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Minimum Insurance for Common Interest Developments
Minimum Insurance for Common Interest Developments
By Mike Rey
In 1992, Ms. Ruoff suffered catastrophic injuries while falling down defective common-area stairs. Her husband sued every homeowner in the community stating that each unit owner was liable for her injuries because each unit owner jointly owned the common area stairs. The court of appeal agreed that each unit owner was jointly and severally liable for her injuries. The cost for such a loss of injury exceeded the $1 million liability limit the association insurance policy held in coverage. (Ruoff v Harbor Creek HOA, 1992)
1) Minimum liability limit for associations with less than 100 units must carry $2 million liability coverage.
2) Minimum liability limit for associations with more than 100 units must carry $3 million liability coverage.
Although these are minimum requirements, they are by no means set as the only limits a community should consider. Associations should base their liability limits after considering their exposure, the health of their reserve account, and any assets of the community. In most cases, the larger the community, the more liability the policy should carry. That is not to say that smaller communities should not carry higher limits, but their exposure could be a lot less than a larger community. Communities should also look at umbrella liability policies between $5 and $15 million. They are usually an affordable way to add additional coverage to protect your community.
I’m often asked by new board members, “Could I be sued individually if I join the board?” Civil Code 5800 (a) (4) offers protections for individuals and the board members as a whole. Individuals doing work on behalf of the community are protected as a whole unit and therefore, would not be singled out in the event of a lawsuit brought against the board or its individual members. Of course, intentional acts of individual board members would not be covered. The minimum requirements for D & O (Directors and Officers) coverage are as follows:
1) Associations with less than 100 units, a minimum of $500,000 in D & O liability is required.
2) Associations with more than 100 units, a minimum of $1 million D & O liability limit is required.
Since we live in such a litigious state, it is recommended to purchase more coverage than the minimum requirements stated in Civil Code 5800(a).
These protections for volunteer directors and officers of associations should provide some security to anyone considering running for the board. The D & O policy is in addition to the general liability required in the overall insurance protection for all common interest developments.
Fidelity coverage, also known as crime coverage, is an important part of a comprehensive insurance package. In 2019, new legislation passed (SB 323), which makes it mandatory that all common interest developments insure their operating accounts for a minimum of three months’ worth of assessments plus the total of the annual reserve account investment. Additional requirements include a check signing protocol with at least two signatures for checks issued over $500. This minimizes the possibility of embezzlement. Keeping good practices and records and having regular audits of the reserve account from an outside source, helps ensure that the bank accounts are secure, and reduces the chance of losing coverage. Insurers are also now requiring that there be a signature protocol for check signing for all board members.
Fidelity coverage must include “computer fraud” and “funds transfer fraud” coverage in case of computer hacking. This policy should also include the management company as an additional insured to cover possible embezzlement by a manager of the management company.
It is important to remember when exploring insurance options to always consult a professional insurance agent that is familiar with the needs of HOAs. Check with your agent or broker and ask for their qualifications and designations. CAI is an excellent resource. This link will take you to the national CAI site of professional designations: https://directory.caionline.org/
Mike Rey is the President of Rey Insurance Services, a FARMERS® Insurance Agency. Mike can be reached at (949) 487-9661 or by email at Mike@mreyins.com.
