00:00:00:00 - 00:00:14:17 Unknown from years ago. Someone set a limit and there's just been a little inflation for years and years. And now the current management, board of directors and insurance professional all have this on their lap to figure this out. 00:00:14:19 - 00:00:33:15 Unknown Welcome to the uncommon area where we're dedicated to reimagining ways. We provide board members and managers with the resources to create uncommon communities where residents love their HOA and truly love where they live. 00:00:33:17 - 00:00:59:22 Unknown Welcome to the uncommon area. I am Matthew Holbrook, and in this episode we dive into a primer on homeowner's association and condominium association insurance. Joining me in this episode is Dennis Socha of Social Insurance Agency. And Dennis helps us unpack all the different kinds of insurance and different considerations regarding association insurance. So hope you check it out and that you find it to be helpful. 00:01:00:00 - 00:01:17:21 Unknown Well Dennis thank you so much for joining us here in the uncommon area. I appreciate you, giving your expertise. Thank you for having me. I thought we could just dive right in to some of the basics of insurance. We want to help board members and managers know what they need to know. 00:01:17:23 - 00:01:47:18 Unknown And, one of the things that I hear that comes up often is board members, especially, often don't know the difference between different types of policies. So maybe to start with, talk us through what's the difference between an Eno policy, a policy and a general liability policy? That's a good question. So within, directors and officers liability policy, there's three, three different, professional liability policies that are synonymous. 00:01:48:00 - 00:02:12:21 Unknown You have it's professional liability. There's emissions and directors and officers in our industry we would most likely see directors and officers liability. And that's going to be for breach of fiduciary responsibility of a board of director, breach of governing documents, discrimination claims, etc.. General liability policy is going to be third party, bodily injury or a third party, property damage. 00:02:12:23 - 00:02:24:19 Unknown So if a gate, in a building, driveway gate, closes on a car, that will be property damage. If someone or slip and fall, there'll be bodily injury. So when it's usually when it's 00:02:24:22 - 00:02:36:10 Unknown bodily harm or property damage, it can be general liability. And then the decisions or errors or omissions is the directors and officers liability side. 00:02:36:15 - 00:02:45:14 Unknown Okay. Great. So, maybe if I was just to summarize this DNA and, you know, or interchangeable kinds of terms, errors and omissions and directors. Correct. 00:02:45:20 - 00:02:56:06 Unknown same, type of policy. And then you have general liability is going to cover those bodily injury or property damage types of claims. Let's go back to the the DNR policy okay. 00:02:56:06 - 00:03:17:10 Unknown You know, policy. That's going to cover individual board members, correct. As well as the association as a whole. If if claims are made for decisions that are made. So have to put it on a quasi attorney hat here. I'm not practicing legal professional. However, as long as your decision making is on behalf of the association, not on a personal gain. 00:03:17:12 - 00:03:42:10 Unknown Usually coverages is afforded for the individual owner under the directors and officers. Correct? Correct. So a board member makes decisions, and that results in the association being sued for the decisions of the board. The association is going to be covered. No policy. Yes. And sometimes there's a lack of decision or even a bad decision. Correct. That's good clarification. 00:03:42:12 - 00:04:14:06 Unknown And then on, as far as the individual board members, they can be covered under that policy if they get sued individually. And now here's where I was really driving out. There are situations where a board member might step outside of what they might be covered for. And so, you did kind of mention that, but could you just articulate a little further, where does a board member run the risk of not being covered by their dental policy for as an individual. 00:04:14:08 - 00:04:14:19 Unknown Well, 00:04:15:00 - 00:04:35:19 Unknown good portion of the question is the aspect of, the type of policy they're purchasing or the quality of the policies or purchasing. In our field, we have this technology revolution where, an insurance professional could just click a box and get a very, boilerplate type of policy where it could be loaded up with exclusions. 