Presentation on theme: "INSURANCE PRIMER FOR ASSOCIATIONS"— Presentation transcript:
1 INSURANCE PRIMER FOR ASSOCIATIONS Scott F. McLaughlin, CIC, CRM, CIRMSCAU, Inc.Office: Ext. 7182Cell:
2 HOW TO BEGINStep one in an analysis of your insurance program will include a review of legal and lender requirements:Know what state statues require. Some states, such as Arizona, require that property coverage for buildings include the developer’s original specifications. This policy form is known as ‘single entity’Review your association’s governing document requirements. Are there specific requirements for liability limits? Is boiler and machinery coverage required? Is a waiver of subrogation against unit owners required? Failure to be in compliance with the Association’s governing document requirements could be construed as a breach of fiduciary responsibility by the board of directors. Remember: the CC&R’s are a legal contract between the Association and the unit owner.Be familiar with guidelines of lenders such as FNMA. Specific guidelines include those for property and fidelity bond or employee dishonesty coverage.A review of policies and coverage forms will begin with the master package policy. This policy can provide a full range of property and liability insurance as well as other coverage parts like boiler and machinery, employee dishonesty, crime, directors and officers liability and others.
3 PROPERTY COVERAGE FORM BARE WALLSProvides coverage for commonand limited common elements.It excludes property within theUnfinished interior surface of theperimeter walls, floors and ceilings of units or privatestorage areas, additions, alterations and structuralrepairs, finishes, coatings and coverings of walls, floorsand ceilings, and permanently installed appliances andfixtures
4 PROPERTY COVERAGE FORM SINGLE ENTITYProvides for commonelements, limited commonelements, and propertyincluded in units and privatestorage areas which were initially installed inaccordance with the association’s original plansand specifications or a replacement of like kindand quality.
5 PROPERTY COVERAGE FORM ALL INProvides coverage forcommon elements,limited common elements, propertyincluded in units andprivate storage areas and additions,betterments and improvements made at theexpense of a unit owner
6 VALUATION OF LOSS REPLACEMENT COST (RC) Allows for recovery of a loss on the basis of actual replacement without regard for depreciation. Property values are considered on the basis of new for old, subject to a specific policy limit.ACTUAL CASH VALUE (ACV)Allows for recovery of a loss on the basis of actual replacement minus depreciation.GUARANTEED REPLACEMENT COST (GRC)Allows for replacement cost with no limit. The coverage form will not state a specific property limit and allows recovery of a loss to be whatever the replacement cost is at that time.Guaranteed Replacement Cost example – Association has a IRC of $12M and it cost $20M to rebuild – cost of materials, labor and increased cost to carry materials across by Ferry.
7 VALUATION OF LOSS AGREED AMOUNT OR AGREED VALUE Coverage which waives any coinsurance clause in the insurance contract and eliminates the possibility of a coinsurance penalty if property is not insured to value at the time of lossINCREASED COST OF CONSTUCTIONAs a property ages, it will become subject to updated building codes. In the event of a loss, reconstruction may be required to meet current codes. For example, a sprinkler system in a building or handicapped facilities in a restroom may be required for rebuilding.Ordinance or Law Coverage – to bring the building up to code after a covered event/loss.NOTE: Coverage 1, 2 & 3 or Coverage A, B & C = Contingent Liability from Building Laws, Demolition and Increased Cost of Construction
8 CAUSES OF LOSS COVERED SPECIAL FORM This coverage form is also known as “all risk” and provides protection for all perils except those specifically excluded. While the special form is the broadest available, there are many variations in perils excluded such as: sewer backup, artificially generated electrical current or mysterious disappearance for property of others. Standard exclusions include flood, earth movement, war and military action, nuclear reaction and material factors such as wear and tear, rust, corrosion, deterioration, hidden or latent defects, settling, cracking, bulging, shrinking or expanding.Most Common cause of loss for property damage in AZ? Water Damage (Washing Machine Hoses and Water Heaters)Sewer Back Up claims on the rise – many insurance carriers either offer low limits of insurance, exclude coverage or include a negligence clause to the policy.Vacancy Clause – over 60 days vacant or unoccupied – exclusion can be applied. If fire – 15% of total loss will be paid. If other cause of loss – no payment will be offered.Coinsurance Penalty - % of underinsured will be deducted from total loss. GRC and Agreed Value eliminate the coinsurance penalty.
