Condominium associations can be sizeable organizations responsible for overseeing and managing hundreds of residents, possibly thousands. This responsibility often involves hundreds of thousands, or possibly millions of dollars worth of property and revenue. A for-profit organization dealing with similar figures will commit significant resources to protecting its assets. For some reason, however, many condominium associations fail to take the same precautions. Perhaps the most common oversight, and often the costliest, is an association’s failure to review and understand their insurance coverages.
The most common mistake made by insureds is assuming coverage for a particular situation. Unfortunately, as a board member, making assumptions may constitute a breach of their fiduciary duty to the members of the condominium association. When, not if, things go wrong, board members should have a solid understanding of what will be covered by the association’s insurance policies, and perhaps more importantly, what will not be covered.
A recent case highlights the importance of understanding an association’s insurance policies, coverages, and exclusions. A unit owner sued the association for failing to adequately maintain and repair the roof and air conditioning system on the roof of the condominium building. Having experienced two hurricanes in 2004, the building sustained severe water intrusion, which allegedly caused pervasive mold and other damage to plaintiff’s unit. The unit owner alleged negligence, breach of fiduciary duty, and breach of contract.
At the time, the association was covered by two insurance policies: a commercial general liability policy and a Directors and Officers (D&O) policy. The D&O policy, which was the focus of the appeal, contained a “property damage” exclusion, which excluded coverage for loss in connection with any claim made “for or arising out of any damage, destruction, loss of use or deterioration of any tangible property including . . . mold, toxic mold, spores, mildew, fungus, or wet or dry rot.”
Despite the existence of this exclusion, the association nevertheless sought coverage under the D&O policy by filing a lawsuit. The association lost.
According to the court, the plain language of the D&O policy excludes coverage for any claim made “for or arising out of any damage, destruction, loss of use or deterioration of any tangible property.” Under Florida law, the phrase “arising out of” is to be interpreted broadly and encompasses all of the following meanings: originating from, having its origin in, growing out of, flowing from, incident to, or having a connection with.
In accordance with this interpretation, the court noted that the unit owner’s breach of fiduciary duty claim not only had a connection with the property damage, but depended upon the existence of property damage. Consequently, the D&O policy’s property damage exclusion applied to deny coverage to the association.
The lesson to be learned from this case is that board members must know what is and is not covered by their insurance policies. Although the association in this case could not have rewritten the D&O policy to remove the exclusion, it would have known that it could not rely on the D&O policy to cover any losses arising out of property damage.
Incorrectly assuming specific insurance coverage is in place can be devastating. The only way to avoid this problem is to immediately read and understand the association’s insurance policies, because receipt of a denial of claim letter is not the best time to first consider the possibility that a claim may not be covered. Rather, board members should designate an “insurance review day” at least once a year.
If reading the association’s policies does not provide all the answers, contact your agent! Unfortunately, many agents only make themselves available when the association’s policies are up for renewal. This is unacceptable. Your insurance agent should be a resource throughout the year, not only when they are collecting premiums. Insurance has become far too complex to understand without professional guidance.
When it comes to evaluating the association’s insurance coverages, the following items should be discussed with your insurance agent.
- Replacement Cost for Building(s): Factor in the type of construction, age, square footage, number of floors, and any other features which may affect the buildings value in terms of replacement cost. An appraisal may be advisable, and possibly required by law. Although the frequency with which this must be done may be set by applicable law, this process should be done at least every two or three years.
- Property Coverage, including Wind Coverage: As condominium communities evolve, so to do their risks. For example, new property may have been purchased or built since obtaining current insurance policies. For those condominiums located in coastal areas that are prone to hurricanes, insurance coverage for losses caused by wind (including hurricanes) is absolutely critical even though it is typically expensive. Importantly, some policies have deductibles that only apply to wind claims.
- Deductibles: Selecting the appropriate deductible depends on various factors, including the association’s ability to withstand the chosen deductible. Also note that different coverages, even under the same policy, may have different deductibles. While adjusting deductibles may result in a premium reduction, care must be taken to ensure that increasing deductibles does not render the insurance coverage illusory because the association cannot afford the increase.
- Umbrella Policy: An umbrella policy is designed to assist an insured once the limits of the underlying policy have been reached. It serves as a failsafe in the event of an exceptionally large claim. Many board members are surprised to discover that such coverage can often be obtained at relatively little expense.
- Flood Coverage: Consult with your insurance agent to determine whether the property is in a flood zone. If so, then flood coverage should be obtained.
- Other Coverages: Depending on an association’s specific situation, other coverages should be discussed with an insurance agent, such as directors and officers, workers’ compensation (if necessary), employee dishonesty (fidelity), ordinance and law, and business interruption coverage (if applicable).
If your insurance agent is unwilling, or unable to competently and patiently discuss any of the risks facing a particular condominium association, then serious consideration should be given to changing agents. In most cases, getting a new insurance agent does not necessarily mean that existing insurance policies and coverages need to change as well. Oftentimes, the transition can be seamless, even though the benefits can outstanding.
Understanding the risks facing a condominium community is critical to eliminating, or at least reducing such risks. Given the complexity of today’s insurance products, the assistance of an experienced and trusted insurance agent is a must.
If you would like more information about anything discussed in this article, or would like to discuss your association’s insurance needs, please contact us.