A homeowners' associations (HOA) is an organization of homeowners living in a real estate development, the major purpose of which is to enforce deed restrictions and maintain common areas of the development. The development might be a condominium, a planned unit development (PUD) with separate home sites or a planned residential development.

Comprehensive Insurance Program

Every association needs a comprehensive insurance program to protect itself from casualty losses, personal injury and property damage claims, as well as miscellaneous areas of liability exposure, such as officers and directors liability for the HOA's board of directors. An adequate insurance program should consider how the units are situated or connected. A condominium building will have different needs than a subdivision with a clubhouse and a pool.

Even though a condominium is required to obtain a blanket fire and casualty insurance policy covering all units, as well as all common areas, a planned unit development has the option of either obtaining such a policy or insuring only the common areas. A developer usually prefers to have the PUD association insure only the common areas, since that eliminates the cost of fire insurance on individual units.

An HOA needs to have insurance but what is right for one community may not be right for another. Coverage needs to be appropriate for the association involved. The following coverages should be considered when determining what is right for your HOA:

  • Property insurance
  • Commercial general liability insurance
  • Automobile insurance
  • Director's and officer's liability insurance
  • Employee dishonesty insurance
  • Comprehensive equipment coverage insurance
  • Workers' compensation insurance
  • Umbrella liability insurance

Property Insurance

Property insurance covers buildings, structures and personal property owned by the association. This type of insurance typically includes common property, parkland, woods, open spaces, recreational facilities, buildings and sometimes portions of residential areas.

Property insurance provides protection for loss of or damage to community association property. A HOA needs to determine the areas to be insured and should have a professional appraisal done to determine the value of the property. Replacement cost plus coverage, which assures full value replacement, without regard to a coverage dollar limit and the actual cash value of the property is also a wise choice.

An open perils policy is preferable to a named perils policy because the coverage provided under the open perils policy is much broader. Under the named perils coverage, it is up to the association to prove the cause of loss is covered by the policy. With open perils policies, all causes of loss are covered, unless specifically excluded or limited, and the burden of proving that a cause of loss is not covered or limited rests with the insurer.

Commercial General Liability Insurance

Homeowners' Associations must have commercial general liability insurance, which is designed to protect the HOA from a wide variety of liability exposures.

Unlike property damage, which can frequently be measured in dollar amounts, liability claims have no limits, other than those imposed by the courts. Commercial general liability insurance covers four types of claims:

  • Bodily injury that results in actual physical damage or loss, such as slip and fall accidents
  • Property damage or loss resulting from the operation, maintenance or use of common areas
  • Personal injury, such as false arrest, libel, slander, defamation of character and invasion of privacy
  • Advertising injury, such as infringement of copyright

With commercial general liability insurance, the insurer typically pays damages, legal defense fees and case settlement charges.

Comprehensive general liability insurance extends liability coverage to any location where association business is taking place. For example, this type of policy will extend liability coverage to an off-property location if that's where a meeting or HOA-sponsored picnic is being held.

Automobile Insurance

Automobile insurance is needed whenever a HOA has employees who drive cars, trucks or maintenance vehicles on association property or while they are carrying out association business. Hired car liability protects the association against liability from the operation of automobiles that it hires, rents, leases, or borrows. Non-owned automobile coverage protects against liability for operation of autos that the association does not own or hire. Also, any vehicle owned by the association should be insured.

Director's and Officer's Liability Insurance

Director's and officer's liability insurance (D&O) is necessary when mismanagement of funds or policies results due to negligence by the HOA's board. Typical claims include wrongful termination, sexual harassment, discrimination and mismanagement of funds. It should also protect employees and any committee members or volunteers.

Employee Dishonesty Insurance

Employee dishonesty insurance, also known as a fidelity bond, indemnifies the community association for the loss of money, securities or any property because of acts of fraud, dishonesty, forgery, theft, larceny, embezzlement, wrongful abstraction, willful misapplication, misappropriation or any criminal act on the part of directors, officers, committee members, association employees, board members and volunteers. Coverage can protect the association against criminal acts by an independent managing agent.

Comprehensive Equipment Coverage Insurance

Comprehensive equipment (boiler and machinery) insurance is a form of property insurance that protects against financial loss from property damage, business interruption and spoilage that is the result of sudden and accidental mechanical breakdown. It fills the gaps left by property insurance policies. Coverage can be written for a specific item such as an air conditioner, or it can be written to cover a number of items on a blanket basis.

Workers' Compensation Insurance

Workers' compensation insurance provides coverage required by state law for injuries to association employees and volunteers that occur on the job. Workers' compensation laws incorporate four types of benefits: disability (loss of income), medical benefits, survivor (death) benefits and rehabilitation benefits.

Umbrella Liability Insurance

Umbrella liability insurance closes the gap between underlying limits of coverage and possible claims in excess of that coverage. Umbrella liability insurance is tailored to each HOA and the risks covered are generally negotiated. No "standard" umbrella policy exists, so a HOA need to work closely with an insurance agent to get a policy that fits their needs.

Personal Insurance Protection

Residents will still need to provide their own personal insurance protection. Many community associations carry master policy coverage on basic structures and common property; however, association insurance usually does not cover personal possessions. Personal insurance protection provides coverage for personal property, unit improvements, betterments, additions and alterations, additional living expenses and personal liability. If you're a property owner, check with your HOA and find out whether HOA insurance will cover any of these items. Coverage can vary-some HOA policies may cover the original unit improvements, or may cover upgrades, like hardwood flooring or new carpet if you pay for the additional premiums allocated to your improvements. Some policies will cover damage to a unit owner's property if the loss was due to a failure of a common element, like a leaky roof.

Periodic Coverage Review

An association must keep its owners informed of the current status of its liability insurance coverage. In addition, it is a good practice for the association's governing body to review the project's insurance coverage at periodic intervals.

Questions for Your Attorney

  • What types of insurance coverage should a homeowners' association purchase? My subdivision doesn't have any common areas or property, so does the HOA really need insurance?
  • Does a homeowners' association need to purchase comprehensive insurance and, if so, how much?
  • What is the difference between an open perils policy and a named perils policy, and what are examples of coverage as applied to my condo development? What insurance do I need to buy as an individual unit owner to round out the condo or homeowners' association's coverage?