change, annually. The insurance carrier or broker should be estimating the replacement cost of community property on an annual basis. While limits that remain artifi cially low will result in a reduced cost of insurance, in a large loss it may be discovered that there isn’t enough insurance in place to make all necessary repairs. And, at some point there will be a large correction by the insurance carrier, which may negatively impact the association’s fi nancial planning. On the other hand, insurance policies typically include an infl ation guard. If not checked annually, this automatic increase in coverage can compound exponentially. Some associations end up paying a premium for much more insurance than they actually need. The most important note is to review this limit annually.
The limit of general liability insurance doesn’t need to change if it is set correctly at the outset. This is coverage for defense and judgement for allegations of negligent maintenance of common area. Per the DSA, communities up to 100 separate interests should maintain $2 million of per occurrence general liability insurance. Communities 100 separate interests or more should maintain $3 million of per occurrence general liability insurance. If the CC&Rs for a particular community has a more conservative requirement, that is the requirement to follow. Note that these are minimum limits. Additional liability protection should be purchased based on risk tolerance and specifi c aspects of a community that may lead to higher exposure to loss.
Like general liability, directors and offi cers liability limits don’t change if set correctly. This is coverage for defense and judgement for allegations of negligent decision-making on the part of the board of directors. It’s what malpractice
insurance is to a doctor, or professional liability insurance is to a consultant. Per the DSA, communities up to 100 separate interests should maintain $500,000 per occurrence of directors and offi cers liability insurance. Communities of 100 separate interests or more should maintain $1 million per occurrence of directors and offi cers liability insurance. Most often, however, the limit of directors and offi cers liability insurance is set equal to the general liability insurance limit.
Crime/fi delity insurance is coverage for money the association has in the bank. If that money is lost or stolen, this insurance is used to keep the community operating. The limit is set at least equal to three months of assessments, plus the current reserve balance. Lending institutions and California legislation have made this the standard for this line of coverage. In addition, most CC&Rs include a similar requirement. There are times, however, that the CC&Rs for a community will require a more conservative calculation, so the document should be reviewed to ensure compliance. The planned contribution to and expenses of reserve funds should also be considered when calculating the limit necessary to protect the community’s funds. Keep in mind that bank deposits are insured very differently. Crime/fi delity insurance is for theft of association funds. In contrast, the Federal Deposit Insurance Corporation (FDIC) insures funds up to $250,000 if the banking institution collapses.
Well, that’s it for the basics. Contact an insurance professional dedicated to the service of community associations to discuss the other types of insurance available to your community. Remember, the legislative and CC&Rs requirements are minimums. Your community may have a lot more to protect.
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