CAI believes that an effective risk management program can best
be achieved if associations and their governing boards work with recognized
community association professionals. CAI further believes that a comprehensive
association insurance program must focus on meeting a broad range of legal and
lender requirements while recognizing that the governing board is the trustee of
the owners in insurance matters. This program (collectively, risk management and
insurance) requires that risks of loss be fully evaluated and that funding for
such loss (whether by commercial insurance or self-insurance) must be completely
COMMUNITY ASSOCIATION RISK MANAGEMENT AND INSURANCE
Adopting a comprehensive risk management policy and
adopting a policy regarding the purchasing of comprehensive insurance are both
vital if a community association is to minimize the adverse consequences of
accidental loss; maintain the continuity of the association as a business
organization; and assist homeowner members in protecting their most important
asset – their homes. Both programs need to be thought of as one program. More
detailed information is contained in the two-part set titled Community
Association Insurance and Risk Management, available in the CAI Press at
There are six steps to establish a risk management program:
Identify Exposures to Loss: There are four exposures to loss –
property, liability, net income and personnel.
Evaluate the Use of Risk Control and Risk Financing: Risk
Control may eliminate or minimize losses. Risk Financing includes purchasing
insurance, funding for deductibles and self-funding for small losses.
Interrelationship of Risk Control and Risk Financing:
Recognition of the important intersection of Risk Control with Risk Financing
and proceed with an understanding of the importance of evaluating both together.
Implement Risk Control and Risk Financing: This requires the
board to work with a range of recognized association professionals --- attorney,
manager, CPA and insurance agent.
Monitor and Improve: These five steps need to be periodically
evaluated in the same manner that the board reviews its financial and similar
operations on a regular basis.
As the program moves from risk management to obtaining insurance,
the board and its professionals need to regularly view insurance obligations in
the broad context of the insurance requirements that arise from several sources:
Governing documents the declaration, CC&Rs and related
guidelines, internal policies and procedures,
Requirements that may exist in a land lease or related documents
that create vested interests in plans and approvals during the development
State Enabling Statutes
Certain Other Local, State and Federal laws:
Building ordinances and laws (local)
Workers compensation laws (state)
Flood insurance (federal) whether as a requirement to ensure
mortgage lending or to protect against a possible exposure to loss.
Lender and "Agency" Standards: Compliance with mortgage lender
requirements and, if desired, with "Agency" guidelines such as those established
by the two primary Government Sponsored Enterprises (GSEs) – Freddie Mac and
Fannie Mae – as well as by the Federal Housing Administration (FHA) and the
Department of Veterans Affairs.
Indemnitor/Indemnitee Obligations: Compliance with contracts the
association may have entered into as well as any entitlement agreements and
regulatory agreements by which the association may be bound.
Good Business Judgment: There may be no specific insurance
requirements for a given type of coverage, but, if the association, using the
Risk Management Process, determines that certain exposures to loss exist and
that those exposures may be funded by insurance, then the board should consider
obtaining that insurance.
CAI believes that there are certain fundamental analytical
components of a Risk Management & Insurance Program:
Determining Values at Risk: This may require obtaining an
Insurable Replacement Cost Valuation to accurately determine property insurance
limits. Similarly, it may require obtaining a Probable Maximum Loss (PML) study
to determine, where appropriate, earthquake insurance limits. This analytical
determination may involve investigating association industry best practices. For
fidelity insurance it may require setting an insurance limit at three months of
assessments plus reserve funds unless state law provides for different measures.
Also, it may require adding the manager/management company as an insured for
both fidelity insurance and Directors & Officers liability insurance.
Further, this may require minimizing or eliminating the application of
coinsurance for property insurance. Insurance is a significant cost to the
association; lack of insurance can be a greater cost in the event of an
under-insured loss because of incorrect limits.
Special Association Coverage Features: Insurance is subject to
pricing cycles and coverage availability cycles, but over time, association
insurance professionals (together with the insurers with whom they work) have
developed certain special coverage features for various critical insurance
policies. These features vary with the type of insurance, but include by way of
example – the association as the First Named Insured, non-compensated
individuals as eligible for fidelity insurance coverage and a broad named
insured for wrongful act protection in a Directors & Officers policy. These
special features can be best be determined by working with knowledgeable
insurance agents and related professionals.
Interface between the Owner and the Association: Often, there is
a coverage gap between the insurance obtained by the homeowner and that obtained
by the association. This gap may be minimized and possibly eliminated if the
association and owners are educated concerning the insurance obligations of
each. This requires an understanding of the following:
Who owns (or has legal responsibility) for something
Who needs to maintain or repair something
Who needs to replace (or reserve for) something
Who has to insure something
These four components need not be linked together, but they need to be
understood especially if the units and common elements are to be properly
Governing boards, working with association professionals, must
develop a comprehensive Risk Management and Insurance Program to minimize the
adverse financial and related consequences of accidental loss and to help
protect homeowner investment in their homes. To ensure there is a comprehensive
approach, this program should be based on certain risk management principles and
anchored in the governance, legal, lender and related requirements. Further,
this program requires analytical efforts for determining values at risk,
obtaining special coverage features and properly allocating risk between the
association and the homeowner.
This effort is best done in collaboration with knowledgeable association
insurance agents and professionals especially those who have earned the CAI
designation of Community Association Insurance & Risk Management Specialist
and who have attended the CIRMS Insurance Masters program.
CAI also recommends that:
risk management and insurance be coordinated with the
preparation of the association’s annual budget and reserves
risk management be reviewed regularly
insurance loss runs annually.
Please refer to the CAI Public Policy entitled COMMUNITY ASSOCIATION BUDGETS
AND RESERVES for a full overview and discussion of this relationship.