Americans place significant value on their residential investments. So who wouldn’t want to get involved in one’s homeowners or condominium association? But the directors and officers of these nonprofit association boards must take on such volunteer, non-paid responsibilities with eyes wide open. They could end up paying a steep price for their good citizenship if a lawsuit comes calling and the board does not have the proper insurance coverage in place.
To nonprofit homeowners and condo association boards, the community agent has a vital role to fulfill as risk manager and preventive insurance counselor. It is important to note the common exposures in this class, as well as guidelines for writing this book of business, which can be profitable for both underwriters and agents.
A growing market
The housing boom, one of the drivers of our economy in recent years, has brought about an accompanying boom in homeowners and condominium associations. Furthermore, these associations have more tasks and responsibilities (and more complex ones) than ever before.
As suburbia marches ever outward shared property and amenities in these subdivisions grow apace. The “good life” can include swimming pools, tennis courts, fancy club houses, walking trails and landscaped berms–even internal roads and secured entry points. Many subdivisions will be built around golf courses, although many of these will be deeded as separate entities, with homeowners having membership privileges or incentives.
Because of these features, a great percentage of all new homes being built today–not just condominiums–will require a homeowner’s association and board of directors.
In other, older areas, urban revitalization has upgraded the residential stock of many cities and downtowns in the form of lofts, condominiums and other “shared structure” owner-occupied housing. Condominiums have become an important component of most master planned town centers, whether all-new or rehabilitated. Too frequently, well-intentioned citizens offer to volunteer their time to a seemingly innocuous position on a relatively “unimportant” board, never realizing the degree to which they have opened themselves to exposure and litigation.
Range of exposures
What is the greatest source of potential litigation against homeowners and condo association board directors and officers?
Undoubtedly, it is the people. A common difficulty is that people running for and being elected to such boards are not always well-versed in running associations. As a result, many disputes revolve around bylaws and covenants.
Beyond this, while homeowners and condo boards have many similar and overlapping functions, it is useful to consider structural or physical issues, as opposed to social or behavioral issues. Condo association boards, in particular, will be responsible for the common structures of a condominium and, for the most part, will be more involved in issues akin to property management and asset preservation. Thus, charges against directors and officers can involve such issues as responsibility for repair and maintenance of condo structures, failure to properly assess members and maintain adequate funds, negligence in hiring contractors, or failure to maintain property value.
A board could also be charged with not properly insuring the condominium property, including exceeding deductible limits in an attempt to save on property insurance.
On the social side of things, two factors emerge. The first is the broader range of activities in the modern, upscale subdivision. More activities mean more things to supervise and more potential for claims against an association. While general liability would be the primary line of insurance defense in most instances (e.g., slip and fall), a board is always liable to a claim of not having acted prudently. Writing general liability and nonprofit directors and officers as a package should provide seamless coverage for any homeowners or condo association.
Next, the scale and character of new residential communities should encourage caution for boards and their insurers. Larger and more highly valued homes within a community, gated communities, communities with extensive internal roadways and the like, all raise security and related issues. Again, the security company retained to manage the entry point to a restricted access community would bear responsibility for its performance, but a board’s decision to hire this security firm will likely be legally called into question should tragedy strike.
Association covenants and their enforcement will be closely scrutinized. For example, pet policies may be an exposure, with opposite sides disputing whether certain pets are allowed, should be allowed, or how a neighbor’s pet fits into the acceptable or unacceptable category.
Lastly, municipalities and state legislatures have recognized many of the dynamics just discussed. Across the nation, new statutes regulating homeowners and condo associations are being written almost on a daily basis, something to which boards must be alert.
Writing the policy
Compared to nonprofit D&O for social service agencies or educational entities, that for homeowners and condo associations would overall seem less complex. And, most often, it can be. Agents writing D&O coverage for homeowners and condo associations do need to watch several key points.
Make sure there is a copy of the bylaws to review, and they comply with relevant state laws, including any common property. Make sure the association is properly certified as a nonprofit. Be on the alert for multiple or dissident boards. Determine if there are prior or pending claims, disputes or lawsuits. The association would be covered in the event of a claim or settlement going forward, subject to statute of limitations, but only if there is no prior knowledge.
Watch out for lingering issues with disgruntled board members. Consider the possibility of owners who believe they have been discriminated against by charges of not following the association bylaws and covenants. If a condominium is relatively new, watch for developer involvement in the association as he or she may still own units that are unsold. While most condo and homeowners associations are all-volunteer, consider the possibility of employment professional liability insurance complaints by employees.
Overall, it’s been estimated that as many as half of condo or homeowner’s associations may be involved in a lawsuit of some kind at any given time. Accordingly, agents have an important role in helping these associations meet their nonprofit D&O coverage needs.
David J. Price is executive vice president,chief underwriting officer, and Kenneth A. Schneider is vice president, director of product development, with Burns & Wilcox. They can be reached at (800) 521-1918.
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