Navigating Insurance Claim and Policies

By Darren M. Bevan, Esq. & Raihane A. Dalvi, Esq.

Associations are encouraged to obtain insurance to protect them from liability from claims. There are different types of claims, including the following:

• first-party property damage claims,

• third-party property damage liability claims, and

• directors and officers liability claims.

A first-party property damage claim is a claim filed with an association’s insurance company for damages to its common area property covered by the policy. Examples of this type of claim are when an association files a claim for losses resulting from a fire or flood or a water leak in a condominium building.

To determine whether or not to report this type of claim, associations should follow a series of steps. First, evaluate the nature and extent of the damages based on factors including:

• the cost of the deductible,

• the risk of the carrier increasing the premium,

• the risk of the carrier not renewing the policy in subsequent years, and

• the risk of the carrier canceling the policy if it decides that the association is too high-risk.

Second, evaluate whether the association is responsible for the loss and paying the deductible by retaining experts, reviewing its governing documents, and engaging legal counsel. Third, determine if the responsible party is insured (if the responsible party causing the damage is not the association). Fourth, the association should evaluate its obligations under its governing documents.

The next two types of claims are “liability claims” made by the association where a third party suffers a loss, and the association may be responsible. To this end, a third-party property damage liability claim occurs when an association’s common area property causes damage to a third party’s property. For example, the association may file this type of claim if a common area tree falls onto an owner’s house or car or if the common area roof in a condominium building causes water damage to an owner’s unit.

Meanwhile, directors and officers (“D&O”) liability claims are made against an association or its board of directors for “wrongful acts.” A wrongful act is broadly defined as any act, omission, negligence, breach of duty, breach of contract, or discrimination.

Some common claims against associations or their boards include the failure to maintain the common area, a violation of the state or federal fair housing laws, challenging an association’s architectural control decisions, a violation of the Civil Code, or challenging the validity of an amendment of the association’s governing documents. These types of claims can seek non-monetary (that is, a court order for the association to do or not do something) or monetary relief, such as money. These insurance policies do not cover claims for property damage or bodily injury.

So, when do you report these types of claims? As a general rule, boards should report all “actual” and “potential” claims to the appropriate insurance carriers as soon as possible. An “actual” claim is one where the claim has already occurred (such as when the association has been sued or suffered a loss resulting in property damage).

A “potential” claim is where a lawsuit has not been filed but may be threatened or anticipated. ”Potential” claims include instances where the association has received a written threat of a lawsuit or claim for money because of alleged damages, or where the association becomes aware that its tree caused damage to property belonging to a third-party. Importantly, reporting a “potential” claim still preserves the association’s right to coverage without triggering higher premiums, whereas reporting an “actual” claim may result in higher premiums.

When an event loss or liability occurs due to an event covered by an insurance policy, the insurer “indemnifies” and “defends” the association. “Indemnify” means the insurer compensates the association for losses or damages sustained by a covered event. “Defend” means the insurer provides the association with funds to defend against claims made under an insurance policy.

For an association’s insurance carrier to indemnify and defend the association against a claim, the association must first “tender” the claim to the insurance carrier. An association tenders a claim when it reports the claim to its insurance carrier when the association is sued, or alternatively, when a major loss has occurred.

By tendering the claim, the association triggers the insurance carrier’s responsibility to investigate and determine in good faith whether to indemnify or defend the association from the claim. Typically, either the association’s board of directors or its manager tender claims on behalf of the association.

Failure to inform the carrier of a claim within a reasonable period of time may result in severe consequences. The carrier could deny the claim, meaning that the association may lose coverage and have to pay out-of-pocket for any damages or other expenses.

Maintaining insurance coverage for these types of claims is necessary and helpful in protecting associations against the unexpected. When renewing an insurance policy or obtaining a new policy, associations should balance the rate of insurance and the coverage needed. A good rule for boards of directors is to evaluate their association’s insurance policies and the coverage provided, including policy limits and types of coverage to ensure that the association will not be underinsured or overissued.

Additionally, associations may consider increasing their deductibles to decrease their insurance premiums. Boards should also work proactively with their insurance carrier to identify and mitigate future risks to protect the association as much as possible.

Darren M. Bevan, Esq.

Raihane A. Dalvi, Esq.

Darren M. Bevan, Esq., and Raihane A. Dalvi, Esq., of Baydaline & Jacobsen LLP specialize in general counsel to community associations and have 19 and 5 years of experience in the industry, respectively.