Insurance as Collateral (Part V)

Unquestionably, a requirement in today’s world - insurance - can be so complex that it often leaves us with many questions. This is the fifth (and final) of several insurance blogs to address various vital components of your community’s health. Please scroll down to read the previous four insurance-related posts for more details. 

With insurance contracts, the devil is in the details.  It is the little unexpected items that may trip you.  For example, what happens if the vendor you are working with files bankruptcy?  In one instance the insurance company did not have to pay on a claim, because the contractor was unable to meet the deductible or self-insured-retention (SIR) requirements.  To avoid this, you should require disclosure and approval of deductibles or SIRs and discuss them with your insurance agent and/or attorney.

Another “unexpected” can happen when dealing with a claim that arises a couple of years after a project is finished.  Very often, the vendor’s insurance is only triggered when claims are made, not when the actual problem actually occurred.  A “claims-made” coverage will only respond to a claim that is presented while the policy is in force or during an extended reporting provision.

Because of this, it is critically important that the Homeowners Association insist on an extended reporting period (known as a “tail” since it covers your tail) of several years as a part of the insurance coverage.   Keep in mind the regular liability policy will not cover professional liability losses, and therefore your contractor may be exposed in the event of a claim arising out of professional services rendered on the project. Normally, professional liability policies can be purchased with a three year “tail”.  Regular liability policies may permit a five year “tail”.  If you can get a longer tail in your contract, do so.

Another exception can occur when it comes to coverage for water damage.  Check to make sure coverage won’t be denied if flooding occurs when a sump pump fails due to loss of electricity – the policy may need an endorsement to cover this situation.

Trying to plan for every contingency can be nerve-wracking:  What do you think of when you are considering electronic data insurance coverage?  In our electronic age, the risk is only growing for losses related to integrated systems with a building’s elevator, lighting, heating, ventilation, HVAC and security systems.  The dollar amount for coverage may need to be increased to account for this.

The “green” movement has created situations not normally covered with standard insurance.  The trend of having vegetated roofs may introduce an exception under “Property Not Covered” for lawns, trees, shrubs and plants that are part of a roof – such property is an insured part of a building. The vegetation may not be covered for loss by dampness or dryness of atmosphere or soil, changes in or extremes in temperature, disease, frost, hail, rain, snow, ice or sleet. The “Additional Coverage” for mold does not apply to vegetated roofs.

As you can see from this and previous blogs, providing the greatest amount of protection  requires that Boards of Directors rely upon the advisement of several outside experts (attorney, insurance broker, community manager, CPA, engineer, etc.) in making the best decisions possible for their community.