Making sure a homeowners association (HOA) has sufficient insurance coverage is something its board shouldn’t neglect. If board members make assumptions, they could discover that they either don’t have enough coverage or they aren’t covered at all if something happens.
Not all insurance policies cover the same things and have the same coverage limits. This is why HOAs may need multiple policies to be fully protected.
Here are some common policies that every HOA should consider.
HOA Master Policy
An HOA master policy typically covers property damage for building exteriors (structure and foundation) and common areas in a condo community. For HOA communities with single-family homes, master policies may only provide coverage for common areas. These policies also provide liability protection for personal injuries or damages that happen on the association’s property.
There are three different types of HOA master policies. It’s important to know which type you have to understand your coverage.
Bare walls coverage: This HOA policy primarily focuses on building exteriors and covers the materials used in the construction up to the sub-floor and uncovered drywall. Bare walls policies usually don’t provide interior coverage except for certain common areas, like main lobbies.
Walls-in coverage: This HOA homeowners insurance policy is also sometimes referred to as “single entity.” It usually covers everything that a bare walls policy covers in addition to some elements inside of units like flooring, countertops, and cabinets. If a homeowner upgrades these interior items, however, the policy may only cover the original replacement value. The homeowner may have to pay the difference for the upgrades.
All-in coverage: This HOA insurance policy usually covers everything a walls-in policy covers in addition to improvements and alterations. It may also cover appliances and security and ventilation systems.
Directors and Officers Insurance
Although HOA master policies provide general liability protection, they usually don’t provide liability coverage for individual board members if they are sued. A homeowner could have a disagreement with a board member, for example, and sue that person instead of suing the board. The board member will then be responsible for his or own legal fees and damages.
A board can protect its members from personal liability by purchasing a directors and officers (D&O) insurance policy. If a board member is sued, a D&O policy will cover liability claims involving legal fees and damages. It’s important to point out that these policies usually only cover current board members and not previous board members.
Umbrella Liability Insurance
An umbrella liability policy increases an HOA’s liability insurance limits. These policies are relatively affordable, and the added protection may be worth it if someone has an accident in a common area or sues for another reason.
If a lawsuit against your HOA is successful, the liability coverage provided in your HOA master policy may not be enough to cover the damages awarded, which could be substantial. This could be financially devastating for your HOA. An umbrella liability insurance policy may give your members peace of mind with the extra layer of protection it provides.
Crime and Fidelity Insurance
When an HOA board saves for capital projects or keeps reserves for maintenance, the funds in its bank account could be significant. The board is responsible for making sure these funds are protected.
A crime and fidelity insurance policy protects the HOA from crimes involving its funds. It may protect the HOA in the event of check fraud, wire fraud, forgery, embezzlement, fraudulent invoices, and other crimes. Some states require HOAs to carry these policies.
An HOA crime and fidelity insurance policy may cover all board members (past, present, and future). It may also cover committee members, community managers, accountants and bookkeepers, and volunteers.
Workers Compensation Insurance
Even in cases where an association may not have any direct employees, workers compensation insurance is an essential insurance to have. This coverage serves as a protective shield, safeguarding the association against potential risks and liabilities. It acts as a safety net, ensuring financial protection in the event of any injury incurred by board members or dedicated volunteers within the premises.
General liability coverage does not extend to situations where workers’ compensation should rightfully be the responsible party, so it’s important to have robust protections in place.
Safeguarding Your Community
Making sure a homeowners association is protected should be a top priority for all HOA boards—you can never have too much coverage. Be sure to review your policies annually to make sure they still meet all of your needs. If you are unsure or have questions, an insurance representative can offer assistance and make recommendations.
It’s also important to check your HOA’s governing documents, which may stipulate certain insurance coverage minimums. These minimums may not be enough, however. Additional policies or higher coverage limits may help to safeguard your community for when something unexpected happens.
This article is for informational and educational purposes only and is not a substitute for professional advice. Valley National Bank does not provide any financial, economic, legal, accounting, tax or other recommendation in this article.
