Insurance offers one of the best examples of how a community association board can work most effectively with their community manager and the professionals involved. 

Keep in mind the two major points: 

#1 Insurance is way too complex for anyone other than an experienced insurance professional to fully understand.

#2 Your job as a board member is “governance” not management.

       There are many questions you should be asking that have answers we can all grasp. When you hear those answers, digest them amongst yourselves. Use your community manager as a mentor. The management professional admittedly has a bit more experience than you, but is still not a licensed insurance broker. Then you come to a decision that will allow your professional insurance vendor to implement a program that fulfills your fiduciary duty. 

Here are a few guidelines, kind of like a cast of characters.


Your Broker
      Your insurance agent is really not too much more than a salesperson that should understand the products being sold well enough to explain them to you. Some brokers/agents work for only one company. These are companies like State Farm. Others call themselves “independent”, and represent many insurance companies. There are pros and cons as to whether to work with a dedicated agent or an independent. I’ll let them make their own cases to you. Just know that there is a difference.
       Warning: Don’t ask four independent agents to bid your policy. They will all probably go to the same carriers and the same person sitting at the same desk at each one of the insurance companies will be reviewing your policy. For some reason, they don’t like this and some may just refuse to give you a quote because they feel you are spinning their wheels. This doesn’t mean you shouldn’t get competitive bids. Just make sure you let the competing agents know so they can avoid that kind of frustrating duplication.

The Underwriter 
       The underwriter is the insurance company. Names like Travellers, Prudential, State Farm, Allstate, Chubb, etc.  Their purpose in life is to collect your premiums and not payout claims. That’s how they make their money. They are not on your side. Don’t feel badly. It’s just business. The brokers are the ones who should explain what “exclusions” mean. If you need a priority of things to focus on, then put “exclusions” at the top of the list.

The Public Adjusters 
       The public adjusters are there for you when you have a claim. Regardless of what the brokers may imply, they are not. They are there for their employers, the insurance companies. They will offer you sympathy, empathy, emergency assistance, but very rarely cash. The public adjusters are the professionals who go to war with the insurance companies to get you paid every penny you deserve. They can be very clever.

The Insurance Adjuster
       This is the person who decides how much you will be paid as a settlement for your claim. This person’s job is to minimize the insurance company’s payout. They are human beings with heavy workloads. Smaller claims can often be settled on the telephone. If you and the property manager can provide complete documentation for your claim it will be to your benefit. Make it easy for the adjuster to reach a conclusion. As much as they need to put their employer first, they also want to close your file.

The Community Manager 
       Your manager should help you make sense out of everything and ask the right questions. Managers will frequently have an agent of choice. That’s because some agents are better communicators than others. One of your jobs after you buy your policies is to communicate what you’ve done to the rest of the community, and then work with them during the year when they sell their units or need to buy their own insurance. A broker who is unresponsive to these requests can make things very difficult. Your community manager is not an insurance professional. Please don’t pretend that he or she is. All they can do is help you ask the right questions, and then follow your orders.

       As long as you know who is on your team, and what you can expect from them, the rest is up to you. Read the articles we offer. Learn about the many different kinds of coverage and the changing laws in regard to your responsibility. Good luck.

Consider risk management

Depending on the area of the country you live in, insurance is either the largest single line item on your homeowner association budget or at least in the top five.  In two surveys we took six years apart we found that in homeowner associations with home values in excess of $200,000, 25% of the total budget was spent on some aspect of security with insurance being the largest portion.  We are an acquisitive society that likes to protect what we’ve earned.  In communities with older residents, that feeling is stronger.

Buying the best policy is an obvious starting point.  Understanding what makes the best policy is what we hope we can teach you.  Certain critical issues must be addressed and understood, not the least of them is loss control and loss prevention.  That’s the real key to lowering insurance costs and overall risk management.

Here are some questions that you must address. Ask your insurance agent and manager.  Make sure you get a full understanding of the answers and the consequences.  There is nothing here that is so technical that it is not understandable by every one of you.  If they can’t explain it, don’t do business with them.  

            Question #1: Are the policies we are buying based on “occurrence” or “claims made” basis?  In simplest form, this means “Are we insuring ourselves for losses that occur during the life of the policy or for claims made during the life of the policy regardless of when the actual loss event occurred?”  Either policy is acceptable, but it is very dangerous to switch from one to another.  Ask the agent to explain why.  

            Question #2: What are the exclusions in the Directors & Officers (D&O) policy? Go over each one of them and understand what you are not covered for.  This aspect of your insurance is the most meaningful to you, the board member. You’re doing a volunteer job for the good of the community.  It would be a shame to end up losing your home because you made an error.  

            Question #3: Will your agent provide a definitive statement to all homeowners outlining the limits of the master policy?  This is so the individual unit owner can use that document to purchase their own supplemental coverage for their personal property or other aspects of their home not covered.  

