By Scott A. Hunter, J.D.
In today’s world, insurance is critical. Without proper insurance, the financial health of your owners association can be devastated. Does your owners association have proper insurance?
General Liability Insurance. General (or public) liability insurance is intended to cover such things as personal injuries, some property damage, or death caused by the negligence or wrongful acts of your owners association. This would include a trip and fall on a common area sidewalk where your owners association has failed to properly maintain the sidewalk. Even if your owners association does a great job of maintaining all the common area, at some point someone will likely make a claim against your owners association for failure to adequately care for or maintain the common area. Your owners association should not be without liability insurance. Owners associations with 100 or fewer units or lots should have a minimum of $2,000,000.00 liability coverage. Owners associations with more than 100 units or lots should have a minimum of $3,000,000.00 in liability insurance coverage.
Liability Protection for Owners. If your owners association carries liability coverage at the minimum described above, then the owners are afforded some additional statutory liability protection.
Any lawsuit in tort, such as negligence, which arises against an owner solely because the owner has an ownership interest in the common area, can only be
brought against your owners association, not against individual owners.
In order to receive this protection, your owners association must: 1) have insurance in place which covers the lawsuit, and 2) have the minimum liability insurance coverage described above (depending on the number of units or lots in your owners association).
Directors and Officers Insurance. This type of policy is generally intended to cover the errors and omissions of an owners association’s directors and officers. Directors should insist on this type of insurance. An owners association with 100 or fewer units or lots should have at least a minimum of $500,000.00 directors and officers insurance coverage. Owners associations with more than 100 units or lots should have a minimum of $1,000,000.00 directors and officers insurance.
Liability Protection for Directors and Officers. On occasion, the issue has arisen of whether or not a board of directors can be compensated for their service on the board, such as a reduction in assessments or cash payments. Often, the CC&Rs or bylaws of an owners association prohibit directors and officers from receiving any such compensation. Even if your owners association’s CC&Rs or bylaws do not prohibit directors and officers from receiving compensation, it is generally not a good idea, because a paid director or officer does not receive the statutory protection, as explained below.
Civil Code Section 1365.7 offers volunteer directors and volunteer officers some protection from liability. Volunteer directors and officers are not personally liable for claims or lawsuits which are above the amount of your owners association’s directors and officers insurance if all of the following conditions are met:
- The director or officer was acting within the scope of his or her duties;
- The director or officer was acting in good faith.
- The director or officer was not willfully, wantonly, or grossly negligent;
- The owners association has both general liability insurance and directors and officers insurance, at the minimum amounts stated above.
This statutory protection does not protect: 1) the developer or the developer’s employees, 2) directors or officers who own more than 2 units or lots within the owners association, 3) directors or officers who are paid for their services, or 4) directors or officers in commercial or industrial developments.
Casualty or Fire Insurance; Other Insurance. Most bylaws or CC&Rs require an owners association to have casualty insurance to protect against property damage caused by fire, sudden breaks in water pipes, etc. Additionally, your owners association should consider other insurance policies such as flood, earthquake, fidelity bonds, workers compensation insurance, and other insurance products. Your owners association should consult with its insurance company and review the bylaws and CC&Rs to determine which amounts and types of insurance are required and which are not.
Insurance Disclosure to Owners. Each year (30 to 90 days before the beginning of your owners association’s fiscal year) your owners association must provide the owners with a summary of your owners association’s property, general liability, earthquake, flood, and fidelity insurance policies. The summary must include the following information about each policy:
- name of the insurance company
- type of insurance
- policy limits
- amount of the deductible, if any.
Your owners association may opt to send the owners a copy of the insurance declarations page if it contains this required information. The insurance summary must state the following in at least 10-point boldface type:
"This summary of the association's policies of insurance provides only certain information, as required by subdivision (f) of Section 1365 of the Civil Code, and should not be considered a substitute for the complete policy terms and conditions contained in the actual policies of insurance. Any association member may, upon request and provision of reasonable notice, review the association's insurance policies and, upon request and payment of reasonable duplication charges, obtain copies of those policies. Although the association maintains the policies of insurance specified in this summary, the association's policies of insurance may not cover your property, including personal property or, real property improvements to or around your dwelling, or personal injuries or other losses that occur within or around your dwelling. Even if a loss is covered, you may nevertheless be responsible for paying all or a portion of any deductible that applies. Association members should consult with their individual insurance broker or agent for appropriate additional coverage."
Your owners association must also inform the owners of any cancellation, lapse, non-renewal, or similar change in the policies of insurance. Additionally, any owner may request a copy of the insurance policy, but that owner is responsible for any copying charges.
In the next newsletter, we will discuss issues regarding earthquake insurance, workers compensation insurance, and similar issues.
Note: Most of the laws in this newsletter apply only to common interest developments (“CID”). If your owners association is not a CID, then the laws discussed herein may not apply to your owners association.
Insurance (Part 2 of 2)
Inspection of Association Records