Insurance and Liability
Most governing documents include a minimum insurance requirement by stating that the limits of coverage shall not be less than the full current replacement cost of the structures. In other cases, the documents allow the board to determine the appropriate amount of insurance. Regardless of what the documents say, the board is empowered to exceed any minimum insurance requirement and must use prudent business judgment in determining the amount and type of insurance.
Homeowner associations must provide copies of their insurance policies upon request.
Most governing documents do not require earthquake insurance, and it is not required by law. Since earthquake insurance is expensive and typically involves a large deductible, its benefits are debatable, and a board should not face liability for choosing not to obtain it if the decision was based on competent advice from an insurance professional.
If the personal injuries were caused by a property condition and not by the actions of a person, and if the association is incorporated, an individual owner should not be responsible for personal injuries that occur in another owner’s home or in the common area. If the association is unincorporated, an individual owner can be held responsible only if the association is responsible and unable to satisfy the claim, and then only if the association does not carry liability insurance meeting the statutory minimums.
The law provides that a volunteer director or officer cannot be held liable for damages resulting from his/her service to the association if he/she performs his/her duties (i) in good faith, (ii) in a manner which he/she believes to be in the best interests of the association, and (iii) with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances. At the risk of oversimplifying this standard, the idea is to protect honest directors and officers from liability for mistakes unless their actions are self-interested or unreasonable. Directors are entitled to rely on information and opinions provided by the association’s officers, committees, and hired experts.
To provide additional liability protection to directors and officers, most governing documents state that the association will indemnify them absent gross negligence, intentional misconduct, or fraud. Indemnity means that the association will pay the damages that are awarded against the directors or officers. Most governing documents require the association to carry director and officer (“D&O”) liability insurance for these costs, and such insurance is always a good idea.
Managing agent bonds and fidelity bonds are a form of insurance for the theft or misappropriation of funds. This type of insurance is not required by law in Washington or Oregon but is required by some governing documents. It is advisable for large associations to obtain this type of insurance unless their funds are handled by a professional manager who already has adequate bonding or coverage.
In general, when insurance proceeds are insufficient to pay repair costs, the association must levy a special assessment to cover the shortfall. But most governing documents describe a procedure for dissolving the association and selling the property following a very large uninsured or underinsured loss. These procedures are intended to provide an alternative to a special assessment so large that most owners could not pay it.
The governing documents contain detailed liability insurance requirements. These typically mandate liability insurance for the association and its directors and officers. The owners are responsible for insuring against their own liability.
The governing documents contain detailed property insurance requirements. In condominium projects, these typically require that the association obtain property damage insurance (sometimes called casualty insurance) for everything located on the property except the contents of the units. These policies usually cover damage to interior walls, floors, and ceilings within units, but do not cover damage to cabinetry, plumbing and electrical fixtures, appliances, wall and floor coverings, and furniture. The individual owners are responsible for insuring the contents of their units, and may also be responsible for payment of the Association’s insurance deductible in some circumstances.
In planned developments, the governing documents usually require the association to insure all portions of the property which it is obligated to maintain. But in some cases, the individual owners are required to insure everything on their lots even though the exterior surfaces of the homes are maintained by the association.