Common claims and exposures are often written out of basic HOA policies. Protect your financial health and avoid lawsuits and losses with these key coverages.
A volunteer position as a homeowners’ association (HOA) board member could end up costing you more than you imagined in legal fees—if you do not have the proper coverage. HOA responsibilities range from creating budgets to collecting dues, maintaining common areas and enforcing regulations. And because of the many roles board members assume, disagreements can arise, resulting in risk exposure.
Case in point: An HOA adopts a rule that tenants are not allowed to smoke in front of the building because it deteriorates property value. A group who’s frustrated and feels discriminated against files suit. Who’s paying the attorney fees? Without adequate Directors and Officers (D&O) insurance, the answer is the board members.
From lack of D&O insurance to overlooking a common HOA claim—water backup—we often find gaps in HOA policies that become costly lessons-learned. The good news is, you can protect yourself and your livelihood, and avoid putting your financial health on the line. The key is to understand the most common HOA exposures, how new regulations can impact coverages, and to assure your insurance policy covers all of the necessary bases.
It’s Not All About Money
You read that right. Specifically, we’re talking about non-monetary claims that are often excluded from D&O insurance. For example, a board member opts for D&O insurance as part of a homeowner’s policy. But the fine print states that coverage excludes non monetary claims. For example, an HOA removes trees on the property that degrade a unit owner’s property value. There’s no real “cost”—yet there is in terms of aesthetics and resale value. Back to the no-smoking rule, here is another instance where there is no monetary loss, but unit owners could argue it costs them freedom or convenience. Many D&O policies deny claims that are not requesting a dollar amount. So, not only is D&O coverage a must for HOA board members, assuring that non-monetary coverage is also important.
Wall-to-Wall Coverage
In Utah, Senate Bill 167 requires HOAs to carry insurance to completely cover the value of the association’s homes with a maximum of $10,000 deductible for claims. The HOA policy covers buildings, unit interiors and common area. But it does not cover personal property. Also, the bill also requires unit owners to cover their own repairs regardless of
who or what caused damage. So, if a leak occurs because of bad plumbing and destroys the floor of one unit and the ceiling of the other, each owner is responsible for his or her own repairs. The lesson here: To avoid large out-of-pocket repair expenses, find out about lower deductibles that do not cost much more when worked into your insurance policy.
Assessment Loss Endorsements
When you live in an HOA, you essentially own a share of common areas. If damage occurs—say wind destroys the roof over a club house—then all owners could be assessed a fee to help pay for repairs. Loss assessment coverage is optional but can reduce the risk of large, unexpected fees—especially if the association’s reserves are not sufficient enough to cover damages.
And speaking of reserves, for units to be FHA-approved, the association must allocate at least 10% of its budget for this purpose. How are you protecting those reserves? This is where crime coverage is also essential for FHA compliance. Case in point: If you collect condo fees of $10,000 per month, we factor in three months of income ($30,000) plus
the reserves, which we’ll say is $130,000. Therefore, crime coverage must be for at least $130,000 to be adequate.
What’s Your Backup Plan?
Common exclusions in HOA and homeowners policies include earthquake, flood and water backup coverage. And of those three, water backup is the least expensive to include in a policy and the most common claim. The need for earthquake and flood insurance varies by location. However, the average water backup claim is $20,000—and
most policies cover just $5,000. Be sure to read the fine print. A policy that shows $25,000 in water backup coverage might allow for $5,000 per occurrence with an aggregate of $25,000. So with this policy, you’re still responsible for a considerable out-of-pocket repair bill.
Are You Covered?
At the end of the day, many claims that cost HOAs, their board members and unit owners major financial losses or result in lawsuits could have been solved with these basic endorsements. But because insurance policies are not so easy to interpret, you can easily overlook exclusions or not realize that certain necessary coverages are missing.
That’s why it’s important to enlist in an insurance partner that can educate you about potential liabilities and share information about regulations that could impact your coverage.
Have questions about your HOA policy? We’d be happy to review it and answer any of your questions.