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Tips for Understanding HOA Insurance When Shopping for Coverages

Insurance coverage may be defined as the amount of risk or liability covered. It generally refers to the perils protected against and those which an HOA is exposed to without coverage. Types of coverages available to HOA's generally include commercial liability, property, crime, directors and officers, workers compensation, and an umbrella policy. Each of these may be written as a combined policies or as stand alone policies. Often times, HOA's may combine some policies while keeping some as stand alone policies to lower costs and risks.

What are the common basic coverages offered to HOA’s?

1. General Commercial Liability. This policy is designed to protect the HOA against general liabilities including sewer backup, employee dishonesty, personal injury, advertising injury, bodily injury, medical payments, hired and non-hired auto, and more. The Board should pay close attention to the coverages and gaps in its general liability policy. Cut rate insurance may be due to gaps in the policy, leaving the HOA exposed to risk hazards.

2. Property. This policy is designed primarily to cover the replacement costs of any buildings and structures existing in a HOA. When considering property coverage pay attention to the replacement costs listed in the endorsement. It may be too high in some cases. Typically insurance companies calculate the square footage of buildings with a specified square foot cost of replacement. This may be somewhere between $90.00 per square foot up to $150.00 per square foot. However, in the event of a fire or structural damage, the insurance company will only pay for the actual cost to replace the damage. This is known as the indemnity principle. According to the indemnity principle, the insurance company will replace the property damage in the condition it was prior to the destruction. Knowing the value of the property is very beneficial in estimating the property replacement coverage, so that the HOA does not pay for more than it needs in coverage.

3. Crime. A fidelity bond or crime policy may be a stand alone or combined with a liability insurance policy. The policy is designed to cover employee dishonesty and crimes occurring by those who handle money and financial records within an organization.

4. Directors and Officers. This policy is designed to cover the costs of defending the Board of Directors in the event of a lawsuit rather than requiring them to pay for their own defense out of pocket. It is important to understand what endorsements and gaps may exist in a directors and officers policy. Otherwise, the Board may have to pay out of pocket for some defenses in the event of a lawsuit. Because the Board is the one who hires the HOA’s management firm, it should include its manager as an endorsement on its policy.

5. Workers Compensation. This policy is designed to cover payroll and non-payroll employees in the event that someone gets hurt while working on the job. The policy is typically calculated on the basis of the amount of payroll or a base rate, whichever is greater. Workers compensation benefits the HOA in the event a contractor does not have a worker compensation policy or it lapses during a period where an injury to an employee occurs on the HOA property. If the contractor does not have this policy in place, the employee may attempt to seek compensation from the HOA who owns the property where the injury occurred. This policy protects the HOA in such an event.

It is always a good idea to have a licensed insurance agent review your HOA's insurance coverages, including determining what the Association's Declaration of Covenants, Conditions, and Restrictions may require. The Board of Directors should also include a review of its insurance coverages, including any exposures to loss or hazards, on an annual basis too.

DISCLAIMER: The information contained herein is intended for informational and educational purposes only and should not be construed as offering legal advice. For legal advice, seek the counsel of a competent attorney specializing in Community Association Law on matters pertaining to your state and community. For insurance advice, seek a license commercial insurance agent in your state.

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