New in the HUD

As is typical during the end of presidential administrations, a lot of new regulations are implemented, and this year is no different.  Beginning October 14, 2016, HUD Fair Housing regulation 2015-0095-0001 goes into effect, incorporating the results of court cases which in some instances involved homeowner associations. 

While HUD says this regulation does not place any new duties on HOAs, it squarely places these items “on the radar” of some who may see it as an opportunity to litigate.  Because of this, it is crucial that Boards of Directors consult with their insurance agents to confirm that appropriate Directors & Officers insurance is firmly in place. 

 This regulation clarifies some instances where a community’s Board of Directors must address harassment between neighbors:  Boards must carry a heightened sense of awareness and act in certain situations that in the past they may have chosen to ignore.  Additionally, they can be held liable for the actions of agents or employees.

In the commentary HUD included in releasing the new regulation are the following tidbits:

• You can be held liable for failing to take prompt action to correct and end a discriminatory situation where the Board knew or should have known of the conduct and had the power to correct it.  Such knowledge can come from, for example, the harassed resident, another resident, or a friend of the harassed resident.  Neither psychological nor physical harm must be demonstrated to prove that a hostile environment exists.
• The power to take prompt action depends upon the extent of control or any other legal responsibility the Board may have with respect to the conduct (as indicated in bylaws or other rules of a homeowner’s association or condominium, or by federal, state or local law).
• Community associations regularly require residents to comply with CC&Rs and community rules through such mechanisms as notices of violations, threats of fines, and fines.  HUD understands that community associations may not always have the ability to deny a unit owner access to his or her dwelling; the rule merely requires the community association to take whatever actions it legally can take to end the harassing conduct.
• Creating and posting policy statements against harassment and establishing complaint procedures, offering fair housing training to residents and mediating disputes before they escalate, issuing verbal  and written warnings and notices of rule violations, enforcing bylaws prohibiting illegal or disruptive conduct, issuing and enforcing notices to quit, issuing threats of eviction and, if necessary, enforcing evictions and involving the police are powerful tools to control or remedy a tenant’s illegal conduct.
• A principal (such as the Board) is vicariously liable for the actions of his or her agents taken within the scope of their relationship or employment, or for actions taken outside the scope of their relationship or employment when the agent is aided in the commission of such acts by the existence of the agency relationship.

The response from some Boards has been denial, believing this regulation only applies to apartment complexes and the like.  HUD has stated otherwise, and this should be seen as an addition to existing Fair Housing considerations Boards must take in areas such as pet regulations and architectural review approvals.  It is crucial that you consult with the Association’s legal counsel on this timely topic.

Insurance Notice Deadline

Lawsuits are almost always unwelcome surprises.  Combined with the regular daily stresses Board members face for their communities, it's a relief knowing you have proper insurance in place, right?  So, when the insurance company denies the claim saying you didn't report it quickly enough, you reach for the heartburn medicine. 

Unlike in Georgia, many other regions of the country are lenient when it comes to missing reporting deadlines.  In these States, the thinking is that only material breaches relieve obligations under a contract.  Insurers should not benefit if they haven't suffered an actual disadvantage due to late notice.  And as one court said, "It would also disserve the public interest, for insurance is an instrument of a social policy that the victims of negligence be compensated."

A century ago, insurance policies were truly private contracts and judges avoided altering them.  Many courts now recognize that insurance policies are no longer fully negotiated agreements.  Instead, these are based on standardized forms with conditions dictated by the insurance company.  Since these forms are now used industry wide, there really aren't alternatives for the consumer to tap into.  But we live in a pro-insurer state, so let's dig a little into this whole "notice" thing.

Your insurance covers a time period defined as either "occurrence" (for damages that happen during the term of the policy, such as a windstorm) or "claims made" (for when you are served a lawsuit, not necessarily when an incident occurred).  "Claims made" policies have become more popular for insurance companies.  It helps them avoid losses from asbestos, environmental, and other claims having roots in actions occurring decades ago.   Among other reasons, the insurer isn't having to defend a previous customer from thirty years back, and can tack on stipulations to the claims-made policy to limit covering similar events for new clients involved in such items. 

