“Operate under the premise that your property insurance policy will pay for damage to whatever your condominium declaration requires to be insured. While not universally true, it should cause you to look closer at your documents.”

Insurance 101 for Associations Duncan Kirk

Protecting the assets of the association is a board of director’s primary responsibility, one not to be taken lightly. This covers the full gamut and, when it comes to evaluating risk, the board must determine whether it should be assumed, transferred, mitigated, eliminated or financed. Here’s the good news from an insurance standpoint: Your association’s declaration (also known as CC&Rs) includes a section specifically labeled “Insurance,” which has guidelines for what insurance coverage the association must procure. Here’s the bad news: This same section can be your undoing if not complied with as outlined in the declaration.

For a condominium association, establishing what property coverage should (or may) be purchased is potentially fraught with problems for the layperson. Many insurance sections are ambiguous in both the scope of property to be covered and the perils to be insured against. Operate under the premise that your property insurance policy will pay for damage to whatever your condominium declaration requires to be insured. While not universally true, it should cause you to look closer at your documents. If you can’t understand what they say, then put yourself in the insurance company adjuster’s shoes, since the adjuster is going to determine what property damaged in a claim will be covered. Common Elements, Limited Common Elements, and the Units—called Apartments in “Old Act” condominiums’ governing documents—are typical terms used for property to be insured. Unit coverage may be further expanded to include fixtures, equipment, and improvements to the Units. There are a few questions to ask about Unit coverage: Does coverage include only as-built improvements, or also those installed by the Unit Owner? Does “fixtures and equipment” coverage include appliances?

The policy will usually include language to the effect that the property must be insured to “full replacement cost.” If you don’t know what property is being covered (e.g., Unit owner improvements, underground utilities, fences, foundations, and appliances in the units) then how are you assured that you have fulfilled your responsibility for the Association’s insurance obligation? Buying a policy with an Agreed Amount, Extended Replacement Cost, or Guaranteed Replacement Cost endorsement definitely provides additional coverage, but doesn’t relieve the board of the responsibility of knowing what is, and can, be insured, and the value of what is being insured. Getting a third-party replacement-cost appraisal is good risk-management consideration. If your association buys earthquake coverage, for instance, there is a wide variety of other considerations in terms of coverage and exclusions— but that’s a topic for a much longer article!

Here are two other considerations for property insurance and risk management. First, as a board, it is important to understand what the association’s property policy covers and where the line is between this policy and the Unit owner’s personal insurance. For an example, an “all-in” association policy covers the Unit equipment, fixtures, betterments, and improvements. What is the owner responsible for in this instance? Remember too that under the Washington State Condominium Act, RCW 64.34 et seq., a condominium association’s policy is primary in the event of duplicate insurance on the same components inside a Unit.

The other consideration is for the board to understand what factors affect the property premiums. You cannot change the building’s age of construction or construction type, but a board can certainly try to keep premiums down by ensuring proper maintenance and replacement of high-risk components such as water heaters, functioning batteries in smoke detectors, and replacing problematic components such as aluminum wiring. Allowing barbeques on decks is another “hot” issue these days, especially in wood-frame buildings.

For a homeowners’ association, the need for property insurance is reduced to coverage of the Common Elements (also known as Common Areas), which is a much simpler proposition. However, more recently, we have seen the requirement for a homeowners’ association to be required to maintain and repair the exterior of townhomes. Can you see how this might lead to confusion?

While the focus of this brief article has been property driven, remember that all associations must purchase General Liability, Directors & Officers, and Crime coverage. Non-Owned & Hired Automobile and Umbrella Liability are also recommended. These types of insurance coverage are relatively inexpensive. But, unlike property coverage, where the loss is more readily quantifiable, liability losses can be unpredictable, expensive, and very stressful. A lawsuit against an association may also affect Unit sales. A good risk-management program should be in place to address life safety, trip and falls, and contractual transfer, among other considerations. Adhering to the association’s documents will go a long way to protecting the association against legal claims.

In closing, well-run associations surround themselves with trusted advisors such as a management company, legal counsel, an accountant, and—yes—a specialist insurance and risk-management firm. Shop for the best representation and you’ll be well served.

22 Community Associations Journal | October 2014