Self-Management: A Guide for the Small Community Association 

Chapter 10: Insurance

Obtaining and maintaining proper insurance coverage is a very important aspect of self managing an association. Not only is it an integral part of managing your finances, it also fulfills your duty to preserve the association's property.

Insurance Requirements: Five Things to Consider

1. State Enabling Statute and Corporation Act: Your condominium, cooperative, or planned community may be subject to a specific state statute. If your association's incorporated, it may also be subject to the requirements of a state non-profit or business corporation statute.

2. Governing documents: In general, your governing documents can require more insurance coverage than your enabling statute, but they can't require less. Read your declaration or proprietary lease as well as your rules and regulations for more specific insurance requirements.

3. Government requirements: Local, state, and federal statutes sometimes require that you obtain, or at least consider obtaining, certain insurance coverages. At the local level, the most common one is ordinance or law insurance; at the state level, it's workers compensation and employers liability insurance; and, at the federal level, it's the National Flood Insurance Program (NFIP).

4. Secondary mortgage markets and lender requirements: FannieMae and FreddieMac, as well as agencies like FHA and VA, may require certain types of insurance before they will buy, insure, or guarantee a mortgage loan in your association. Meeting these requirements may enhance the marketability of units in your community.

5. Good business judgment: Even if steps 1-4 don't mention a certain kind of insurance, use your best judgment. The most overlooked insurance coverage is boiler and machinery insurance. It covers mechanical breakdown and electric arcing (you don't have to have a boiler!). Unfortunately, it's usually not mentioned in state statutes or governing documents.

Four Exposures to Loss

Your community can suffer from losses in four areas, and insurance is available for most of them. You may have to self-insure, however, for some types of losses. The insurance deductible, for instance, is one form of self-insurance. You might consider budgeting for it.

1. Property Exposures and Property Insurance

Your association may be responsible for insuring all the residential buildings in your community as well as equipment like lawn mowers or property such as the pool house, and these tangible assets must be protected.

How Much and What Kind of Protection? Legally, how much insurance do you have to purchase? Practically, how much do you need to purchase? The answer will depend on whether you live in a planned community, a condominium association or a cooperative, so begin by checking your governing documents. Check resolutions also, which can be just as binding as recorded documents and may stipulate details such as deductible amounts.

Next be aware that local, state, and federal statutes may have a bearing on how much and what kinds of insurance your association must have. At the local level, pay attention to building codes and zoning ordinances. For example, if local zoning prohibits rebuilding in your area, the differences between actual cash value and replacement costs become important. The state will require workers compensation and unemployment insurance and the federal government will require Social Security if you employ anyone. And, if your community association is located in a flood area, you are required by federal law to participate in the National Flood Insurance Program or your homeowners will not be able to get mortgages from federally insured lenders.

Lenders, agencies, and professional organizations will also require certain levels of insurance coverage before they will do business with your association or people who want to live in it. For example, the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation will not mortgage homes in associations whose insurance programs don't meet their standards. The same is true of the Federal Housing Administration and Department of Veterans Administration, which will only insure or guarantee mortgages in associations with the required levels of coverage.

Most communities fail to consider boiler and machinery insurance. This is a serious mistake because this type of insurance covers Ask your agent for a quote.

Other Insurance Coverage Considerations

Consider whether your association needs extra or special coverage in these areas.

• Ordinance and law coverage may provide funds that you need to comply with local requirements.
• Machinery and mechanical equipment coverage might be needed for elevator systems, electrical switch gear, intercom and security systems, pumps and motors, and boilers.
• Earthquake or hurricane coverage might be appropriate depending on your location.
• Pollution and environmental hazard coverage might be needed for cleanup or injury to people.

What's it worth? Before you can insure the association property, you must determine it's worth. But worth has different meanings, and there are numerous ways to assign it--market value, replacement cost value (RCV), actual cash value (ACV), investment value, and several others. Don't confuse RCV with market value--your homes may be worth much more than it cost to build them because of location and other factors, but you can usually only insure for either RCV or ACV.

You, as the insured, are responsible for determining value, and the insurable replacement cost appraisal is the best way to do so. This appraisal becomes very important if your insurance carrier asks the association to sign a statement of value. Once you have paid for the initial cost of such an appraisal it can be updated every year for a nominal fee. (The person doing your reserve study may be able to help you.)

[This sample comprises 25% of the complete chapter.]