Good risk management and the securing of an insurance
policy are primarily the responsibility of the Board of Directors
of an association. The purpose of this article is to help clarify
these subjects and assist you as a Board member in meeting your
responsibilities.
So what is Risk Management? It is the process of
making decisions that will limit accidental losses for your association.
For example, if a part of the community-owned sidewalk has shifted
upward at a joint above the rest of the sidewalk, a tripping hazard
has been created that may cause an accident. This accident may
then result in a claim and/or lawsuit against the association.
So what can we do? There are two primary risk management techniques
one could use: Risk Control and Risk Financing.
Risk Control relates to the steps that can be taken
to prevent or limit losses and the financial burdens that can be
placed on a Community as a result of a loss. For example, the removal
of the diving board from the pool. There is little question that
this step could reduce the frequency of a loss. Or you could take
steps to completely avoid a loss. A rule prohibiting the use of
personal BBQ grills within a condominium community would help avoid
a fire. You could also transfer some of this risk and responsibility
to vendors. Instead of hiring employees, you can enter into contract
with third-party vendors requiring them to provide their own fully
insured personnel to get a job done. These are just a few steps
that can be taken to control risk.
Risk Financing is the way to pay for the financial
burden that may result in the event of a loss. There are two ways
to accomplish Risk Financing. One is save funds to cover the expense
of a possible loss whenever it should occur. For example, the Board
may decide to cover the replacement of office and computer equipment
with a funded savings account. Since faster and better computers
and copiers are being produced each year, insuring this equipment
may not seem economically practical. Another way of Risk Financing,
of course, is to purchase insurance - - which is typically offered
at a fraction of the replacement cost of that being insured.
The insurance industry offers property and liability
insurance through two systems. The America Agency System is a system
where agents secure policies through many different insurance companies
for the benefit of their client. The Direct Writer System is a
system where the agent is an employee of the company and only secures
a policy with that single company.
Once you have purchased insurance for your community,
you have entered into a contract with that insurance company and
this contract is called a policy. A common commercial policy has
five parts. The first part is the called the common
declarations. This part includes information as to
the name and address of those insured and the time period of the
coverage. It is similar to the title page of a book. The next part
is known as the common policy conditions.
This is the area that provides that basic information about the
policy. For example, how the policy can be cancelled, whether there
is a penalty for cancellation, or how to file a claim. The next
section explains the type of coverage that is being provided and
is called the selection of forms. More
simply stated, this area states what is and what is not being covered.
For example, property insurance for the front entrance monument
may cover the brick wall but exclude the plants and shrubs around
the entrance in the event of weather related loss. The next part
of the policy is called optional endorsements.
This is the area where you or the insurance company can add or
subtract items that are covered or causes of loss. A common example
of this is mold exclusion. The last part is the Glossary.
As in any book, this is the area that defines terms and concepts
that pertain to the policy.
Your association is created with a set of governing
documents that identify the responsibilities of all parties involved.
The Covenants, Conditions & Restrictions and By-Laws, Rules
and Regulations clearly establish the direction of the community
and further identify the common areas (property shared by all owners)
and limited common areas (property not shared by all unit owners).
This concept is imperative when discussing the insurance needs
of the community. The policy coverage that is attributed to association
can be seen in the following:
Property
All real property such as buildings, entrance walls,
clubhouses, water and sewerage treatment buildings, light fixtures,
fences, etc. Waiver of subrogation against other unit owners. Replacement
of units back to their original construction quality.
General Liability
Coverage that protects the association from injuries
sustained by the individual(s) when they are on common area, such
as walkway, swimming pool, or any other amenity owned by the association.
Directors and Officers Liability
Coverage that protects and provides legal representation
for the decisions and actions of Board Members (including committee
persons) that are disputed by another party.
Fidelity Insurance
Coverage that protects both the association and the
individual or Management Company that is assigned to collect and
pay out monies on behalf of the association. The Property Management
Company is typically an additional insured under fidelity coverage
and in D&O claims.
Building Ordinance Law
Provides coverage that automatically includes demolition,
contingent liability and increased cost of replacement construction
due to more stringent building codes on a state, city or county
basis.
Environmental Impairment
Bodily injury caused by pollution conditions, property
damage, remediation expenses and defense costs attributed to pollution
claims.
I would strongly suggest that the individual, committee
or management company soliciting proposals from various insurance
companies on behalf of the Board of Directors for the community
association they represent use a spreadsheet to disclose their
findings. This technique allows careful comparison of competing
policies while evidencing a thorough job. All too often, the task
of collecting this information is rather tedious so you should
encourage interested insurance agents to assist you in this chore.
Good risk management and the prudent selection of
coverages can help to assure that your community association limits
its losses, is adequately insured when the unexpected happens,
and is deserving of the lowest-priced premiums in the marketplace.
For the benefit of your neighborhood, an aggressive program to
reduce losses pays huge dividends for all!
