Insurance Claims — Why Are They So Darn Confusing? By JoAnn Borden, CMCA, AMS, PCAM
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s a board member or homeowner, one of the most confusing situations you are faced with is insurance claims, and while you may have your manager to guide you through these insurance claims, it’s important you understand them as well.
Additional coverages can be included. Your insurance agent will review your governing documents, inspect the association, and interview the board/management to determine the necessary coverages for your association. All associations engage in three core activities — business, government, and community — and purchasing a commercial package policy is essential to covering the overall association risks.
Insurance is convoluted at best; two parties (association and owners) having similar responsibility in ensuring they have proper coverage, homeowners not necessarily understanding the association isn’t responsible for “everything”, who owns what, who is responsible for repairs in the event of an insurance claim… I could go on and on. Convoluted, yes; confusing, VERY. As you read on, I hope to provide you with a broad understanding of the different types of insurance coverage, homeowner vs. association responsibility, and details of how a claim amount is determined.
Homeowners’ personal insurance is important not only for the individual, but also for the association. I’m sure you have heard the term “HO-6”. This type of personal insurance may cover the dwelling, personal property, loss of use, personal liability, and medical payments to others. Now… I want to define the dwelling coverage, because as a board member I’m sure you’re thinking the association covers the dwelling; you are correct, this is because commercial and personal insurance are interconnected on some levels because of the interface between common elements and individual units (condos or townhomes). HO-6 dwelling coverage of the unit, as defined in the governing documents, may include additions and alterations to the unit, items of real property that pertain exclusively to the unit, and structures owned solely by the owner located at the residence.
Insurance is divided into two broad categories: • Accidental, Life, and Health insurance • Property and Liability insurance Property and Liability insurance is split between two types: • Commercial insurance — A community association purchases commercial insurance • Personal insurance — Homeowners in an association purchase personal insurance Insurance policies are special contracts between the insurer (insurance company) and the insured (association or homeowner). A commercial package policy may include the following coverages for an Association: • Property and Liability • Boiler and Machinery • Blanket Employee Dishonesty (Fidelity) • Directors and Officers Liability 28
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The type of commercial coverage the association has purchased will define the responsibility of insurance coverage for the homeowner vs. association. There are three types of coverage: • Bare Walls — treats the unit and common elements as entirely separate • Original Spec — treats the unit and common elements as one as originally built • All-In — treats the unit and common elements as one and includes betterments and improvements not originally built Once insurance responsibility has been determined and allocated, it needs to be communicated to all owners. It is important
to remember that homeowner maintenance responsibility does not negate or absolve the association’s insurance responsibility. When the association holds the insurance responsibility it also has the repair/reconstruction responsibility, in the event of an insurance claim. As a board member, I know that you worry about whether the homeowners are adequately insured. Unfortunately, there is no way to control the effects of an owner’s underinsurance or lack of insurance. So, what can you do? Well, I haven’t talked about the deductible and how important it is to explain the financial responsibility of the deductible to the homeowners. Let’s talk about “Loss Assessment Coverage”. This coverage should be included in an HO-6 policy. The Association must communicate what the deductible amount is for the Association commercial policy to the homeowners so that they are aware of their financial responsibility. Regardless of an owner having adequate or inadequate loss assessment coverage, the deductible may be assessed back to the unit owner, damage in their home when there is association insurance coverage for a common element. When the association has original spec or all-in coverage, it is the association’s responsibility to perform the work and ensure it is brought back to an insurable state. Even though the association’s bylaws require the association to obtain insurance, the financial responsibility to maintain and repair individual units is not removed by the insurance provisions of the governing documents. And while the governing documents set forth insurance requirements on the association, they further provide that owners are responsible for the damages and liabilities pertaining to their unit. Since neither the governing documents nor state statutes alter the requirement that the owner is financially responsible for the maintenance and repair of the unit, the responsibility remains with the homeowner. Regardless of the insurance deductible amount ($2,500, $5,000, $10,000, etc) and because the