The claims-made version can be either "general claims made" (discovery policies) or "claims made and reported policies" (reporting policies).   A general-claims-made policy may say something like,  "The Insurer shall pay on behalf of the Insured on account of any claims first made during the Policy Period."  A claims-made-and-reported policy may be something like, "The Insurer shall pay on behalf of the Insured all sums which the insured shall become legally obligated to pay because of any claim or claims first made and reported to the Insurer during the policy period." 

See the difference?  General-claims-made versions often give you a longer window to place a claim.  While Georgia courts usually side with the insurer when it comes to determining the notification period, on occasion something known as the "prejudice" rule comes into play.  In this arena, prejudice means that delaying notification to your insurance carrier placed it at a disadvantage.  It needs time to investigate, set aside reserves, and control or participate in negotiations if it hopes to have the best outcome possible.

If the insurance company can show prejudice, it avoids covering the situation even if there is a question about the late notification.

The take-away is this:  As soon as you suspect a claim, notify your insurer.  If your claim is denied, consult with your Association's legal counsel.  And most importantly, be sure to only use insurance brokers who regularly operate in the homeowner association industry.  You can locate them at the Georgia CAI (Community Associations Institute) website.  The first mistake many Boards make is cutting corners on costs by using an insurance broker who is not familiar with all the intricate pitfalls faced by HOAs.  An inexpensive policy fails you when you need it the most.  Don't scrimp in this area.   

Secrets, Secrets Are No Fun

Association members are welcome to read official association documents. There’s nothing secret about the business of the association. In fact, you should already have copies of key documents like the bylaws or rules. Other common documents that are open for members to review include:

• Board meeting minutes
• Insurance policies
• Financial statements and annual audits
• Declaration and bylaws
• Rules and regulations
• Current contracts
• Leases and agreements
• Ballots and proxies

Here is typically how homeowners are able gain access to these documents (procedures may vary depending on your exact community):

• Send the board a request in writing specifying exactly what records you wish to review, the date of those records and the purpose of your request.

• The board will respond to your request within 30 days. During that time the board or manager will locate the correct documents and get them ready for you.

• The records you requested will be available for your review during regular business hours at the manager’s office for 30 days after your request is processed.

• The association will make copies of records for a reasonable fee.

Please do not request documents that infringe on the privacy of an individual like medical or personnel records. These are not public records, and the association will not make them available. Salary information is available in the aggregate, but not for individuals. Some requests might also be denied if they involve ongoing legal or contractual obligations that might expose the association board or manager to liability.

D&O: Revisited

#1 Board/Director Rule:  Never serve on a Board of Directors for a community that does not have proper Directors & Officers (D&O) insurance coverage in place.  Without such coverage, money may not be available to defend you in the event that you are personally sued by an angry homeowner - leaving you potentially exposed to covering such costs out of your own pocket!  Of the different types of insurance communities need to carry, D&O is the least standardized. For instance, did you know there are three areas of coverage? 

• Side A coverage protects Directors from claims of wrongful acts when the Association refuses or is unable to provide indemnification
• Side B is for claims by the Association for money paid to indemnify a Board member 
• Side C is for claims by the Association against the Association itself.

Confusing? In addition, constant court challenges continue to add new wrinkles to how D&O is processed.  See how technicalities impacted three recent court decisions:

 

Internal lawsuit coverage

Normally, insurance cannot be used when parties within the same corporation are suing each other (ex: the Association suing an individual Board member, or Board members suing each other).  However, in Georgia this assumption has been weakened.  At the trial level, the D&O insurance carrier (St. Paul Mercury) obtained a judgment against the FDIC and former bank officers, barring coverage under the usual insured v. insured exclusion.  However, the Georgia appeals court reversed the ruling, saying that such exclusions are ambiguous under state statutes, and outside evidence might be necessary to determine intent.  

Timing of Contract

In a Rhode Island case (Transched Systems v. Federal Ins.), the insured client negotiated to sell its software products. Following delivery, the purchaser realized that the seller had breached the asset purchase agreement, and that the senior officers misrepresented the software.  Since the seller was no longer in business, the purchaser attempted to collect a judgment from the seller’s D&O insurance company, but was denied based on the breach of contract and other exclusions.  The court reversed this, saying that contract exclusion did not apply since the misrepresentations took place before the contract was formed.