00:04:35:20 - 00:05:02:17 Unknown So the association as well, the individual has a huge exposure. So on that aspect, it's worth the time to review the policy. And with the insurance professional and look to buy the broadest terms. And then you want to work with that insurance professional to go through what, what is covered or not covered, and then, being redundant here is that the the board of directors needs to really think about that. 00:05:02:17 - 00:05:36:01 Unknown Their decision making is not for personal profit or personal gain, that they have multiple persons that they are thinking about within the complex. Yeah. So I know that at least here in California, we have this concept of fiduciary duty, where a board member is acting on behalf of another entity, in this case the association. And as long as they are acting in the best interests of the corporation, then, it is would be expected in most cases that the board member is going to be covered by that policy. 00:05:36:06 - 00:06:09:02 Unknown Now, you bring up a good point about the exclusions. First of all, I would recommend and as a as a management company, we would always recommend that a board bring their, insurance broker to a meeting at least annually to correct their policy with the broker directly. Correct. Use that expertise. And if I'm hearing you correctly, one of the things that should be discussed, I would think every single year is walk us through what are the exclusions in our liability policies? 00:06:09:04 - 00:06:27:07 Unknown My guess is that's an area where board members could often miss and and not be covered for something that they might think that they are. Yes, a lot of decisions are made on, financial level of looking at the bottom line, as we say, it's very you we live in a reactive society, and we don't know what we didn't have until we lost it. 00:06:27:09 - 00:06:51:03 Unknown So it could be on a personal level or in this case, a professional level. So, to take a step further on your, annual review review of the insurance policies, I suggest a good 90, 120, 160 days out when that process starts with the conversation with the insurance professional. The reason why I say that is that you don't want to be dealing with this 60 days, a 60 days out, 30 days out. 00:06:51:05 - 00:07:14:02 Unknown And now the the time crunch starts. So the biggest the the wider of, time you can give the better. So that's an important point. I know that one of the challenges, I especially here in the California market, but I think this is true often nationally is those quotes for a renewal policy oftentimes don't come in until the very last minute. 00:07:14:04 - 00:07:38:21 Unknown So if I am understanding correctly, you're suggesting that the board have that conversation with their broker about what exclusions they might be willing to entertain or not even before they see the renewal policy, because by the time they get the policy, it might be too late to actually have a thorough discussion. That is true. There's will be multiple, items discussing that. 00:07:38:23 - 00:07:56:13 Unknown In that meeting, you're discuss property values. You're in discuss the directors officers. What's the ins and outs of the policy? Should the board spend instead of $1,500, $2,000 for broader directors and officers liability policy? If it's a condominium or a townhouse association, the insurance professionals probably want to gain. 00:07:56:16 - 00:08:03:10 Unknown Characteristics of the complex years of, replacing the roof, siding, painting other items. 00:08:03:15 - 00:08:23:14 Unknown So it's actually be more of a broader and robust conversation. And I strongly recommend that the association a lot for at least an hour, once a year. And like I said, a few months out. Yeah. But again, that's probably they're probably not having that conversation in conjunction with when the quote comes in that that is accurate. 00:08:23:14 - 00:08:24:01 Unknown So 00:08:24:03 - 00:08:54:04 Unknown it's a California insurance carrier in this case since we mentioned California, most policies are available 4530 to 45 days out. And in my opinion, the insurance professional knows about 60 days out what the carrier's doing or even before then. If it's California, not big insurance carrier, the policies will run roughly three weeks before the renewal is just how much involvement the insurance professional has in managing it sometimes, and I won't. 00:08:54:04 - 00:09:14:15 Unknown I don't really want to go down that tangent, but at the same time, some insurance professionals, either they're too busy or quite frankly, they don't care and they'll run it. They'll run the renewal down to 7 to 10 days. My professional opinion on that just mismanagement. I'm not here to focus on that. At the same time, I just believe in transparency. 