EXECUTIVE SUMMARY
Greatest Risk to Association Managers From the desk of Rod Medlin, AAI
I often read and follow trends and legal issues arising in property claims relating to property managers. I do this for obvious reasons, as my agency insures over 1,000 HOAs and well over 150 associations. So it is important to us and our client management companies. Recently I asked myself “What is the most catastrophic claim that can happen to both a management company and the association they serve? My conclusion is based on my experience and knowledge gained in 40 years in this business. The answer is underinsurance due to an inadequate property valuation, typically resulting from a defective decision-making process when selecting the insurable value. Swiss Re, who provides high limits for insurance agents E&O, agrees on this subject. I have found that there is often a big misconception shared by both property managers and board members, which can and has led to litigation adverse to both parties, and sometimes their insurance agent. That misconception is that “the insurance agent is responsible for picking the total insurable value adequate for replacement cost.” Specifically, legally, who picks the property value for a Community Association? So I put this question to Leland de la Garza, a shareholder at Hallett & Perrin, P.C., who has served as our Corporate Counsel and has served as our exclusive litigator since 1999. I asked Leland to prepare a brief on this important issue, which is attached. I encourage you to read his brief and do a self-evaluation of your own decision-making process. How did you do? This issue deserves some attention before it rears its ugly head. Leland’s brief gives some good suggestions on how to mitigate the risk of facing a claim because of an inadequate insured value. Agents, managers, and board members would be well served by not learning the hard way. If we were discussing my home insurance, the analysis would be simple. I choose the insurable value of my house. If it is too low, so as to be inadequate for replacement, then I pay the cost of my mistake. When discussing a community association’s property insurance, that decision must, necessarily, be made by the board of directors, and may be guided by a property manager. And, it must be evaluated regularly because property values and replacement costs rarely remain the same. The failure to properly evaluate and determine the insurable value must fall on the ones charged with managing the association’s property, the board of directors, and the property manager if that responsibility has been shared. At Scarbrough, Medlin and Associates, Inc., my Association Team of 8 Producers and Account Managers can assist any managers and boards with securing the property insurance they need. Insurance Agents Are Not Responsible Under Texas Law for Procuring “Adequate” Property Insurance A frequent source of disputes and litigation when dealing with property insurance is inadequate insurance coverage. While property owners usually want the most insurance possible at the lowest cost, owners or property managers often decide to use a lower property value to reduce their premium cost. And, many times owners simply do not pay enough attention to the values used each year in insurance applications when buying insurance, only to realize after a loss that values that were adequate in the past are no longer adequate. Whether due to cost-cutting or inattention, when a loss occurs the owner or property manager usually casts the insurance agent as the villain, while claiming victim status. Under established Texas law, an insurance agent is generally not responsible when insured property is under-insured.
CONTACT | FALL 2021 • 29