Substandard Coverage

Over in Kentucky, (State Auto v Highland Terrace Counsel of Co-owners), Highland Terrace was sued by an owner trying to block a $700,000 special assessment.  The Association's D&O claim was denied by the carrier.   The court upheld the denial, since the underlying suit did not allege claims against the individual members of Highland Terrace for which the insurance could have had an indemnity obligation.  The State Auto D&O form did not provide entity coverage to Highland Terrace.

The above situations illustrate why it is critical that you use a professional insurance broker who regularly operates in the HOA industry – preferably someone who is active with the local Community Associations Institute (CAI) chapter.

While there will always be kinks in obtaining the best coverage possible, here are some ‘best practices’ you can implement to reduce risk exposure, according to insurance attorneys:

• Create term limits
• Locate and train Board volunteers with diverse sets of skills and backgrounds
• Evaluate the quality and effectiveness of Board meetings, including the use of agendas, the preparation and distribution of materials, and the timing and length of meetings
• Keep apprised of governance trends and legislation
• Develop and adhere to a code of ethics
• Develop and implement committees to oversee and monitor areas of potential liability, such as  director nomination, financial audits, and regulatory compliance
• Prohibit related-party transactions or require independent review of such transactions
• Maintain open and active homeowner relations

Full Disclosure

New homeowner association clients occasionally ask, “Why do we need to provide the management company the bank statements for Board-controlled accounts, such as CDs or money markets?”  Since the management company doesn’t draw on these monies, the confusion is understandable.

Although not directly handling these funds, the management company is required to provide a full picture on the financial health of the community.  Incomplete disclosures impact several areas:

• Insurance.  The fidelity/crime coverage must be adjusted based on actual dollar amounts held.  Besides not receiving back all funds in the event of a loss, lenders may also refuse to provide home loans if the Association is under-insured in this area.
• Tax Returns.  These could be delayed or require re-filing if the CPA does not have full, timely access to bank statements of all assets.
• Homeowners & Lender Inspection Rights.  Georgia Statutes and the Association’s Bylaws require that financials be made available for review, often within five days of a request.  Providing inaccurate balance sheets (by not listing all funds) exposes the Association to potential litigation which may not be covered by the Directors & Officers (D&O) insurance carrier.
• Speaking of D&O:  Withholding account information may be considered a violation of fiduciary duty, which can be used as an excuse to deny coverage for any D&O claim, not just one directly related to financial disclosures.  It gets expensive litigating with the insurance company afterward, trying to reverse a denial of coverage.

To ensure information is getting forwarded to your management company in a timely fashion, be sure to notify all of your lenders to automatically mail copies of bank statements to the manager.  You want to reduce human error and avoid any appearance of impropriety:  Failing to fully disclose only raises red flags.

Lending Restrictions

Worried about what trouble your future Board might create?  A great way to lock in good governing habits is with a bank loan.  Yes, a bank loan.  All those restrictions for an Association loan guarantee that no funny business will be happening under someone else’s watch.  Just make sure the loan includes the following:

The 'proxy put'   This provision allows the lender to immediately call the loan due if a majority of the Association's Board of Directors becomes filled with 'non-continuing Directors' that were not approved by the original Board members.  Take it a step further to a 'dead hand proxy put', which prevents current Directors from bestowing 'continuing director' status to any new directors seated via a contentious election.

Governing Amendment   The lender holds veto power over any changes to community regulations.  That smoking ban will just have to wait.

Annual Audits   No, the treasurer did not pay for that Porsche with community funds.  Conspiracies are a thing of the past, when you’re required to have a CPA touch the books every single year. 

Insurance coverage    No corner-cutting here.  Great way to ensure that D&O insurance, fidelity, and workers comp coverage - the three coverages that typically get neglected - are fully in place.

Self-Managed?  No way.  That lender is going to have the last say on any changes in professional management.  And self-managed always turns out to be more costly in the long run.

Minimum Annual Budget   Yep, put the kibosh on all those crazy candidate promises of ‘lowering assessments’.  A related requirement keeps wastrels from draining your reserve funds.