00:09:14:17 - 00:09:39:06 Unknown If it is true professional in this field, there are no what's going on and they could relay that back to the board and management months beforehand. So you had, mentioned the in this, meeting the board should review, things like the property coverage. One of the challenges I know for an association is knowing what is the proper valuation of their property. 00:09:39:07 - 00:10:04:05 Unknown Yeah. And what I have heard as an objection that often comes up from, a board member. Say, hey, the, the insurance company has an incentive to push that value as high as possible so they can get the most premium as well as the best coverage. How can a, a board member have confidence that they are insuring for the right value in their property? 00:10:04:08 - 00:10:25:23 Unknown this is a good business question for the insurance professional. And I usually recommend the the question is impose from the either management or board. And then they take a step back and see what their answer is. Just to feel out. If they know that agent or broker knows what they're talking about. First of all, insurance carriers, I think it's a little fallacy that insurance carriers are going to, 00:10:26:02 - 00:10:29:18 Unknown dictate higher building limits, gain more insurance premium. 00:10:29:19 - 00:10:43:04 Unknown Usually if they're dictating more, higher and higher, building limits is because the association's probably been uninsured for many years. So the true answer for where a, the building limits come from could be 00:10:43:07 - 00:10:55:11 Unknown from years ago. Someone set a limit and there's just been a little inflation for years and years. And now the current management, board of directors and insurance professional all have this on their lap to figure this out. 00:10:55:13 - 00:11:00:15 Unknown So to expand upon that is that if a board really wants to pay for it, they could buy, they could 00:11:00:18 - 00:11:01:20 Unknown get the services of a 00:11:02:00 - 00:11:17:07 Unknown commercial real estate appraiser. It is expensive to be to be fair. Then you also have, third party companies such as, CoreLogic, Marshall Swift and Verisk, which is through the insurance services office. 00:11:17:09 - 00:11:19:15 Unknown These are two third, third party companies where it's 00:11:19:15 - 00:11:42:15 Unknown subscription based. The insurance and actually individual could do it just the same if they subscribed. But you add in the characteristics of the building or buildings, your built number stories type of construction is, are fire suppression, fire sprinklers. And it computes basically what, an estimated replacement cost is of the building, building or buildings. 00:11:42:15 - 00:12:15:15 Unknown Now, they're usually conservative because they don't take in demand surges. Demand surges basically law supply and demand. If their usage of labor, materials and supplies are backed up, then the price rebuilds tend to go up on that. So, these are, two ways of, figuring out what's the estimated replacement costs. The third one is really difficult is you talk to a developer, a general contractor, you're really not going to catch their attention unless they're going to get the business. 00:12:15:17 - 00:12:36:06 Unknown So, you know, they say, take it with a grain of salt, or they might not be successful. On getting the specifics for that particular community. Okay. Going back to the, liability policies here, you know, and the general liability, how does a board determine the right, 00:12:36:09 - 00:12:38:20 Unknown coverage that they should have on those kinds of policies? 00:12:38:22 - 00:12:42:21 Unknown How much how much liability coverage should an association house? 00:12:42:23 - 00:12:45:02 Unknown So, every state has its own 00:12:45:05 - 00:12:45:21 Unknown statutory limit. 00:12:45:23 - 00:13:02:17 Unknown a common instrument, it has to maintain. So the state of California has actually, $2 million for under 100 units. This is through the Davis Sterling Act, or over, 100 units is 3 million for directors officers liability, 100 units or less is 500,000. 00:13:02:19 - 00:13:14:03 Unknown They have to purchase or over 100. So it is 1 million. That's that example for California's particular. Again, other states will have different limits that are have to be purchased. Now it feels like, 00:13:14:05 - 00:13:25:18 Unknown those limits, if anything, are very low. That's correct. An association would likely want something significantly more. So how should a board think through? 00:13:25:20 - 00:13:49:20 Unknown How much is enough? That's a good question. It's kind of open ended. One one way to look at it is that, in traditionally speaking, in a directors officers liability policy, a lot of the loss comes from the expenses of adjusting the claim, expert witnesses, legal fees, etc.. So if you have $1 million policy, if you have a litigious state, it could have that could 00:13:49:22 - 00:13:51:23 Unknown be eaten up in the million dollars. 