9 CAUSES OF LOSS COVERED CONTINGENT LIABILITY FROM BUILDING LAWS To understand this coverage, one must recall that the special form, replacement cost policy will repair or replace those items damaged by the peril of fire, wind, lightning, etc. However, if a regulatory authority condemns a whole building rather than allowing the repair or replacement of the damaged portion of the building, the total building is lost. Contingent liability coverage is needed to rebuild the undamaged portion of the building while the standard policy form will rebuild the damaged portion of the building.DEMOLITION COSTSWhen the Contingent Liability clausebecomes operative, the undamaged portionof the building must be razed before it canbe rebuilt. Demolition cost coverage affordsthis protection.
10 ITEMS OF PROPERTY COVERED BUILDINGSCould include residences, club house,meeting centers, boat houses, carports,garages, sewage treatment facilities,and heating and air conditioning plants.Could also include foundations; pipes, wires, conduits, andutilities whether above or below ground; heating, ventilationand cooling systems; sprinkler, fire protection and securitysystems; permanently installed building machinery andequipment; balconies; porches; decks and patios
11 ITEMS OF PROPERTY COVERED STRUCTURESCould include arbors, awningsor canopies, bridges, bulkheads,cabanas, courts for handball, courtsfor racquet sports, flagpoles, fences, walkways, roadways, fountains, gatehouses, gazebos, piers, docks and wharves, pump houses, recreation fixtures, retaining walls, swimming pools and statues.
12 ITEMS OF PROPERTY COVERED OTHER PROPERTYCould include antennas andsatellite dishes, electronicdata processing equipmentand software, fine arts, indoor and outdoorfurnishings, glass, personal effects, propertyof others, property off premises, signs, andtrees, plants and shrubs.
13 ADDITIONAL PROPERTY COVERED LOSS OF INCOMEProvides coverage to replace the lost income during the period when damage to the premises or other property prevent this income from being earned. For example: loss of maintenance fees when a unit is damaged by fire.EXTRA EXPENSEProvides coverage for the additionalexpenses needed to continue theoperation of the association followingan insured loss. The expenses of atemporary office, phone lines andequipment rental would be an extraexpense.Discuss Maintenance Responsibilities versus Insurance Requirements – most common misconceptions – unit owner is responsible for maintaining their unit – washing machine breaks releasing water – not the Association’s responsibility.If nothing is done: 3 things can happen:1: Nothing2: Subrogation by the HO6 Insurance Carrier3: Litigation against the Association/Board of Directors for gross negligence and following the requirements of the governing documents.
14 PRIMARY LIABILITY COVERAGE Liability coverage insures against third party claims arisingform alleged bodily injury (BI) or property damage (PD) to membersof the publicThe insurance companyhas the duty to defend theassociation against anyclaim which alleges injuryor seeks damages regardless ofwhether the association is negligent.A comprehensive general form is preferred as it covers alloptions of the Association and is not restricted to theAssociations premises.