First priority asset status   This allows the bank to have first dibs over any money or property the Association holds or might hold in the future.  Since HOAs rarely actually own real estate, the next best thing is having rights to all future assessments paid by homeowners.

Collections  The days of “going easy” on deadbeats are over.  Your banker expects the community to hit delinquent behavior with both barrels.  Absolutely no write-offs of debt without prior approval!  Best of all, if the delinquency rates slip above 10%, the note is called due.

Cross Default   Not cross-dressing, but close.  If the Board stiffs the plumber, it’s an automatic bank loan default.  It is also a default for any other creditor to have the ability to elect a majority of the members of the Board.

The point is this:  Requirements like those above have ramifications most of us never guessed existed, so be careful navigating past potential problems.  When your community obtains a bank loan for a major renovation/repair project, be sure your attorney is heavily involved. 

Protect Yourself

Through the years this blog has covered several aspects of Board member liability.  One additional item for your consideration is the use of indemnification agreements.  These provide a more inclusive protection than what you might find in State statutes or your community's governing documents.  These agreements contain detailed procedures and time frames - and clarify the types of claims covered.  If you decide to utilize this option, consider clarifications in the following areas:

Expenses.  Protect yourself against expenses connected with any proceeding, by expanding the definition of “Expenses” to cover items often excluded in a D&O policy:   fines & damages, experts’ and arbitrators’ fees, bonds, settlements, and income taxes resulting from payments.  Proceedings should include any threatened or pending legal proceeding such as investigations, discovery requests, and administrative proceedings.

Fees-on-Fees.  Directors are not necessarily entitled coverage for legal costs needed to sue the Association to enforce your indemnification rights - be sure this is added! 

Insurance.  Require that the Association have its D&O coverage audited to obtain the highest quality insurance available in the homeowner association industry.

Express coverage for negligence.   An all-inclusive provision may be voided because it is overly broad.  Be sure that your agreement explicitly covers all negligence except gross negligence.   Here are a couple of court cases that talk about this quirk in Georgia law:  Service Merchandise Co. v. Hunter Fan Co   "Georgia courts never imply an agreement to indemnify another for one’s own negligence in the absence of express language.”    Satilla Community Service Board v. Satilla Health Services, Inc   "Contracts indemnifying one against the consequences of his own negligence are not favored, but will be given effect where the intent is expressed in plain and unequivocal terms." 

Procedures and Timing.  The agreement can require that the Association, when settling a claim against you, include an unconditional release from all liabilities relating to the proceeding, along with an acknowledgement that you deny all wrongdoing.  Require all indemnification payments be made within 30 days, and all advances within 20 days of a written request.   In the event of an adverse ruling, you can appeal, and be indemnified for all expenses.  Include a presumption in favor of indemnification, that you have met the applicable standards of conduct allowing for indemnification, and that a judgment, settlement, or criminal conviction does not create a presumption against indemnification.  And impose a reasonably short period on any claim that the Association might have against you.

It is important that you require immediate money advances to cover defense costs, regardless of whether you are the subject of a lawsuit, investigation or witness subpoena, with coverage continuing for your legal expenses - even after you leave the Board.

The above is not to be considered legal advice, and you should consult with a legal professional before acting. 

CAUTION: Insurance Ahead

"That's what insurance is for."   Uttered by a Board member after several 300-pound marble blocks plummeted from the sides of his condominium tower. 

What sounds like a punch line for a joke will punch a hole in your financials with this attitude.   A visit by the Association's attorney and insurance broker is vital so Boards can see how coverage is stripped away in these situations.  Insurance is not a 'Get out of Jail' card when you turn a blind eye to dangerous situations. 

Such coverage is provided with the understanding that you take steps to avoid having to use it.  A review recent lessons learned shows what happens if we’re not careful:

Confirm that you are only using top-rate insurance providers. Mountainside Holdings v. American Dynasty Surplus Lines   In this situation, the umbrella insurer (the one providing additional money beyond the limits of the regular liability insurance) did not have to pay when the primary insurance went bankrupt.  The additional coverage would only have kicked in if the underlying coverage had actually been paid out.   

