Pros & Cons of Owners and Renters Insurance

By Colin McCarthy, Esq.

Do you know what the insurance salesperson said to his potential customer after describing all of her insurance policy options, what they were for, and what they did? He said, quietly, “Call me tomorrow when you wake up . . .”

Without putting you to sleep, this article will attempt to inform you about insurance policies for associations, owners and renters, and key exclusions. As unexciting as the topic may be, (some of us love this stuff – you know who you are!) it is an important one for a manager, as knowing the insurance requirements and the types of coverages for your association and your members can save both money and headaches.

With no gaps in coverage between an association, a member, and a renter, the astute manager can cover casualty, property damage, and personal injury loss without resorting to reserves, or worse, special assessments.

What do sunscreen and insurance policies have in common? You’re never really covered as much as you think.

The first step in the manager’s analysis is looking to the law and governing documents to determine what coverage is needed for the association. For third party liability purposes, the law provides that the volunteer director will be subject to personal liability if the association does not carry general liability insurance for the association and directors and for the officers with certain limits.

For developments with 100 or less separate interests, there must be a minimum of $500,000 in coverage for both types of policies. The minimum rises to $1,000,000 if the development has more than 100 separate interests. If the 100 or fewer separate interest association does not have $2,000,000 in general liability coverage, its members can be personally sued for losses occurring in the common areas ($3,000,000 for developments with more than 100 separate interests).

If your governing documents do not require these coverages, consider amending them. See Civil Code §5805 for additional details on these last two categories of common interest developments and coverage.

The governing documents will set forth what insurance is required (and sometimes what is “recommended”). Usually, this will include at least “Fire & Casualty” Insurance, Liability Insurance, and Directors and Officers Insurance. Sometimes, the governing documents will also recommend fidelity bonds, umbrella policy, earthquake insurance, or flood insurance. The manager will need to then cross-reference what’s required with what the association currently has in place.

Did you hear about Fleetwood Mac’s special insurance policy? They got it for landslides.

Checking the insurance means knowing what the different kinds of insurance do. Call your broker if you can’t read the policy declaration pages or don’t understand something.

“FIRE & CASUALTY” INSURANCE

is for the buildings and property repair and replacement after a fire, storm, or other “casualty” event. For condominium or townhome associations, these policies will either be “walls-out” or “walls-in”. They will either cover the building and structure down to the structural walls and no further, or will include repair and replacement inside the unit to “as-built” condition.

“Walls-in” coverage does not cover upgrades – a new kitchen countertop – but such policies can be endorsed to include upgrade coverage. “Walls-out” coverage means members need homeowners policies with casualty coverage of components in the interior of the unit.

Regardless of whether an association has walls-in or walls-out coverage, homeowners will need to secure coverage for personal property, because the association’s property and casualty will not usually cover personal property within the unit.

LIABILITY INSURANCE

protects the association against third party claims and lawsuits related to injuries or property damage sustained by said third parties at the development. If Larry trips on a sprinkler head in the common area and breaks his ankle, the association will utilize the insurance to pay that third party claim. If an association’s tree falls on several parked cars or a neighboring fence, this liability insurance will operate to defend any lawsuit and pay the claim.

DIRECTORS AND OFFICERS INSURANCE

protects the directors from lawsuits related to their decisions as a board. A lawsuit for breach of fiduciary duty is protected by this insurance. Without such insurance, the association would have to indemnify the director – pay her legal fees and any judgment.

The member will have different insurance.Homeowners insurance will include casualty and liability insurance for the owner. This protects the owner against gaps in “walls-out” coverage, personal property damage, and third party lawsuits stemming from injuries inside the unit.

Coverages for dues payments and lost business income (if renting the unit) can be added to protect the member against having to pay dues while the unit is being repaired and is not occupiable.

A tenant should obtain renters insurance to insure against liability and personal property loss while occupying the unit. If a visitor gets bitten by the renter’s dog, the tenant will need renter’s insurance to protect against such suits. If a casualty event damages all his personal property, renter’s insurance will cover up to the limits obtained.

Why did the insurance company deny the church coverage after a lightning strike? They said it was an act of God.

What the insurance company gives, it also takes away. Excluded from the association “Fire & Casualty” Insurance and homeowners insurance is earthquake coverage and flood insurance. Walls-in coverage will not cover upgrades to the unit. Liability policies frequently exclude injuries related to mold or fungi. Separate policies or endorsements will be needed for these coverages.

Colin McCarthy, Esq.

Colin McCarthy, Esq. of Angius & Terry specializes in insurance and association law and has 25 years of experience in the industry.