Ask an audience of community association board members if their communities are “fully insured,” and you will almost certainly receive a unanimous and confident show of hands.  Ask if they have reviewed their insurance policies in recent memory, or have ever read them at all, and the hands will begin to waiver.  If participants are honest, the show of hands should all but disappear.  
     
That’s not surprising.  Insurance is complicated, dry, and unlikely to be a favorite topic of conversation for anyone, with the possible exception of insurance professionals and their close relatives.  As a result, communities can have serious coverage gaps that often do not become obvious until after a disaster, when the insurer pays less than the amount of the loss or declines to pay anything at all.

How Much Is Enough?
The Fannie Mae requirement for condominiums (and thus the industry standard) calls for $1 million in general liability coverage.  But in a world in which litigation is constant and multi-million dollar awards have become the norm, a $1 million policy no longer goes very far.   It certainly wouldn’t have helped the community forced to pay a $32 million judgment awarded a resident claiming damage from mold, nor would it begin to touch the claim if an employee of your association accidentally runs over and kills a child in your community’s parking lot.  
     
Insurance professionals will tell you that property damage coverage is also often times inadequate.  That is partly because some boards set policy limits too low to reduce premiums, but it is also because many boards don’t know how the coverage they have matches their community’s needs.  What boards don’t know about their coverage can definitely hurt them, as the board of a Massachusetts condominium discovered after their building was destroyed by a fire.  When this board filed the association’s claim, it discovered that because of a measurement error, the policy understated the size of the development by 10,000 square feet.  As a result, the coverage fell far short of the amount required to rebuild, and owners had to absorb a $50,000 - $70,000 per unit special assessment to close that gap.  
    
A policy offering “guaranteed replacement cost” coverage (paying full costs of rebuilding) would have taken care of the above problem.  But that coverage, once widely available, is now obtained through endorsements that must be specifically requested.  Furthermore, few carriers offer it and those that do are extremely selective about the communities they will cover.  However, most policies do include an automatic inflation adjustment provision, which increases the policy limits annually to reflect increases in area building costs.  Boards should make sure their community’s policy includes that inflation trigger and also make sure the cost benchmarks the insurer uses are reasonable.    It is also a good idea to have the property appraised periodically – at least every three or four years – to make sure the coverage limits are adequate.  Also make sure you add coverage for any additions you have built or improvements you have made since the existing policy was issued.  
    
Having enough coverage is critical, but allocating it properly is equally important.  A stick-built suburban townhouse community paid $11,000 annually for a policy that provided 100 percent replacement coverage for earthquake damage.  That was probably overkill, given the relatively low risk that a quake would completely destroy a complex of this type.  On the other hand, this community had a $55,000 per building deductible for wind damage – an extremely high risk for these buildings, which were located on a hill.  Having the right amount of coverage overall won’t help if your policy leaves you exposed in the areas where you most need protection.  
    
These are the kinds of issues community associations should consider, but often don’t, when they are obtaining insurance coverage or renewing existing policies.  Most treat insurance like a commodity and shop for it based almost entirely on price, without considering the nuances that may make one policy, even if somewhat more expensive, a more cost-effective choice than another. 

Shopping for Insurance
The best way to shop for an insurance policy is to retain an insurance broker knowledgeable in association issues.  Such brokers can obtain bids and explain the similarities and differences of proposed policies.  Make sure your broker can analyze the association’s coverage and make sure it dovetails properly with the unit owners’ policies.  Otherwise, the association and individual owners could end up paying too much for coverage, or discover after-the-fact that no one had the coverage they needed. 

Problem Areas
Having the coverage you need in the areas in which you need it – is the biggest challenge.  The areas most often overlooked or structured improperly include: 

Deductibles.  Many associations have increased their deductibles from the $1,000 that was the industry norm to $2,500, $5,000 and as much as $10,000.  Those that haven’t yet made that adjustment should think about doing so.  Higher deductibles may both reduce the association’s premium costs and eliminate the small claims that can trigger future increases or even threaten future coverage.  Associations should also consider amending their governing documents or adopting a policy shifting the deductible payment obligation to the owners – easy for owners to do if they have the deductible coverage, which may be obtained as an endorsement to their policies.  

Ordinance or law.  Even guaranteed replacement cost coverage described earlier won’t pay to bring older structures into conformity with building code requirements adopted after the buildings were constructed.  If a building is damaged severely or destroyed and requires rebuilding, such building will need to be constructed in compliance with all current building codes.  A standard policy might pay the cost of restoring the building to its pre-disaster condition, but it won’t cover the cost of installing sprinklers, adding handicap parking spaces, increasing setbacks, and making other changes building codes will require.  Association policies typically exclude losses resulting from such “governmental orders.”  However, associations may purchase an endorsement that erases this exclusion and covers requirements created by state or local laws. 

Agreed amount endorsement.  This coverage eliminates the penalty that would apply if it turns out that your property is under-insured.  If you have only $10 million in coverage on a building that should be insured for $20 million, the insurer would be required to pay only half of any claim — $50,000 on a $100,000 loss.  An agreed amount endorsement would ensure full coverage despite that gap.

Business interruption.  If a fire or other disaster forces owners to relocate and temporarily disrupts the collection of common area fees, this insurance would enable the association to continue meeting its financial obligations until its normal income stream is restored. 

Non-hired auto coverage.  Assume that a board member while driving to a board meeting accidentally kills someone in an automobile accident.  If his/her personal coverage isn’t adequate to cover the claim, the victim’s family can sue the association for the balance.  For an additional $50 to $75 a year, a community association can obtain $1 million in coverage for this risk.   

Workers’ compensation. Many boards overlook this coverage, assuming they need it only if the community employs workers directly.  But associations without anyone on their payroll may still be vulnerable to claims.  For example, if an employee of a contractor the association hired is injured while doing work for the community and the contractor does not carry adequate coverage, the association may be required to provide the workers' compensation coverage.

Directors and officers liability coverage (D&O).  These policies typically will cover claims for unlawful employment practices, breaches of fiduciary duty and the like.  Make sure your policy covers the legal defense fees as they are incurred so that the association doesn't have to spend dollars up front.  Boards should also make sure their policies cover non-monetary claims (for board election challenges, architectural review decisions, rules enforcement, and the like).  Finally, most D&O policies exclude coverage for discrimination claims.  Boards should make sure they obtain an endorsement to cover such claims, which are getting more and more common.

A few more insurance tips for community association boards:

• Be proactive about risk management.  The best way to reduce premium costs is to limit the number of claims you file.  Use the association’s reserve study to identify risks and quantify exposures.  An older roof is more likely to be damaged in a severe storm and so represents a greater risk than a newer one.
• Shop the community’s insurance periodically to compare the coverage available with the coverage you have. 
• If you are changing carriers and/or agents, ask the agent to certify in writing what the new policy covers.  You want this statement to include an apples-to-apples comparison listing the coverage you had in the old policy, the coverage you are getting in the new policy that you did not have before, and the coverage you had previously that the new policy will not provide. 
• Establish claims management procedures and follow them if your community has a claim.  Most policies will specify the steps boards should take after incurring a loss, but it is also a good idea to ask the carrier to specify in writing any additional measures the company requires.
• Educate owners.  Make sure they understand why it is essential for all owners to have individual unit-owners’ policies, and consider adopting a rule requiring owners to demonstrate that they have this coverage. 
• Understand what property the association maintains and what property it is responsible for insuring. 

Don’t assume that your community is “fully insured.”  Read the association’s policy to make sure it provides the coverage you think you have and the protection that your community needs or have it reviewed by a professional.