Insurance Coverage Denied Avoiding a Costly Insurance Denial

INSURANCE COVERAGE DENIED

Avoiding a Costly Insurance Denial

The sight and sound of a large red rubber stamp pounding the paper documenting a major loss a community just suffered is an image no homeowners association wants at the time of an insurance claim. So how can communities worry less about denied coverage of a loss claim?

BY CHARLOTTE ALLEN

Claims can be denied for a number of reasons. Simple and logical steps to avoid denial include paying insurance premiums on time to avoid lapses in coverage, working with a broker that specializes in homeowners association insurance to ensure policies are adequate for the specific risk of the HOA, avoiding false or misleading statements on insurance applications, and understanding (and helping other homeowners understand) where the policy for the association ends and their own personal homeowners coverage begins. But one of the most common denials for coverage, which can be avoided if the right steps are taken, is the lack of maintenance, or wear and tear on community assets.

Tragically, and in light of devastating losses such as the Berkeley balcony collapse and, more recently, the Champlain Towers South in Surfside, Florida, the lack of maintenance can lead to deadly consequences. Too often “maintenance” of property begins with an insurance claim denial or a new law. Poor maintenance creates a liability that can be avoided by using best practices and planning maintenance before an incident occurs.

Planning starts with the community and includes a toolbox of professionals. Often, signs of wear and tear are not obvious to an untrained eye. And in some cases, even a trained eye has to do some professional digging in order to discover components that need repair or updating. There are a few reliable sources that provide warnings of maintenance needs.

The first line of defense for a common interest development includes the community at large, the board of directors, and the community manager that serves them. Due to the pandemic, homeowners are spending more time at home than ever before, and folks are noticing maintenance issues that went unnoticed when lives were hurried by the hustle and bustle of daily routines and commutes. It is important to track trends and threads of comments from the residents of the community. These can often identify problem areas and help to avoid risks of greater loss if the issue was undetected. Professional community managers are highly specialized leaders who often have seen many properties and may notice issues of concern well before they are visible to a homeowner. Boards should trust their intuition, listen to homeowner concerns, and if they have a community manager, rely on their advice. Having a good system in place to detect potential problems is the first step to minimizing long term risk.

When a maintenance or repair issue is identified, it is important to call in professionals. Whether the original developer, a construction management company, restoration specialists, or the association attorney, a qualified team of experts will help the association to make the repairs needed to avoid costly insurance claims, denials, or, worse yet, structural failure and loss of life.

Calling in professionals and obtaining bids is a good start. But the board should follow through with their fiduciary duty by comparing bids, understanding the strategy to fix the issue, and comprehending and relaying a plan to the membership. These best practices will keep the process transparent and imbue faith in the board.

The earlier maintenance needs are discovered and tackled, the less likely a loss will occur, and almost certainly fewer out-ofpocket expenses will be accrued. Insurance companies and agents often give early

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warnings and recommendations. These should be taken seriously. Many insurance carriers conduct their own property surveys every few years. When an insurance company inspects a property, it will look for deficiencies such as missing fire extinguishers; or components that need attention, like raised or cracked concrete; or elements that need updating, like fire sprinklers and alarms. The intent is to be a good business partner with the communities by using their expertise and experience to minimize risk and avoid loss. The recommendations may cost money to accommodate; however, in the long run, the cost is often far less than the insurance deductible itself. By following the recommendations of the insurance carrier, these actions should minimize the risk of claim denial, but more importantly, the community may avoid costly repairs and maintenance, and potentially a catastrophic failure and even loss of life.

In addition, a well-prepared reserve study can often point the association in the right direction. A highly proficient reserve analyst will take the necessary professional steps to inspect the property and offer advice on component life expectancy, including an estimate on the reserve funding needed to repair, maintain, or replace a component. If a reserve study is followed properly and the right assessments are collected and used to maintain common areas, then the association may avoid loss or claim denial, and also increase the value of the homes and the morale of the community. This in turn will improve the desirability and buyer interest in the community.

A poorly funded reserve study does not and should not prevent proper maintenance from taking place. Special assessments may need to be taken into consideration. Banks that specialize in low-cost loans for homeowners associations are also available to walk communities through the loan process. Even as loans are secured and projects are completed, a proactive approach to funding future projects is the best bet for communities. Getting on track with appropriate regular assessments and maintaining a well-funded reserve study only furthers trust in the community and contributes to home values.

Maintenance of community property should be a routine part of community management, whether the association is small or large. The devastation of the Champlain Towers South only highlighted the endemic risk and importance of a maintenance plan for larger buildings and high-rise structures, and the need for better inspections and management action to avoid catastrophic failure. These large-scale buildings often need more direction than simply the homeowners’ comments and insurance company recommendations. They need more than a well-prepared reserve study. Maintenance of these unique buildings will benefit from more invasive studies such as engineering reports, regular fire inspections, and city or county guidance. Associations should stay tuned for anticipated changes to state, federal and local laws for required maintenance and inspection of these larger, multistory buildings.

Other reasons association insurance claims may be fully denied or, more commonly, partially denied by insurance companies include policy exclusions (of which the board may be unaware), lack of insurance, or failure to submit the claim on time.

Associations can sometimes feel blindsided by denials due to

policy exclusions of which they were not aware. It is important and extremely valuable to review policy exclusions and address hypothetical scenarios before any such loss occurs. For instance, a standard fire insurance policy excludes earthquake and earth movement. Only a DIC (difference in conditions) policy can protect the association in the event of an earthquake. Be mindful that, despite the best efforts of a board, some homeowners may be unaware of this exclusion and may even assume that damage due to an earthquake is automatically covered by the master policy of the association.

Older associations should be particularly careful. Older communities may be required to bring their buildings up to code when repairing, maintaining, or replacing a community asset. Often building codes and ordinances change from the time of original construction. Fire sprinkler systems and elevators are two examples of likely code changes in older buildings. If the association has little or no building ordinance coverage, it could be facing major out-of-pocket expenses at the time of loss.

When an incident occurs, association management often feels confident they are taking the appropriate steps and time to investigate the claim and look into a potential loss. The claim is filed only after they know more about the nature of the loss, including location, components impacted, and estimated cost of repairs. But if the potential claim falls under a claims-made policy, like most directors and officers (D&O) liability policies, delaying a claim

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or waiting to submit a claim can result in a denial and ultimately a large financial loss.

If the board becomes aware of a potential D&O loss, they are urged to put their insurance carrier on notice quickly. There is little harm in making an insurance company aware of a possible issue and great potential harm in withholding it. If the board is unsure of what warrants notice to the carrier, they should contact their insurance specialist for clarification. Insurance experts, such as brokers and agents, are there to offer guidance and advice.

At the end of the day, repairs cost money and maintenance takes work. Oftentimes, communities are reluctant to raise assessments, and spending money is not always welcomed or made easy by the homeowners. But in order to uphold the fiduciary duty of the board, to avoid liability exposure to board members and the community, and to prevent denial of claims and perhaps even greater out-of-pocket expenses, these maintenance obligations must be met. Communities should start these important conversations with their insurance professional today to avoid that big red rubber stamp of a claims denial.

Charlotte Allen first walked through the doors of Socher Insurance Agency in 2005. As director of marketing, Charlotte works collaboratively with our brokers to highlight Socher’s service, knowledge, and dedication. Her commitment remains focused on educating common interest developments and their community leaders in some of the most prevalent issues faced today.

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