BEWARE! Allstate and State Farm D&O endorsements will not cover you when a D&O suit happens. (Don’t take my word for it -Ask your agent to get a letter from their claims counsel on the matter and see if I am right) Remember, when you, the manager, do not comply with your warranty, you have triggered  an exclusion in your own E&O policy.

HOLE #3 – Exclusion of Non-Monetary Damages
Most of the endorsements do not provide coverage for non-monetary suits.  That means that if the board gets for something other than money there is no coverage.   An easy example is that you are being sued to get an injunction to enforce a rule, or to execute repairs and maintenance to the complex.

HOLE # 4- Full Prior Acts Coverage
State Farm, Allstate, and OneBeacon all write their coverage on an Occurrence Basis.  If the D&O coverage that they are replacing is written on a Claims Made Basis, if there is no tail coverage purchased of offered, you are walking away from years of coverage. If a prior board gets sued or the current board is sued for an event that occurred prior to the policy period that you have purchased you have no coverage.  The State Farm, Allstate or OneBeacon endorsements won’t pick up coverage because it didn’t occur during their policy period.  The previous policies will not provide coverage because there is no coverage on a Claims Made policy. Once the policy expires, your coverage is over unless you purchase a tail from your previous carrier.

Unfortunately Farmers writes on a Claims Made Basis and does not offer tail coverage for its expiring policies. The only way to properly protect the board is with a policy that provides Full Prior Acts Coverage; an occurrence contract can’t do that. Therefore, you need to purchase separate D&O policy with Full Prior Acts coverage to properly protect the board.

CLOSING THOUGHTS
Without a doubt, a Directors and Officers stand alone policy is far superior to the minimal amount of coverage provided by a package policies D&O endorsement.  However, you must be careful not to be misled by an agent who is unaware of the fine nuances of D&O. If you have an agent that doesn’t know condo insurance, he won’t understand why a seemingly small difference in coverage now can and will cause big trouble later when a claim happens.  If you are dealing with a captive agent such as Farmers, Allstate, State Farm etc., then he/she has no incentive to explain the defects that are in his contract because he only has one contract to sell, and sell he must.  That is why it is important to find an agent with the knowledge and experience who can help you sort out fact from fiction. As condo insurance experts, with a current roster of 178 associations, we can to guide you through all the complexities and help you obtain the correct coverage for your association. If you have any questions and would like a free no obligation insurance risk evaluation, please call us at (310) 945-3000.

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Related posts:

1. Southern California Association Board Members and Property Managers Praise Insurance Agent
2. Vital Insurance Information Your Current Agent Doesn’t Want You to Have
3. 7 Common Mistakes Made by Agents on HOA Insurance

As anyone that specializes in associations can tell you, condominium and homeowners associations have many unique issues. The same is true for the insurance they require. These associations are not like any other commercial entity in many ways. It takes an expert in this type of insurance to properly evaluate what is needed and what is missing from an association’s policy. These are the most common problems that occur in HOA insurance, and why these errors are a potential problem for your association.

1. Wrong Coverage for Unit Interiors Who is responsible for covering the unit interiors is dictated by the association’s CC&Rs. In some instances, the CC&Rs will dictate full coverage for unit interiors on the master policy, and in others it will tell you to exclude them. In even other instances, the CC&Rs will dictate that the association must restore the units to the original condition they were in at the time they were built.

If your master policy is not written to match the CC&Rs requirements, then the association can potentially be over-insured or dangerously under-insured, and it can possibly create situations where coverage is purchased and then denied at the time of loss.

If the association’s CC&Rs dictate that the association’s policy provides coverage for the unit interiors, yet the agent fails to sell a policy that includes the necessary coverage, and if there is a loss that includes the interior of the unit, the association will be required to pay that portion of the loss out of its own pocket. The master policy will decline coverage for the claim because it was excluded on their policy. The unit-owner policy will also decline coverage because owners will look to the CC&Rs, which state that coverage is to be provided by the association, and therefore the owner is not responsible for paying the claim. Why expose yourself to these problems when a proper review of your CC&Rs by an expert in association insurance could help you avoid this problem?

On the other end of the spectrum, if the association’s policy provides for full coverage of the unit interiors when they should be excluded, you can end up with one of two possible problematic outcomes. The first outcome is that the association’s policy will cover the loss when it should be denying it. This will lead to higher premiums and possible cancellation from your current insurer when your policy renews. The alternative is that the association’s adjuster will review the CC&Rs and deny the claim, insisting the association has no insurable interest in the interiors. In this situation, the unit-owner’s policy should pick up coverage. However, some unit-owner contracts state that they will refuse to pay a claim if there is coverage stated under the master policy’s contract. The result could be that you have purchased the coverage twice and neither insurance company will pay the claim.

2. No Building Code and Ordinance Coverage Safety codes are constantly improving all the time in order to better protect the lives of individuals in the event of a disaster. These features are not part of a building, but after a major loss, the association will be responsible for putting them in. In addition, this coverage also pays for the demolition of undamaged portions of the building that need to be altered in order to comply with code when the building is being rebuilt.

An example of this is the installation of fire sprinklers as part of reconstruction. If they were not there originally, this coverage would pay to put them in after a covered loss. The demolition portion would pay for the demolition of the undamaged portion of the building so that sprinklers can be installed in the whole building. The property portion of this coverage would provide for the actual cost of the sprinklers.

3. No Boiler and Machinery Coverage This covers far more than a hot-water boiler if your building has one. It also provides coverage for mechanical breakdown of items such as your elevator, sump pumps and pool equipment, as well as off-premises electrical problems.

A common loss that is covered and can happen to any association is to have the transformer on the pole outside your building blow. This will cause an arcing due to unstable electrical regulation of the electrical system, which can destroy a whole building’s electrical system. Due to the fact that the cause of the loss was off premises, the only way to get coverage is from boiler and machinery coverage.

