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California HOAs Need Workers Compensation Insurance to Protect Association from Claims

Elliot Katzovitz — Wed, 12 Oct 2011 21:43:04 +0000

Appeals Court Ruling Leaves HOAs vulnerable to Workers Comp Claims

If you and your association are under the false impression that you don’t need work comp insurance because you don’t have anyone on payroll, think again because you could be in for a nasty surprise. Just ask the Montana Villa Homeowners Association who are now facing a back-breaking settlement which could easily reach a sum into the millions.

On April 11th, 2007 the Court of Appeals issued a far-reaching decision in the Heiman vs. Workers Compensation Appeals Board case which could establish future precedent for HOA associations. The ruling means your association could possibly be held liable to pay workers compensation benefits to an injured worker employed by an uninsured and unlicensed contractor.

How did this happen? The association, after reviewing three bids to install rain gutters, decided to go with the lowest bid ($1050 for a 2 day job) and hire Rubes Rain Gutter Service (who happened to be uninsured and unlicensed) . Rubes then hired, Freddy Aguilera, a day laborer to perform some of the work for $65 a day. On the first day of the job, Mr. Aguilera touched a high voltage power line with the metal rain gutter and was severely injured, leaving him 90% permanently partially disabled. (In basic English this means you owe the injured employee 90% of his future earning potential plus 100% of all injury related medical bills) The Work Comp Appeals board originally found that only the property manager was jointly liable with the contractor for the paying the injured workers. The property manager’s work comp carrier, State Fund, appealed the decision. The court of appeals reversed the decision and found that the association was also jointly liable for paying the injuries.

Is your association at risk?
1)   Do your property manager and association require all contractors to provide proof of license and insurance when bidding for jobs?
2)   Are you and your property manager hiring only licensed and insured contractors for all jobs (no matter how small?)
3)   Can you be absolutely sure that your pre-approved contractor has not allowed a lapse in license or insurance coverage at any time during and up to the completion of the work?

If any answer is ‘no” you may not have the systems needed to fully protect your association!

Practical implications:
It is not uncommon for associations to hire unlicensed and uninsured contractors to perform activities such as landscaping and gardening. If a vendor is uninsured at the time he is performing services at your premises you become the de facto employer for that vendor and his employees. If he or any of his employees get injured while working at your association you are now responsible for paying for those injuries. There are only two ways to eliminate this exposure: 1. Make sure that your vendors are licensed and insured as of the day they walk on to your premises. 2. Purchase workers compensation insurance, like every other employer in the state. If you choose not to buy coverage, and you do not aggressively check for insurance, you are accepting a possible expense that can be hundreds of thousands dollars, when a vendor’s employee gets hurt at your association.

CLICK HERE for HOA Work Comp Insurance Claims Prevention Checklist

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Help for Property Managers Under Pressure from CA HOAs with Budget Problems

D&O Insurance Problems Put HOA Board Members’ Personal Assets at Risk

Elliot Katzovitz — Tue, 16 Mar 2010 01:22:11 +0000

One of the most common insurance problems I come across when doing risk evaluations for associations is a fatal gap in the Directors & Officers Liability coverage. What’s truly frightening is the fact that the board members I speak with often times had no idea that their personal assets have been at risk all along. The reason is that they do carry some type of D&O coverage in the form of either an insufficient add-on coverage or D&O endorsement provided with a package. Unfortunately for them, their current brokers failed to explain that as a board member they would have greater personal exposure due to the limitations and exclusions of their association’s insurance policy.

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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Help for Property Managers Under Pressure from CA HOAs with Budget Problems

Elliot Katzovitz — Sat, 13 Mar 2010 23:06:36 +0000

ARE YOU UNDER PRESSURE TO STOP THE BLEEDING AS YOUR ASSOCIATIONS LOOK TO SQUEEZE EVERY PENNY FROM ALREADY LEAN BUDGETS ?

The Elliot Katzovitz Insurance Agency understands you are under extreme pressure by your boards to cut costs and save every penny imaginable. We sympathize with your pain and thought you’d like to hear some good news for once. Rates are dropping for association insurance and more companies are now writing HOA insurance because they perceive this niche as recession proof. As a matter of fact, we have access to several carriers who are cutting their rates up to 43% so far in 2009. In addition, we have developed unique strategies for structuring your clients insurance, which can save them up to 50% on their earthquake policy. These are tough times and your clients cannot afford to waste a single dollar, so make sure that you are getting the best value for your client’s insurance dollars.

In addition, we pledge:

To act as YOUR RISK MANAGER making sure all your clients are insured properly
To REVIEW ALL YOUR CLIENTS POLICIES for compliance with CC&Rs, Davis-Stirling Act, gaps and coverage mistakes
To DELIVER MULTIPLE PROPOSALS to be sure your client gets the best insurance at a price they can afford
To provide EASY-TO-UNDERSTAND PROPOSALS with your insurance coverage clearly outlined
To provide FREE GUIDANCE & ADVICE any time you have an insurance question
To educate you on LITTLE KNOWN STRATEGIES to help your HOA contain costs
To provide COMPLETED INSURANCE DISCLOSURES so you don’t have to
To PROVIDE CLEAR CONCISE INFORMATION FOR UNIT OWNERS so they can properly insure their units without gaps or overlapping coverage
To DO WHAT’S BEST FOR YOUR CLIENT – even if it means sending you to another agent
To TREAT YOU LIKE A V.I.P.