Check your policy for 'consent-to-settle' restrictions.  Piedmont Office Realty Trust, Inc. v. XL Specialty Ins. Co   In Georgia, proceed carefully when settling claims against where policies include consent-to-settle and no-action provisions.  In this case, the umbrella carrier for the D&O (Directors & Officers) coverage refused to cover for the full settlement amount, since it had previously already agreed to only contribute $1 million.  The client settled a suit for $4.9 million, and then tried to claim this amount against the umbrella policy, saying the carrier unfairly withheld consent.  The appeals court said that settling without first obtaining consent means you forfeit coverage and are barred from suing. 

The clock doesn't stop if years pass between 'same claims'.  W.C. and A.N. Miller Dev. Co. v. Continental Cas. Co   An adversarial proceeding held years ago had enough similarities to a lawsuit brought years later to effectively be the same claim. A claim doesn't need to be covered in your insurance for it to be classified as an “Interrelated Wrongful Act” and be treated as a single claim.

Always notify your insurer the first time round.  Hamman-Miller-Beauchamp-Deeble, Inc. v. Liberty Mutual Agency Corp   A broker received letters from an attorney claiming that a client suffered damages due to the broker's negligence. The broker waited until he was served with an actual lawsuit almost two years later before notifying his insurer.  The broker argued that the attorney letters didn't constitute a claim triggering reporting requirements. The court disagreed, since the letters said the broker was “legally responsible for...damages” making this a demand for damages.  

Don't take any action outside of your Board duties when dealing with the Association.   The Langdale Company v. National Union    This Georgia case reemphasizes the need to clearly operate only within your Board capacity.   Not having a clear delineation allowed the insurance carrier to claim a Director was operating in an uncovered capacity.  Because of this, the insurance could not be tapped by the corporation or other Board members to cover expenses.

Insurance companies are in the business of making money, so review the insurer terms with an expert to make sure you understand when you can and cannot rely on such coverage.

Black, White & Gray

A wily Board member once said about governing documents:  "There is black & white, and there is gray, and gray is what I define it to mean."   When a community has poorly-drafted documents, a Board may find itself filling in the gaps where the documents are silent.  

One community had a problem with off-leash dogs.  The covenants were silent on the subject.  The Board used the generic nuisance provision in its violation notices, even though it was possible that a determined homeowner could successfully challenge it.

A Board may find itself getting creative within the boundaries of the governing documents, but realize that this ‘gray is what I say’ can also work against you.  This is especially true with service contracts, such as landscaping or pool maintenance.  One vendor hired to replace buried cast iron pipes left a path of plant destruction in the common area.  Although the contract included road repairs, it did not stipulate shrub replacement.    

It is not unusual for the wording in a contract to grow organically over time.  New situations lead the vendor to add wording which doesn't play well with the other sections.  Or an attorney ‘fixes’ items included by another attorney, which is ‘fixed’ in turn by yet another attorney.  

The longer the contract, the greater the chance that something important gets overlooked.   This is especially true when it comes to insurance.  These documents easily run 100+ pages, filled with a lot of ‘If-Then’ statements.  The contract definitions are not necessarily placed at the beginning of the document, and there may be other sections that completely redefine a definition.

For example:  How do you know whether a Board member’s spouse is being protected with the Association insurance policy?  With more and more claims being filed against spouses (as a way to get around the protection of a Board member), you want to be sure they are included in the General Liability, Directors & Officers, and Fidelity/Crime policies.

Even if your spouse is explicitly an ‘Insured’ in the definitions, 20 pages later there may be a listing of ways the spouse ends up excluded.  To avoid this snake’s nest, require the insurer to issue an Endorsement explicitly adding your spouse as additional insured and overriding exclusions listed elsewhere.

Community Association Managers also find themselves excluded from insurance coverage, even though the Association is required to provide protection.  Community managers act as agents for communities, but some insurance policies exclude agents from the definition of ‘employee’ when determining who should be covered. 

Another insurance document covers real estate managers, leading some to think this covers your manager.  However, in the State of Georgia, real estate managers are a distinct class from community association managers, making it a possible avenue to deny coverage.  Again, use endorsements to clear up any confusion.

The best way to manage the ‘gray’ in these situations is to insulate the Board with third party experts (i.e. an attorney).  If that gray item should suddenly become black & white, being able to shift the risk to the expert is an added layer of protection.   