15 PRIMARY LIABILITY COVERAGES ADDITIONAL INSUREDSProvides employees and property managers acting within the scope of their duties the same liability protection afforded to the associationADVERTISING INJURYProtects the association against injury arising from advertising activities including slander, defamation of character or libelCONTRACTUAL LIABILITYProvides coverage if the association has entered into any contracts where it agrees to indemnify or hold harmless the other partyAdvertising Injury – offer Poem example
16 PRIMARY LIABILITY COVERAGES CROSS LIABLITYProvides protection if an owner or member of the association sues the association for bodily injury damages occurring on a common area as a result of negligence by either a unit owner or the associationGARAGEKEEPERS’ LEGAL LIABILITYProvides protection for the automobiles of unit owners or guests that are in the care, custody or control of the association, such as attendants that park cars. Coverage is provided for such perils as collision, vandalism and theft.HOST LIQUOR LIABILITYProvides coverage for liability that may arise if the association sponsors events where liquor is consumed or served.Holiday Parties – Host Liquor Liability example
17 PRIMARY LIABILITY COVERAGES INDEPENDENT CONTRACTORS LIABILITYProtects the association from loss due to liability arising from operations of subcontractorsSEVERABILITY OF INTERESTPrecludes the insurance company from denying liability because of negligent acts of the association or a unit ownerMEDICAL PAYMENTSProvides coverage for medical expenses ofmembers of the public injured on the commonproperty whether or not the association is liable
18 PRIMARY LIABILITY COVERAGES PERSONAL INJURYExtends bodily injury to include false arrest,detention or imprisonment, maliciousprosecution, libel, slander, defamation ofcharacter, invasion of privacy, wrongfuleviction and wrongful entry. Some formsmay also include coverage for humiliation and discrimination.PROPERTY DAMAGE LEGAL LIABILITYProvides coverage for the association for property of others in the association’s care, custody or control at the time of loss. Some forms limit coverage to the peril of fire only.Libel example: Late Assessments – 30 days, 60 days and 90 Days ‘Chart’.Property Damage example: Common Area tree falls on unit owner’s vehicle
19 PRIMARY LIABILITY COVERAGES LIABILITY LIMITSOCCURRENCEAn occurrence means an accident that results in injury or damage neither expected nor intended from the standpoint of the insuredGENERAL AGGREGATEThe general aggregate limit is the most the insurance company will pay for any and all liability occurrences or losses under the policy during any one policy year
20 UMBRELLA POLICYThe umbrella liability policy provides coverage in excess of general or primary liability and other coverage’s which could include automobile liability, employers liability (workers compensation) and directors and officers liability.An umbrella policy becomes effective when primary or underlying limits have been exhausted, or when a claim develops that is not covered by primary insurance but is covered by the umbrella policy.It is important to distinguish the breadth of the umbrella coverage form. It may be a excess form which is the same as the primary coverage, it may be a following form type or it may be a form that is broader than the primary policy.Determine whether defense costs are provided in addition to policy limits. Establish whether there is a self insured retention which applies to coverage not included on the underlying or primary policy.SIR – Self Insured Retention (amount of the claim payment that the Association is responsible)
21 DIRECTORS AND OFFICERS LIABILITY Directors and Officers liability provides protection against claims alleging loss arising from mismanagement or wrongful acts.A wrongful act means any breach of duty, neglect, error, misstatement, misleading statement, omission or other act done or wrongfully attempted by the association.
22 DIRECTORS AND OFFICERS LIABILITY SCOPE OF COVERAGEClaims Made FormProvides protection for claims made or presented to the insurance company while the policy is in force, without regard to when the event occurred. Most policies today are written on a claims made basisFull Prior ActsProtection for losses which occurred before the policy inception on a claims made coverage form. Full prior acts coverage eliminates a retroactive dateRetentionAmount of claim payment for which the association is responsible. The retention may be in addition to a policy deductiblePersons InsuredShould include the association; directors and officers, past and present (elected or appointed); employees; committee chairs and members; and other association members acting at board direction
23 DIRECTORS AND OFFICERS LIABILITY HOW IT PAYSIndemnity ContractThe insurance company will indemnify the association for any costs for which the association becomes legally liable. The association is responsible for hiring and paying legal counsel until indemnified by the insurance company. indemnification may not occur until the claim is concluded.Pay on behalf of contractThe insurance company will choose legal counsel, handle the claim, and pay any costs for which the association becomes legally liable including costs of the defense.Defense CostsDetermine whether defense costs are included in the policy limit or are paid in addition to the policy limit.
24 DIRECTORS AND OFFICERS LIABILITY EXCLUSION REVIEWThe coverage provided by directors and officers liability forms varies greatly. The extent of coverage provided or not provided can be determined by reviewing policy exclusions.Those exclusions include:Failure to maintain adequate insuranceInjunctive Relief/Non-Monetary damages (the most common type of D&O claim today)Discrimination – illegalWrongful TerminationSexual HarassmentMost common reason that a D&O Liability suit is denied: Neglecting to report a written notification of the law suit or possible law suit to the current insurance carrier.