ALL IT TAKES IS ONE 5 MINUTE PHONE CALL
TO SEE HOW MUCH YOUR ASSOCIATIONS CAN SAVE (310) 945-3000
OR IF YOU PREFER YOU CAN EMAIL OR FAX THE QUICK QUOTE FORM
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Vital Insurance Information Your Current Agent Doesn’t Want You to Have

Elliot Katzovitz — Sat, 13 Mar 2010 12:44:40 +0000

As a responsible agent and an expert in association insurance, I feel compelled to educate board members on the most common mistakes made by agents when bidding association insurance. If you are not careful, you could end up purchasing a “Broken Policy” with overcharges, missing coverages and gaps that can leave you and your association and vulnerable to unnecessary liability risks and financial losses.

1. Does your policy comply with your CC&Rs?

If your current agent is not an expert in association insurance then he may never have read your association’s CC&Rs. Even if he did, he may not have understood what they dictated for coverage. There are no standard rules when it comes to associations and what is required. The only way to do it properly is to read the insurance clause of the associations CC&Rs and understand how they need to be applied as well as the coverage that they dictate the association purchase. If your association’s insurance does not properly reflect the coverage that is needed to comply with your CC&Rs, you will find out when the claim happens that you most likely have coverage gaps. This will create losses that could have and should have been covered.

Here is an example of what I am talking about:

An association’s CC&Rs dictate that the association is responsible for insuring the interiors of the units. The agent writes a policy that excludes the interiors of the units. A pipe breaks causing water leakage in a unit. The master policy denied coverage because the policy excluded the unit interiors. The unit owner then submitted the claim to his carrier and they denied it also because they said they had no responsibility to pay the claim under the association’s CC&Rs. This ended up being a claim that the association got sued over and was forced to pay out of its own pockets. You don’t want this to be you.

2. Does your policy comply with the Davis Stirling Act?

Most agents are completely unaware that the State of California has laws that govern the amount of coverage that an association must carry. If an association is not in compliance with the Davis-Stirling Act, you could be exposing all of the owners and the individual board members to potentially being sued individually in addition to the association being sued.

3. Missing Coverage

Not all contracts are the same. There are some coverages that are necessary for all associations. There are also coverages that are only necessary for certain associations and not for others. Many of these coverages will probably be meaningless to boards until they have a loss that is not covered because it is missing from their policy. It is many of these coverages that will affect the price of an insurance policy. When an association shops policies it is amazing how many of these coverages are dropped off the contract in order to create a better price. As the saying goes, “you get what you pay for.” Here are some examples of types of coverage that will be left off contracts and can come back to haunt associations later:

•   Back up of Sewers and Drains – Say, for example, that unit 301 snakes its drains and the clog simply relocates down to unit 101’s plumbing and starts backing up there. The owner of 101 comes back from his three week vacation to find a foot of sewage throughout his unit. If the coverage is excluded or extremely limited, you are going to be in big trouble. This is the 2nd most common form of loss that associations have.
•   Liquor Liability – If your association allows parties that serve alcohol in the common areas of your association, you need this coverage. This protects you if one of the guests leaves drunk and gets in an accident and a third party sues the association for having allowed him to leave drunk.
•   Boiler and Machinery – This provides coverage for off premises electrical failures as well as the breakdown of association equipment such as elevators.
•   Property manager failing to be added to the Directors and Officers coverage. Please see the “7 Stupidest Claims” article for an example of why this is important.
•   Building Code and Ordinance Coverage – This provides payment for items that are not currently part of the building, but would need to be added in order to rebuild after a claim. A common example is the need to install a fire sprinkler system in your building. If you don’t have this coverage you will be paying for it out of your pocket.

These are just a few of the many types of coverage that could be missing from your contract when you are bidding on a policy.

4. Replacement Cost

One of the other common errors is evaluating the correct cost of rebuilding your building. There are two problems that could potentially occur. Your property could be under valued. If you do not have enough coverage, your insurance company may reduce the amount it pays you by the percentage that you are underinsured plus a penalty. If the property is over-insured you are going to be stuck paying for coverage that you don’t need to.

There are only two ways to beat this problem. One is to use an agreed value contract instead of a stated value contract. This shifts the burden of valuation onto the insurance company and away from you. Two is to have a very accurate Marshall & Swift replacement cost worksheet done for you annually and based on recent construction data. This way you have something to justify your valuation to the insurance company when the claim occurs.

5. Use an independent broker that specializes in condominium association insurance

You want a professional that is able to evaluate your needs and find you the right policy based upon those needs. State Farm, Farmers and Allstate agents are restricted in what they are able to sell you. They must sell their companies’ products if they have one, even if it isn’t the right policy for your needs. They have to do this because they are the company’s representative, not yours. You need to have an insurance professional to represent you. This is no different than hiring your attorney or CPA. Insurance is complicated. You need to have a trustworthy professional that will honestly compare the alternatives. Someone that will provide you with all of the alternatives and explain what the differences between the contracts are, as well as letting you know if those differences are of importance to your associations.

Our agency prides itself on being at the height of professionalism. We would be happy to review your current policy and help you understand what you have as well as what you need to properly protect your association.

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7 Common Mistakes Made by Agents on HOA Insurance

Elliot Katzovitz — Wed, 10 Mar 2010 15:34:00 +0000

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.

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