00:13:52:03 - 00:14:18:00 Unknown So you have a couple of different routes. The board could pursue higher limits or instruct insurance professional to purchase higher limits of directors and officers liability. And there's also something called an excess or umbrella liability policy. As long as long as that excess or umbrella liability policy will go in excess of the underlying liability policies, an association can successfully increase those underlying limits to higher limits. 00:14:18:02 - 00:14:47:09 Unknown Now, how much should association purchase? There is no kind of rule of thumb. Major metropolitan cities usually buy five, ten, or $15 million easily. Some associations that have swimming pools, usually want to buy at least $5 million. But again, there's no rule of thumb. I don't usually suggest lower limits unless, the board's looking to keep the expenses at the minimum. 00:14:47:11 - 00:15:10:08 Unknown Yeah, I do think it's important, that the swimming pool component is a huge part of the equation, and, board should look at higher limits. I think I read, at one point, the, the highest, judgment ever against an HOA, I believe, was about $40 million in new Jersey for a 00:15:10:10 - 00:15:12:20 Unknown swimming pool related accident. 00:15:12:22 - 00:15:40:10 Unknown obviously that's an extreme example, but, yeah, your 2 million or $3 million policy isn't going to cut it if you have a really serious, incident relating to a pool, especially so in my career. I've heard of three different situations. Two were non-life threatening, but they both costs associations, separate associations for million dollars. So, your team members and myself tend to, societies give education both the boards and management. 00:15:40:12 - 00:15:41:01 Unknown So, 00:15:41:05 - 00:16:19:18 Unknown they're legal professionals in those fields. Give case law and real life examples. There is a place, judgment that I'm aware of insurance wise in Texas. That was, I believe, in the $26 million range. I do know of a water exposure claim in Michigan area that that exposed $25 million in that type of exposure. So when water's related not not, sudden burst water, but, any type of water related swimming pool, lakes, ponds, etc. look to instruct the insurance professional that the board is looking for higher limits of liability and look at the, options that are available. 00:16:19:20 - 00:16:39:04 Unknown Yeah. So insurance these days is really difficult, whether it's in California or across the country. Talk a little a little bit about why that is and maybe how that differs in different markets. Well, five years ago I had had a full head of hair. Yeah. So in 2017, prior to 2017, 00:16:39:06 - 00:16:44:23 Unknown you call me up and you could call a farmers agent State Farm in all state and get four different quotes. 00:16:45:01 - 00:17:06:00 Unknown Now a couple of those insurance, more than a couple of those insurance carriers are what we call stand by the sidelines. They didn't leave the insurance market, but they're just none. They're not offering coverage or new business out there. So you're you're left, which is not a negative item, but you have insurance broker. Insurance broker, technically speaking, works on behalf of the policyholder or association here. 00:17:06:01 - 00:17:11:00 Unknown Now when you have multiple brokers looking for a quote, then you running, then you have, 00:17:11:03 - 00:17:37:11 Unknown redundancy and you might be blocking, the incumbent broker out of market going in alternate quotes. So you want to rely on it actually ties into a selecting insurance professional of entrusting and that they're selecting in the market and coming back with bids for the community, the market, current market situation, not just in California, but the majority United States, is what we call a hard insurance market. 00:17:37:17 - 00:18:00:21 Unknown It is softening, like immediately and fast, but there are going to be several different areas where an association is still going to have a tough time. That could be in a higher brush area. Deferred maintenance would shake, siding would shake, roofing. So there's some items, but it is it is a difficult, I would say not necessarily hard insurance market, a difficult insurance market. 00:18:00:23 - 00:18:01:06 Unknown Yeah. 00:18:01:10 - 00:18:15:19 Unknown so you were, you were making the point, on a couple of things, but one in particular. When an association is choosing their broker, I know I will oftentimes hear a board say, hey, go out and talk to three different brokers. 