Penny Pinchin'

One compelling reason to do annual increases to the community’s budget:  The courts' intolerance of delayed maintenance work.  In the last few years, judges have made it clear that they do not accept excuses for refusing to increase assessments.  One community opted to discontinue landscaping service, rather than raising dues.  Commercial units in the association sued since this was directly noticeable by their clients.  The judge was not happy.  A special assessment was ordered.  In another community, the Board felt it was too expensive to repair the exterior of the building, and black mold took hold.  A court order and a million dollars later, not only was the building repaired at greater expense, but penalties were tacked on for the Association shirking its duties.

Now another critical reason prompts us to thoroughly maintain common areas:  Cancelled insurance policies. 

Insurance inspectors are tightening up on property reviews, and we have had several instances in the last few months where the carrier dropped a homeowners association, or threatened to do so - if action wasn't taken within 90 days to address basic items such as new roofs and pool resurfacing.  And it doesn't stop there - insurers are also dropping property, liability and directors & officers coverages.

Unless your community's bank account is flush with millions of dollars, the above should be terrifying.  Without insurance to personally protect you, no intelligent person willingly serves on a Board of Directors. Next, all mortgage lending dries up, since a master insurance policy is a basic requirement.  Things snowball from there.

An insurance inspector will not be fooled by substandard work resulting from ‘going cheap’.  Boards of Directors can no longer push for cutthroat contract rates and refuse to increase assessments over two or three years. 

The best course of action is educating your homeowners on the above.  Share with them the basic conclusions of your engineering study, analyzing the life expectancy and replacement cost for big ticket items.  Items such as road resurfacing, detention pond maintenance, clubhouse renovation, sewer line repairs and tree replacement can’t be neglected.

Bottom line - Uninsured is unacceptable.

There Goes the Neighborhood

The community is in an uproar.  Some of the neighbors have been using online services to lease out their homes on a short-term basis, bringing in new faces every few days.  Crime is a concern.  Unfortunately, for years no one has been enforcing the community's rental regulations.  Housing patterns changed in the face of hard economic times, and now nearly half of the homes are non-owner occupied (even relatives are technically renters).

A new Board of Directors has learned that it is legally required to uphold the land use restrictions about rentals.  Fines start being assessed when unauthorized rentals continue.  Now, upset homeowners are working to have these Directors replaced to stop enforcement.  Even one of the Board members has violated his duties to the Association and is assisting with the overthrow.

What to do?

While not everyone can be reasoned with in this situation, education is key.  The Board should send a respectful and professional communication to the community, describing the consequences for non-enforcement.  People often need concrete examples to see past short-term gains:  Hearing about some nebulous potential costs of selective enforcement is unconvincing.  It is difficult enough to have permanent residents understand and abide by noise, odor and visual regulations.  Short-term residents have even less motivation.  By the time citations and fines start accumulating, the tenant has moved out.

You must speak in terms of money.  What comes out of a person's pocket is a powerful motivator.  The lack of commitment by renters to the success of the community is a common complaint.  The wear and tear drives up expenses that result in higher assessments. 

Insurance premiums (both for individual homeowners and for the homeowner association) go up dramatically in communities with substantial rentals.  For example, Citizens Insurance treats any community having more the 25% non-owner occupied homes as a commercial operation.  Any coverages above very basic dollar rates may be at 400% higher premiums. 

And for unrestrained rentals, banks will refuse lending for purchases and refinances.  This depresses housing prices, and limits the pool of potential new homeowners.  One person with an extremely high credit score and 20% down payment was rejected by four banks because of the percentage of rentals in the community in which they were hoping to buy.   

Sharing these examples resonates with resident owners, but many investor owners purchase in cash, so need a larger direct immediate impact:

Bank lending also dries up for the Association, too.  If a project pops up requiring large amounts of cash, everyone may be facing a huge special assessment.   Given the choice of either coming up with $5,000+ (per home) right now, or having a bank loan that is paid back over five or ten years, everyone (including landlords) opt for the loan.