            Question #4: Does the broker carry Errors & Omissions Insurance? This is a kind of malpractice insurance that every agent should have. If they make a mistake in advising you on coverage, you’ll be covered anyway.  They should all have it.         

            Question #5: What impact will a Loss Control Committee have on our premiums?  A Loss Control Committee is a group of homeowners that meet regularly (quarterly is fine) to examine the property for potential hazards.  Looking for cracked or raised pavement, problems around the pool, checking on fire extinguishers, holding classes on fire escape routes and procedures.  These meetings should be documented in writing and submitted as proof of activity.  Most insurance carriers will provide some rate reduction for this activity. 

            Question #6:  This one might be more for the board to discuss with the manager first and then bring to the agent.  How will my rates and liability be effected by raising the deductible by $5,000-$10,000 or more and self-insuring for those smaller losses? If the association were to have a small special assessment of $25 or so per unit, that could create a special self-insurance fund that over the years could save tens of thousands of premium dollars.  If raising your deductible can save you $5,000 on your premium, take that $5,000 savings and add it to your self-insurance pool created by the small special assessment.  Treat that money as you would your reserve fund, i.e. invest it.  The return makes it grow.  Have an accountant or other numbers kind of person work out the different scenarios for you.  What happens if there are no losses for the first year, two years, three years?  What happens if there is?  What is your loss history?  This is a creative area of cost savings that can be enormously efficient in reducing your premium.  It has its risks.  But that’s what we’re talking about, risk management.

            Question #7: Ask about pooling insurance.  No it’s got nothing to do with diving boards and swim fins.  Some management companies will get one blanket policy for all their associations.  There are many ramifications to this concept.  Here are the two most important.   

There are tremendous savings to be had by reducing the administrative activity.  There’s more savings to be had in the area of sales commissions.   I know of one California association that reduced its premium by 50%.  There is a trade-off.  Better associations with a more attractive loss history (non-loss history) are mixed in with those that have a bad loss history.  The result is that the bad risks get a better rate and the good ones don’t get quite what they would normally get.  This is often more than compensated for by the overall savings.  Talk to your manager about the possibilities.

These are seven pointed questions that should be asked and answered.  They are not the only questions.  Your agent should have measurable experience in homeowner association insurance.  The rest is not germane.  You should understand that the three areas of coverage are for property, overall liability, and Directors & Officers Liability.  Understand that if you have other recreational facilities, you require additional coverage.  

Keep in mind that the insurance companies are suffering their worst economic crisis since insurance was invented.  The recent group of natural disasters from Florida & Hawaiin hurricanes, Mississippi flooding, and California fires have put some companies out of business and driven others out of certain states.  Premiums are rising and will continue to rise for the next few years.  Be creative.  Measure your risks and concentrate on preventing losses as much as you concentrate on selecting your policy.  Loss Control Committees can be very effective. Listen to the experts.  The lowest insurance bid must be understood. It is not the obvious choice. Coverages vary tremendously. 

Community association insurance has become simpler over the years as the major carriers and agents have ironed out most of the problems that come with having an association insure one part of a property and the individual homeowners pick up the rest. It used to be the main point of essential education to avoid overlapping coverage, and more importantly, coverage gaps. It seems that the problems these days center around the major carriers willingness to offer coverage at all. Too many have dropped out of the market entirely.  They just don’t want to bother with community associations, especially those high profile oceanfront associations that need it the most.

          The issues to be understood today would focus around umbrella coverage and Directors & Officers Liability (D&O) insurance. It’s still astounding to me to see how many boards do not have adequate D&O coverage. There you are, unpaid volunteers giving hundreds of hours for the good of your community, facing the slings and arrows of outrageous homeowners along with potential lawsuits for what could be breach of fiduciary responsibility, and you don’t get adequate insurance coverage for yourselves. You try to pinch the insurance penny in the one area that will hurt you personally. Isn’t it enough that you donate your personal time? Why expose yourself to the costs of defending against a frivolous lawsuit brought by that nut in unit 317? If you take the time to really understand just one part of your overall responsibilities, make it the D&O policy.  

          An important adjunct to D&O is additional umbrella coverage.  It is very inexpensive and provides the community the total protection it requires. 

          Selecting an agent has also become much simpler. Over the years there have been a small handful of individuals in each market that have taken community association insurance as their major focus and have learned through experience how to deal with the carriers as well as the clients. I suggest you listen to your property manager’s advice and look at the track record of the agent. Most of the strong players have 15-20 years experience in this field. Don’t settle for anything less. You don’t want to have to make claims against your agent’s Errors & Omissions policy, though you might ask if they have one.

          D&O coverage and umbrella coverage: learn about these two aspects of insurance and you’ll have the major bases covered. There’s plenty to learn for the new board member in regard to the “normal” coverage areas, but your agent should be able to walk you through the questions and answers. Most of them are accustomed to attending board meetings. Some even bring the donuts.