Shopping for Insurance: Mitigating Misfortune

By Kathy Danforth / Published December 2015

Insurance won’t prevent forest fires, broken legs, or hurricanes, but it will provide the financial resources to address the adversity. Boards of directors of a condominium or homeowner association are responsible for assessing the risk of damage or liability their association may face and planning their financial escape route. Determining how much and which types of insurance are needed to avoid unacceptable exposure to loss is an ongoing process.

“Property insurance coverage, to protect against losses from fire, windstorm, or any damage to the physical structure, is the big ticket item,” says Wayne Howell with Herbie Wiles Insurance. “Typically, the windstorm deductible is available in increments of two to five percent of the value of the property. However, for associations with multiple buildings, associations should note that insurance companies may calculate this differently. If you have a three percent deductible, some companies will consider that to be three percent of the value of the complex, while others apply the deductible separately to each building based on that building’s value. When only one building is damaged on a property with multiple buildings, a deductible based on the value of all buildings can be a significantly larger amount.”

Ordinance and law coverage is available to cover the additional construction costs to bring a damaged building up to local building ordinances if it requires major repair or rebuilding. “Some companies include this in their standard coverage,” remarks Stephen Jones with Herbie Wiles Insurance, “but it’s important to ask about, especially for older associations. A basic policy only requires bringing the building back to how it was before the loss. Following Hurricane Andrew in 1992 and prior to 2004, building codes changed significantly. Depending on the area, frame construction may no longer be allowed, and electrical, plumbing, and other standards have also been upgraded. For older buildings, reconstruction could cost 50–100 percent more than the building’s value. Though it is not that important for new buildings because they already meet current codes, the older the building, the more changes and expenses you would have to rebuild to current codes.”

With the 2015 FHA Condominium Guidelines stating that the master coverage “must be 100 percent of replacement cost of condominium, not including foundation or land,” associations have recently encountered challenges meeting those lenders’ requirements. “Some major banks have been requiring that the association’s property insurance be for an agreed-upon amount with no coinsurance,” says Jones. “Coinsurance is the percentage of the cost to replace the building that a policyholder is required to insure. If the property is insured for less than the required coinsurance amount, then a proportional penalty is applied to any subsequent loss, thus reducing the claims payment. Insurance only works if people insure for the amount it would take to replace the building. If you think you’ll never have a total loss and you only insure for half the value, that doesn’t work! Coinsurance encourages policyholders to carry an appropriate amount of insurance on their property; if they do not, then they will share in any loss.”

“Mechanical breakdown coverage can be included with property insurance, or it is available as a separate policy,” states Howell. “This covers breakdown of major equipment, such as elevators, large air conditioning units, coolers, etc., and it is almost like a warranty. As we’ve educated people, more associations are picking up this coverage. In reality, a small association without major air conditioning units or an elevator is less likely to need or purchase it than a high rise.

“Most property insurance is special form, so it covers all damage that is not specifically excluded,” explains Howell. Coverage for earthquakes, sinkholes, or floods is not generally included, though it can be added for an additional charge. Howell remarks, “You hear, ‘We don’t need flood insurance because we’re not in a flood zone,’ but if you’re in the state of Florida, you’re in a flood zone. You may not be in a special flood hazard area where the banks require coverage, but flooding can still happen. For example, the severe flooding in South Carolina this fall was flooding in a standard zone. Though it may not make sense, hazard zone coverage may be cheaper than standard zone because it’s rated based on the difference in elevation between the first floor and the surrounding elevation. In a standard zone, there is not a requirement for an elevation certificate.”

“The other major coverage besides property insurance is general liability,” says Jones, “which will cover expenses for injury or property damage when the association is at fault. The most common liability claim is from someone’s fender getting caught going through the gate. However, a claim can get quite expensive if someone falls and is seriously injured because of a loose handrail.”

Workers’ compensation insurance, providing coverage for injuries occurring at work, is required for employees, but can be a valuable protection even for communities without employees. “Since the premium is based on payroll, the charge is low for associations without employees, but it will cover any vendor onsite who doesn’t have their own coverage,” notes Howell. “The liability for an injury to a worker onsite may come back to the association if the vendor does not have coverage. Workers’ compensation will also cover a resident who is doing volunteer work, if that work was requested by a board member. It’s important to note that for coverage the member has to be acting on behalf of the board; if I pull weeds for the community on my own, there is no coverage.

“Directors and officers coverage is very important for board members because it covers the board of directors and individual board members for their actions or decisions,” says Howell. “An individual member may sue, saying the board or an individual board member hurt them in some way, which would not be covered by general liability insurance as a trip-and-fall accident would. Some companies extend this coverage to committee members also.

“With escalating litigation, umbrella policies are becoming more common,” says Howell. “This coverage sits on top of the association’s liability and directors’ and officers’ coverage to increase those amounts by the amount of the umbrella policy. For many years, $1,000,000 was adequate coverage for a lawsuit, but now $5–$10,000,000 umbrella policies are more common.”

Protections against embezzlement or theft by board members or management is mandated by state law for condominiums. Florida Statute 718.111(11)(h) governing condominiums states, “The association shall maintain insurance or fidelity bonding of all persons who control or disburse funds of the association” in an amount that would cover the maximum funds available at any time. For homeowner associations, this coverage is not required; however, the decision whether to carry crime coverage must be presented for a vote by the membership rather than decided by the board.

For condominiums, the state specifies which items must be covered by the association property policy and which items the homeowner is responsible for. “Some confusion arises because the insurance responsibility the state assigns may be different than the maintenance responsibility that the association assigns,” observes Howell. “For example, a door may be covered by the association’s insurance policy, but the homeowner must maintain it.” Changes made by the state in 2009 include a requirement for the association policy to cover air conditioners.

Homeowners in a condominium are not required by state law to carry homeowner insurance as they have been in the past, though the association may require it. “Typically a unit owner can purchase a package policy that covers contents and liability,” says Howell. Liability coverage for residents can be important for instances where one unit owner’s problem—such as a water overflow—damages another unit.

For contractors working onsite, Howell states, “Regardless of the size or type of project, they should have general liability insurance. They could damage the property, or someone could trip over their tools. Workers’ compensation is necessary, too, for any employees who might be hurt on the property. The association could be included in a lawsuit if someone is injured without coverage, and it could become a claim against the board of directors for negligence in using a contractor without appropriate insurance.”

Insurance needs and requirements are a shifting target, which requires adjustment over time. Howell notes, “Appraisals are required every three years to ensure that property coverage is based on the current value of the property. Every board should meet with their agent at renewal to see what else is new, also. Legislative changes do come out of Tallahassee periodically. New credits may be available for roofs or other features. One company may have better premiums, while another has better terms or deductible options, so it’s important to deal with an agent you trust who will get multiple quotes to consider.”  Prevalence of a particular type of claim may result in the insurers changing coverage, which may affect which carrier the association needs. And, the association’s access to funds may dictate what out-of-pocket costs can be handled by the community. Insurance comes into play when there is already a problem; not having adequate insurance will make it that much more difficult to face accidents, catastrophes, or blame-and-claim lawsuits.