Failure to Procure Insurance and the Ramifications of Special Assessments

In Parts 1 and 2 of this article, we discussed how the majority of Directors’ & Officers’ (D&O) Liability Insurance policies on the market today exclude the most common lawsuits facing homeowners associations, and the value of having a policy tailored to an HOA.

What is “failure to procure insurance” and why does it matter to an HOA?

Failure to procure insurance is an another example of a common D&O claim that is excluded from the commercial property and liability package policy endorsed for D&O. However, such claims are covered by the stand-alone D&O policy like the one offered through Ian H. Graham and underwritten by CNA. This type of claim can occur when an HOA board approves an insurance policy (typically for community-owned property) and the property or risk is underinsured. Then there is a catastrophic claim such as a fire, hurricane, or flood. “If the board failed to procure the correct insurance, they could be held liable for the difference,” said Kim Angeli, President of Powell, Angeli and Langford Insurance in Raleigh, NC. “That’s another example of a claim that’s specifically excluded on most D&O policies, but covered by the CNA policy offered through Ian H. Graham.”

Can your homeowners afford a special assessment due to a D&O liability claim?

One of the hidden consequences of a special assessment is that it can hurt the homeowners’ ability to sell their unit. Today, mortgage companies are asking if a special assessment has been done in the HOA before they will approve a loan. “This is a huge deal at the moment,” said Angeli. “We have unit owners who can’t sell their units. The mortgage companies who got burned in the financial meltdown now want to know how many people rent in the community, when the last special assessment was, and how much it was. If they do not like the answers, they do not approve the loan.” Having the appropriate D&O liability coverage should be important to everyone in the HOA, not just board members. Because it provides more coverage, it helps the community avoid special assessments, thereby protecting the entire community and its ability to buy and sell property within the HOA.

What is meant by fiduciary responsibility and how does it impact the board?

Because HOAs can have large numbers of homeowners, making decisions on behalf of the entire community would be unmanageable if not for its elected board members. Many board members are unaware that the bylaws and governing documents of the HOA may assign board members a fiduciary duty to the community, and hold them personally liable for the decisions they make while on the board. “The board members are the ones that make the decisions for the HOA, so they have a fiduciary duty to maintain the property, keep the values up, and govern the HOA based on the declarations and the covenants and bylaws,” said Angeli. “If they aren’t meeting those responsibilities, they can be taken to court and sued because they’re not doing their job. A lot of board members don’t understand what they’re getting into when they volunteer.” Brokers like Angeli, who have done their homework, do their best to educate board members regarding the differences in D&O liability policies on the market, and the importance to the entire HOA of having the appropriate coverage.

How do I know if my HOA’s D&O liability policy provides the appropriate protection?

You may want to start by contacting Ian H. Graham. IHG offers the stand-alone CNA D&O liability policy discussed in these articles and is endorsed by HOA-USA. IHG can provide you with a checklist that points out the important coverages your HOA needs to be adequately protected. “We use Ian H. Graham’s checklist a lot,” said Angeli. “I hand out that checklist at seminars that I do across North Carolina. I challenge the board members or property managers to take that checklist to their current insurance agent and ask them what’s covered. I had a man call me from Wilmington, NC, after I did a seminar who said, ‘My agent could not answer yes to any of these. Not one of them.’ It can be enlightening. If you can’t check off five items that are included in your policy, then you need stand-alone coverage.”

Author: Andrew Bateman
Articles have been Reprinted with permission from Tri-Sure.

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