25 EMPLOYEE DISHONESTY (FIDELITY BOND) Employee Dishonesty coverage indemnifies the association for loss of money, securities or any other property due to acts of fraud, dishonesty, forgery, theft, larceny, embezzlement, wrongful abstraction, or willful misapplication or misappropriation or any criminal act.Coverage is provided only for the association’s employees, unless it isspecifically broadened. Directors and officers of the association andemployees of the property management firm who handle associationfunds should also be covered. Association documents and/or FNMAguidelines may specifically require that coverage be broadened.FANNIE MAE requires at least 3 months operating expenses plus reserves. Many Association’s CC&R’s require 1.5 times the full operating expenses plus reserves.
26 ADDITIONAL COVERAGESAdditional policies or coverages which the association’s exposures may require or desire include workers compensation, employee benefits liability, boiler and machinery coverage and automobile liability.The basics of these coveragesAre outlined as follows:
27 WORKERS COMPENSATIONWorkers compensation insures against claims for work related injuries or diseases suffered by employees that are compensable by statute and/or are imposed by law as damages. Coverage is provided for payment of medical expenses and reimbursement of lost wages.Coverage should be considered even if there are no regular employees. Protection may be needed in the event the association employs casual labor or if the association hires an independent contractor who has no insurance coverage.
28 Employees of Independent Contractors: WORKERS COMPENSATIONEmployees of Independent Contractors:Q: Isn’t the contractor responsible for its employees?A: Normally, independent contractors with employees are required by AZ state law to maintain Workers Compensation insurance. However, when a contractor fails to maintain the required insurance, a sick or injured employee may – and often does – recover direct from the Association – even though he or she is not an Association employee
29 Part-Time, Casual, Seasonal & Unanticipated Employees: WORKERS COMPENSATIONPart-Time, Casual, Seasonal & Unanticipated Employees:Q: Is it possible to have an employee and not know it?A: A person performing services for you may or may not be an employee for Workers Compensation purposes. What appears to be an independent contractor relationship – and which may indeed be one for all purposes – could be an employment relationship where Workers Compensation is concerned. Aside from any other considerations, courts and Workers Compensation commissions lean toward an employment relationship whenever the person in question is otherwise uninsured.
30 EMPLOYEE BENEFITS LIABILITY Employee benefits liability provides coverage for errors and omissions which may occur in the administration of the association’s employee benefits program.Usually written on a claims made form, the coverage will respond for example, when in the event of an administrative error an employee is not added to the group health policy and the employee or covered family member suffers a serious illness or accident.The association should establish whether this coverage is subject to a retroactive date, deductible and/or an aggregate policy limit.
31 BOILER AND MACHINERYBoiler and machinery coverage provides coverage for exposures which are normally excluded in the property coverage form. Boilers, pressure vessels and mechanical equipment including compressors, pumps, fans, blowers, engines, turbines and wheels can be covered for mechanical breakdown perils. Most boiler forms will provide coverage for individual heating and air conditioning units, as well. Loss of income and extra expenses incurred as a result of a mechanical breakdown can also be covered.
32 BOILER AND MACHINERYCommon terminology necessary to understand boiler and machinery coverage includes:AccidentA sudden accidental breakdown of the object or part which manifests itself by physical damage and necessitates repair or replacement of the object or part.Repair or ReplacementReimburses the association for the amount actually expended to repair or replace damaged property. Payment is normally made for the lowest of the costs either to repair or replace the object or part.Extra ExpenseExpenses incurred to continue operations after an insured accident; i.e. rental equipmentExpediting ExpensesExpenses incurred to get the association back in operation in the shortest time possible; i.e., air freight feesJoint Loss AgreementProvides prompt payment of a claim for the association when the package and boiler and machinery policies both must respond to a loss
33 AUTOMOBILEThis coverage is needed for the operation of motor vehicles. A policy includes liability coverage for protection against third party claims arising from alleged bodily injury or property damage to members of the public. Coverage may also be provided for medical payments, collision, comprehensive perils and non-owned and hired autos.Non Owned AutoProvides protection against the exposure of the association from liability for operation of autos that it does not own. For example, a claim could be made against the association when an employee is involved in an auto accident while on association business.Hired AutomobileProtects the association from liability for operation of automobiles that it hires, rents, leases or borrows.