00:18:15:19 - 00:18:45:09 Unknown We want to see competitive bids. And you highlighted this, that really is the broker who's getting the competitive bids correct. Once they start doing that, that's blocking other brokers from going to those same carriers. And if a broker is doing their job, another broker shouldn't have really any viable options to go to, theoretically. So, I think what's key for a board is work with a broker that you have confidence in, that you can trust, and that person will go in and get those competitive bids for you. 00:18:45:11 - 00:19:08:23 Unknown That is accurate. And just to I'm always one about the case in point. If you took, mid to high res single large building, technically speaking, there's two major, companies that we call slang terms players that are offer coverage. As long as the insurance broker is doing their job, they're negotiating with these two companies. As long as they're willing to offer coverage. 00:19:09:01 - 00:19:15:13 Unknown Then that should be most broad and robust. Option for the association. 00:19:15:15 - 00:19:24:05 Unknown Is there anything else that, stands out as big differences between different markets, whether it be geographically or product types, that board members should be aware of? 00:19:24:07 - 00:19:29:13 Unknown when we have an account approaches us for a quote, there's basically three different categories. 00:19:29:19 - 00:19:53:03 Unknown You have planned development attached dwellings which are townhouses and condominiums. And there's two different section subsections for there. There's going to be garden style. There may be your 2 or 3 storey that's mainly wood frame with a attached two car garage. Then as I mentioned just recently or briefly, is, that there's mid to high rise and then you have your master planned or your planned development or single family homes. 00:19:53:05 - 00:20:23:01 Unknown So those are three categories. Word. When we first get an opportunity to quote or our own client that we look into, technically speaking, there's mixed use condominiums, there's tennis in common, and there's cooperatives. Those usually fall into the condominium category. Different beast, so to say. But, there's only that's the way we're in and decipher where coverages placed and those coverages are going to be different with different kinds of risks and correct in different markets. 00:20:23:02 - 00:20:45:14 Unknown You know, you're a single family home community that's in a high risk fire zone. Might have a very hard time getting coverage at all. Whereas a, a single family home community that's in a non fire zone, that may be no issue, for, for coverage in any case, that is very accurate. And I'll dissect that a little further for you. 00:20:45:16 - 00:21:28:18 Unknown So yes, if you have a cookie cutter, flat land, no brush issue, type community, the market probably didn't affect that association. They're probably paying the very little an annual insurance premium. But if one, single family home association is sitting in a higher brush area. What's probably happened was that the a package policy, which is contains property in general liability was split up into monoline policies, and the general liability portion was probably easier to obtain, wasn't as as inexpensive in the recent past, but that portion was easy for the insurance professional to obtain for a quote, and the property became a very tough decision. 00:21:28:20 - 00:21:57:03 Unknown There's carriers out there, but you to pay accordingly. I've seen where, very little common area, policies were $100,000 at one point. But I would say to this day, they run if there's a brush exposure or high fire score 12 to $15,000 just for property, they can have the minimum amount of property. But that's what the association has been put into in the tough decisions now in the vertical markets, like a high rise. 00:21:57:05 - 00:22:23:18 Unknown What are the what are the biggest challenges with, with getting coverage there, work in association, have a hard time. So, there's favorite thing that categories. So what's essential is that there's not mixed construction insurance carriers love that. There's noncombustible materials, fully sprinkled buildings. But then there's some beautiful buildings out there that are turn of the century buildings that were converted. 00:22:23:20 - 00:22:43:06 Unknown And they have some, yeah, it could be deferred maintenance could be non modernization of the building. Those ones become the more tougher challenge. And they don't as I mentioned there's two main insurance carriers. Well those two main carriers may not offer coverage. And that takes us into a whole other underwriting scope for insurance carriers. That's where they become challenges. 