The Role of Insurance in Homeowner Associations

P.O. Box 90748, Henderson, NV 89009

By Robert Holloway

The critics of homeowner associations have often commented on the role that insurance plays in protecting homeowner boards. It has often been said that boards feel immune from personal liability and therefore do things that they might not do if they were vulnerable to a lawsuit. Virtually all boards have agreements with the association where the association agrees to protect them from the financial consequences of their actions. If a board member is sued, he or she could normally be defended by an attorney who was paid either through insurance or by the financial assets of the association, or both. The largest company involved in this business has been Chubb Insurance, operating through a subsidiary, usually Federal Insurance. A couple of years ago, it seemed to many that board members had in effect "deep pockets" with the insurance protection. But something happened. Chubb insurance defended some rather large cases and lost. Judgments in the range of $300,000 and more were paid by Chubb, several of them due to improper foreclosures by boards. Also, as noted in the text quoted below, there were a few claims in the million dollar range, that Chubb ma have had to pay.

There seem to be some lessons in this situation for both board members and homeowners in conflict with their board. First is that the almost complete protection for the board members that formerly existed, may no longer exist. Second, if you are a board member, you should make no mistakes or look very carefully at your insurance coverage that may or may not protect you against mistakes.

A couple of years ago, I decided to take a look at the insurance policy covering our association and I found something interesting. In the files was a letter from Chubb Insurance that sharply reduced the coverage that they were providing. They deleted all coverage that involved "personal injury". That term does not mean "bodily injury" but instead means financial injury to a person. In other words, if a person lost his home due to improper or illegal foreclosure by an association, that would be personal injury. So in essence, Chubb deleted the type of protection that was most important to the average board member. No longer could a board make a dumb mistake on foreclosure and be protected by Chubb insurance. Naturally, my board and community manager seem not to have paid any attention to this letter and therefore probably never knew that their protection had virtually ceased. Chubb insurance didn't exactly put out a news release with this drop in coverage and continued to collect their premiums at slightly increased amounts while drastically reducing the risk to Chubb insurance. I wonder how many associations failed to notice that their coverage had been drastically reduced.

This also leads to the question of the competence of most boards. I believe that my board never understood that their protection had been sharply reduced. Not only did the previous policy protect the individual board members but indirectly it protected all homeowners as well. Apparently there was never any discussion or realization of the reduced coverage because no one except me ever bothered to look into it. Nor can it be expected that the property manager would have alerted the board, because in my opinion, the property manager would not have understood the implications of the letter from the insurance company even if she had read it.

>>>>The widespread acceptance of the importance of owning these policies, however, anticipated a growing number of claims. “From Chubb’s point of view,” Davis says, “the first five years, until 1990, were very profitable. There were virtually no claims. From 1990 to 1995, though, we started experiencing frequency problems. We saw a lot of small claims. We started seeing claims stemming from litigation against boards of directors of condos, homeowners associations, and co-ops, which were primarily actions against the sponsor or developer. Shareholders started suing on such issues as inadequate budgets for construction or reserve funds. Now, in the last four years, we started seeing severity – claims at the $1 million mark or more – which we had never seen before.”

Davis says that these claims are primarily in the area of housing discrimination (refusal to rent or sell), which are “difficult to settle, because you can’t prove that you did not discriminate, so it’s up to a jury or your claims person who decides to settle.” He adds that the difference between litigation involving corporate boards at companies and condos and co-ops is that “when you work for a company, you don’t have an emotional tie. In condos, everything is based on emotional attachment. We spend 75 percent of our claims money in defense costs against litigation, because often the plaintiffs will not settle until they get vindication. They don’t want the money.”

Also complicating settlement discussions is the fact that many plaintiffs want to change board policies, and are not asking monetary damages. Davis pointed to a recent case in which a shareholder with a pot-bellied pig brought litigation to contest the board’s definition of “livestock” which was prohibited, and reclassify the animal as a pet. “When condo owners are upset, they call attorneys and assert that the house rules are unreasonable and ask them to litigate.” The upshot, Davis adds, will be an increase in D & O policies by major insurers, across the board, of as much as 20 to 25 percent over the next two years.<<<<<<<<<

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