Providing these dollar cost comparisons may be enough.  Or not.  In some communities, homeowners decide to essentially (though not legally) convert to an apartment complex.  Unless there is a disgruntled individual with enough money for a lawsuit forcing the neighbors to live by the covenants, such communities will remain landlord havens.  Until conditions deteriorate to the point that the local government steps in. 

Government action involves imposing daily fines for code compliance, requiring a very large special assessment to cover.  If the community fails to comply, condemnation is the final act, leaving all owners (including landlords) with worthless property.

Discuss the above with your neighbors if you find your community in this situation. Trust us, its not a great place to be!

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.  

Insurance As Collateral (Part IV)

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

One of the fears an Association faces is whether or not a contractor will cancel his policy the day after presenting proof of insurance to the Association.  While in the past it was easy to require the insurance company to notify the Association about a cancellation, some insurers are now refusing to provide notice. To address this, if a contract involves a risk so substantial that cancellation or coverage reduction is heightened, a project-specific policy with the Association listed as an “additional insured” may be considered - although this is an added expense.

Another layer of financial security is via the use of bonds.  Here are a few different types:

•          A Bid Bond guarantees that the bidder will undertake the job at the quoted price and replace the bid bond with a performance bond once the contract is awarded 
•          A Performance Bond guarantees that if the bonded contractor fails to complete the job as quoted, the bond company assumes the contractor’s financial responsibility to have the work completed
•         A Payment Bond or Labor and Material Bond guarantees that the contractor will pay all the bills incurred on the work to avoid liens (subcontractors, suppliers, laborers)
  

You should require the contractor to obtain a Performance and Payment Bond with penalties equal to 100% of the contract price.

When an incident does occur that requires you to tap into insurance or a bond, it is very important that the reporting requirements are met.   It is customary for many of us to report such claims to our insurance agent, and we depend on that agent to pass along the information to the insurer. While convenient, this practice does not technically fulfill the notification requirement and can be used as a reason to deny coverage. Typically, all insurance policies contain a "Notice" section that clearly addresses the correct and proper way to notify the insurance company about a claim or potential claim.The safest practice is to report the event directly to the insurer or bond holder, with secondary notification to your agent.  Written notification is best, and if you provide a verbal notification, be sure to document afterward, including things such as the date and person spoken to. Follow this up with a formal letter as soon as possible. And its always a good idea to report anything that could potentially develop into a claim - waiting until a later date, in some cases, can also be grounds for a denial of coverage.

Preventing loss of insurance coverage is so important that many require a clause in the vendor contract, stating that maintaining proper insurance coverage is a material element of the contract, and that failure to maintain or renew coverage or to provide evidence of renewal may be treated by the Association as a material breach of contract.  For large, ongoing projects you may want to include a provision allowing the Association to withhold payment, so that it can purchase insurance on behalf of the contractor to replace expired coverage.   

Bottom line - Insurance is important stuff!

Insurance as Collateral (Part III)

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

Another common phrase in the insurance industry is “waiver of subrogation.”  To reduce confusion, some in the insurance industry may say “Transfer of rights of recovery against others to us.”  Clear as mud?  

“Subrogation” is when you give to the insurance company your right to collect for damages from someone else.  Why is this important?  If a contractor working for the Association assigns this right to his insurance carrier, that carrier can then look to the Association to reimburse any claim costs incurred defending the contractor on your project, when some of the blame for the problem may possibly have fallen on the Association.  So to prevent this, in your contract with a vendor, you will want to have this power waived - or a “waiver of subrogation”.

You should ask for a waiver in workers compensation and property insurance policies.  In the case of liability insurance, you normally do not obtain a waiver.   Courts have concluded that it is against public policy to allow an insurance company to subrogate against its own insured, including anyone added as an “additional insured.”  As long as the Association is diligent in securing and confirming its “additional insured” status (by insisting on receiving a copy of the additional insured endorsement), the waiver of subrogation is not a necessity.

Regarding workers compensation:  The standard WC policy does not allow the insured to waive subrogation.  Most insurers will agree to waive subrogation if requested, but often charge the contractor an additional premium for this. 

When requesting a waiver, be aware that some insurance policies void the coverage if the insured agrees to waive the insurer’s subrogation rights without receiving prior approval from the insurance company.  You should have the policies carefully reviewed when dealing with waivers of subrogation.

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.