4. Inaccurate Building Values If the building is not covered for an amount that will adequately replace the building in the event of a total loss, there can be major problems, even if the building is not completely destroyed. By not insuring for the amount the building is valued at, you can trigger a policy’s co-insurance clause. Co-insurance states that if the insured has not properly valued the replacement cost of the building, the insurance company can reduce a claim settlement to reflect the proportional amount that you insured, and then reduce it further by whatever the penalty is in the contract. An example of how this works is if the actual replacement cost of the building is $1,000 and you only insure it for $800, you have now only insured to 80 percent of the building’s value. You now have a $300 loss. They will say that you under-insured by 20 percent, so if there is a 150 percent co-insurance penalty, you will be penalized 30 percent on your claim settlement. They will pay you only $210. Now subtract your deductible and that will be the check that you receive.

On the other side, if the building is overvalued, you may be paying money for coverage that is not necessary, which will end up wasting the association’s money.

How is a lay board supposed to come up with a proper valuation for the cost of rebuilding? Our solution to this problem is to provide the board with a Marshall and Swift replacement cost worksheet so that you can feel comfortable with value used to protect your assets.

5. No D&O Coverage for the Association Manager It is common to see that the manager has been left off the D&O coverage. On most policies, this is not fixed by a typical additional insured endorsement as it is with general liability coverage. They normally charge extra premium and ask additional questions about the manager to allow for the coverage. This is important coverage because an error of communication can create a situation where this type of suit can happen.

An example of this is when the board has put rules in place where late pays will not be tolerated. If you have been late two months in a row, they will begin legal proceedings against the owner. If, for example, the first month the owner pays late by a few days and the next month he is accidentally left on the list of delinquent owners, the board will file suit against the owner. The owner will counter-sue for defamation of character. Without the association manager being named to the D&O coverage, there will be no insurance coverage for the claim.

6. Employee Dishonesty Coverage Excludes Association Manager Depending on the insurance contract, the manager may be excluded from the association’s fidelity coverage. If you have one of these inferior contracts, you will find that the association is exposed and liable if an employee of the management company embezzles funds from your accounts.

7. Inappropriate Liability Limits California law requires that you have $2 million of liability coverage if the association is less than 100 units, and $3 million in coverage if it is 100 units or more. If you have less than that amount of coverage, each individual unit owner becomes susceptible to personal liability for lawsuits by the association.

These are just seven of the errors that are commonly made on association policies. There are others as well.

These errors tend to occur for two reasons:

1) The agent isn’t an expert in association insurance. If the agent is not dealing with association insurance on a daily basis, he will not be aware of many of these issues. These are fine nuances that are not common to other types of insurance. The person that handles your auto and business insurance is not the person that you want handling your association insurance. Make sure you have an expert.

2) An agent is in a competitive bid situation and believes the only item that the board is concerned about is price. You will find that he will get you the cheapest price by removing one or more of these items to gut the coverage he is selling you. Is that the price-reducing strategy you really want? It’s no different than buying a stripped down version of a car versus the fully loaded version. The difference, though, is that the items that get left off the punch list can cost you dearly when you really need it.

These possible problems are why you need an expert in association insurance to review your policy and bid your insurance. You need one agent you trust, not three that you don’t. By using an agency, you will be able to obtain multiple bids using the same standard of coverage. It will also allow you to have an expert in this type of insurance make sure that these and other potentially costly oversights do not exist in your policy.

Note: There is an email link embedded within this post, please visit this post to email it.

Related posts:

1. Vital Insurance Information Your Current Agent Doesn’t Want You to Have
2. D&O Insurance Problems Put HOA Board Members’ Personal Assets at Risk

So, what does the financial crisis have to do with condo association insurance? A couple years ago insurance carriers were in a buying frenzy, grabbing up other insurance companies and calling it growth. However, in today’s business climate financial companies no longer want to buy out other financial companies. So now, the only way for these companies can grow is by writing new policies. Cash flush insurers that are motivated to grow are aggressively pricing their policies in an effort to expand market share. Even so, not all companies are in the mood to be aggressive. Captive carriers like Farmers and Allstate are raising prices in order to maintain their profit levels. Knowing their agents have only one product to sell, they are hoping customers are lazy and renew without shopping for alternatives. On the contrary, companies represented by independent agents are pricing themselves aggressively because: 1) they expect to get shopped on a regular basis 2) they must be competitively priced because independents have no loyalty to any one company and will move business elsewhere if need be. The difference in pricing between the captives and an independent agency like ours can be as much as 53%. It’s no wonder that hundreds of condo associations have called on us for help this year.

In the current marketplace, holding on to “insurance antiques” can waste thousands of dollars from a  condo association budget as well as supplying inadequate coverage. We’ve quoted hundreds of policies in 2009 and have found savings ranging from 10-53% off the current renewal offers our prospects are receiving. The largest gaps in premiums are coming from current Farmers and Allstate customers who save on average about 22% when they switch to another A-rated carrier. The reason for the savings is that a couple of large first-rate companies have decided they want to gain market share in the condo association niche and are cutting prices so to that the decision to switch to them is a no-brainer.

On the other hand, if you are the one bringing the savings to their attention they are going to be a very happy.

As independent agents that specialize in association insurance we update values annually for every client, and then shop it to multiple carriers. We also provide a comparison of current coverage to the next best alternative available, assuring you and the client that they get the right coverage at the best possible price. All it takes is filling out our quick quote form, and fax/email it back along with the insurance clause of the CC&Rs and the current dec pages and one 5 minute phone call (310) 945-3000

Note: There is an email link embedded within this post, please visit this post to email it.