Monday, April 21, 2014

Insurance as Collateral (Part II)

Unquestionably, a requirement in today’s world - insurance - can be so complex that it often leaves us with many questions. This is the second of several insurance blogs to address various vital components of your community’s health. Please scroll down to read last week's insurance-related post for more details.

Insurance terminology sometimes makes our eyes glaze over, but there are several concepts that cannot be ignored - no matter their names.  The first and perhaps most important of these is “indemnification”.

Indemnify  can be simply thought of as a fancy way of saying “Sugar Daddy” – promising to provide financial security to someone else.   This obligation is frequently agreed to in situations where the work one party is doing is so intertwined with the beneficiary that the receiving party should obligated to extend this promise.  For example, when a homeowners association hires a management company, the manager becomes an agent of the association, and needs coverage and defense if sued while working on behalf of the association.  Of course, this does not apply if the manager is negligent or at fault or involved in criminal activities.

To have the necessary funds to provide or receive this defense, homeowner associations are interested in another special phrase:  “Additional Insured”.  This is used to describe a person or company that is not normally covered on an insurance policy.  The policy holder directs the insurance company to add this person or company as an additional beneficiary.   Only parties that really have a direct working relationship with the insured party will normally be accepted by the insurance provider.  A request for a contract to provide additional insured status to dozens of entities - from employees to successors - and assigns to government subdivisions is likely to be rejected by the insurance company, since many of these are only somewhat involved.

As proof that you have been added as an additional insured, do not make the mistake of accepting a certificate of insurance as proof – this summary document does not alter the terms of the insurance contract.  To be effective, a document called an endorsement has to be issued by the insurance company.  You need to see a copy of this endorsement.

Insurance brokers may try to convince you that endorsements are unnecessary.  You must respond by pointing out the verbiage at the top of the certificate, which will typically state something such as "This certificate is issued as a matter of information only and confers no rights upon the certificate holder. This certificate does not amend, extend or alter the coverage afforded by the policy below."

One exception to the above is when you are dealing with contractor’s professional liability coverage – the insurer will refuse to add you on this, as it does not want to pick up the Association’s professional liability hazards.  Professional liability policies are specifically underwritten based on the professional history of the contractor.

Finally, don’t depend on wording in your contract with the vendor to take the place of this “additional insured” endorsement.  The insurance carrier is not bound by such contracts, only by what is in the actual insurance policy.  Also, consider having the Association named in the policy as a Loss Payee, to protect your interests with respect to the repair or replacement of any damaged property or other amounts payable under the policy.  Being included as a Loss Payee means that any payment will have to include the Association as a payee or otherwise have your written authority to make payment to someone else.

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