00:22:43:06 - 00:23:05:18 Unknown And I, I love I do so I could take Tower tower sorry took hours on end on it but is modern is say I mentioned modernization of the building. If association never change for example, the knob and tube out for circuit breakers and modern modern intellectual equipment, then the insurance carriers are going to do their inspections on an annual basis. 00:23:05:20 - 00:23:07:06 Unknown They're probably going to get caught and 00:23:07:07 - 00:23:24:23 Unknown it's going to become a financial burden on the association for non monetization. Yeah. I think one of the other places, where associations in that are these high rise buildings can really be hurt is when they have high levels of, water claims. 00:23:25:01 - 00:23:25:19 Unknown And 00:23:26:00 - 00:23:51:19 Unknown those can accumulate and build up significant losses in that loss history can correct increase in premiums. So getting a handle on those water leaks. Yes. Is is a really important part. So so protectiveness insurance carriers love proactive. Nice. So level that protectiveness ties into meeting with the insurance agent or broker earlier and discuss that, the associations added meters, which is app based. 00:23:51:20 - 00:24:11:19 Unknown Let's know there's a, more of a flow of, of water so they could go address that area. Frankly, insurance carriers are tacking on to mid to high rises, 100,000. Our water damage deductibles. That could be for an association that has water damage claims or not. They just don't want to be involved in the water. 00:24:11:21 - 00:24:30:07 Unknown Claims. Lastly is just, re piping or rerouting a piping. So it's the buildings getting older. Original construction of galvanized piping. There's going to have to be some expenses, whether in the recent past, past or in the near future, 00:24:30:09 - 00:24:37:00 Unknown redo the plumbing, to make them insurable and make it more appetizing for an insurance company to offer coverage. 00:24:37:02 - 00:25:01:19 Unknown I think as we, as we kind of bring this to a close, one last topic. One of the things that comes up in this, this affects me quite a bit is, there are insurance questions that relate back to the management company and in particular, virtually every reputable management company is going to require the association to name the management company as additional insurer. 00:25:01:20 - 00:25:20:06 Unknown Sometimes board members push back on that and they say, hey, we don't want to pay that extra cost insert. Can you speak a little bit to how does, how does an insurance carrier view the idea of naming the management company additional insured? Well, you'd be surprised, but it's more common than you think. Our office. 00:25:20:08 - 00:25:29:17 Unknown Well, for a call from an insurance company, there's no additional premium. You just. It's very common to have additional named insured in this case will be a professional association management company. 00:25:29:20 - 00:25:34:19 Unknown almost all the companies that offer directors, officers liability either include management as, 00:25:34:21 - 00:25:38:09 Unknown definition of named insured or as add as additional insured. 00:25:38:11 - 00:26:04:00 Unknown And then on the fidelity bonds which came about many moons ago. But that management should be additional insured. For association funds in this case the management is additional insured. It's only in the secondary markets where they'll charge. But it's it's nominal, depending upon where geographically the association is and an exposure I would say 150 to $500 at the most. 00:26:04:02 - 00:26:26:04 Unknown So what we're talking about is, first of all, on the additional insured, I can just address from a management company standpoint, the management company is an agent of the association and so is acting on behalf of the association. That's why the management company asks for that. It's also why I think the insurance companies assume that and name the management company as an additional insured. 00:26:26:04 - 00:26:47:03 Unknown And as you said, for the primary markets, there's no extra cost to the association. It's assumed as part of it, secondary markets, there might be a nominal fee. That is correct. But in most cases an association is not going to pay extra for that. That is correct. So, well, Dennis, that's really helpful. We appreciate, your feedback or expertise. 00:26:47:05 - 00:26:59:02 Unknown There's, there's a lot to talk about, and we could go on for a long time. Yeah, but I think this is a really helpful, discussion for, board members and for managers. So I appreciate you having me. Yeah. Thank you very much. All right. 00:26:59:04 - 00:27:16:22 Unknown Well, thanks to Dennis and his expertise and input on this really important subject of insurance. I hope that you found this to be an enlightening episode, and if so, we would love it for you to like and subscribe to this podcast and to tell other people about the uncommon area.