Insurance: How Community Associations Protect Themselves 

Introduction: Background and Key Points

Risk management is the process of making and carrying out decisions that minimize the adverse effects of accidental losses on the community association. An exposure to loss is the possibility of financial loss that the association may incur because of the occurrence of some event, activity, or peril. Risk management is a five-step decision-making process that:

• Identifies exposures to loss.
• Examines treatment techniques (control and financing).
• Selects the best techniques.
• Implements the techniques.
• Monitors the techniques.

Carrying out these steps involves planning, leading, organizing, and controlling community association activities. (See the companion guide Risk Management: How Community Associations Protect Themselves.) Purchasing commercial insurance transfers some of the risk of loss to another party—the insurer. Insurance helps offset property, liability, net income, and personnel exposures to loss that all community associations face.

Commercial insurance is one of the most important components of a community association's risk management program. To help managers and boards fully understand insurance issues, this guide will explore three key areas:

• Insurance terminology, in terms of coverages, policies, and practices
• Association exposures to loss and insurance coverages
• Risk management and the association insurance industry

The following four topics are an integral part of each of these areas:

• Insurance industry and insurance
• Community association industry
• Types of community association insurance
• Related community association insurance issues

When confronted with decisions concerning their commercial insurance program, association boards sometimes simply repurchase the old program. This guide will provide boards with the critical knowledge necessary to fulfill their legal requirements and fiduciary obligations by providing information to make informed decisions without merely repurchasing what's in place.

Key Points

• Property and liability insurance can be divided into commercial and personal insurance. A community association purchases commercial insurance; a unit owner or homeowner in an association purchases personal insurance.

• The insurance industry is highly regulated at the state level in terms of rates, policy forms, financial standards, and business practices.

• Insurers, operating primarily through agents and brokers, offer a variety of property and liability coverages. Most are standardized, but some are designed for community associations.

• Condominiums, cooperatives, and planned communities each function as a business, government, and community. Each function can lead to property, liability, net income, and personnel exposures to loss.

• Legal obligations to develop a commercial insurance program flow from the association's governing documents and the need to comply with various statutes, agency mandates, and prudent business practices.

• Developing an association's property insurance program depends on determining values and defining the interface between individual units and common areas and the responsibilities of each.

• Insurance professionals can tailor coverages for most of the four primary loss exposures.