Insurance – Does Your HOA Have ALL It Needs?

The previous column discussed considerations regarding property insurance, but that is only one of many insurance types which most HOAs should have in place.

First and foremost is liability insurance. This is the insurance which covers claims of negligent damage or injury affecting persons (owners, tenants, or visitors) on the property. Civil Code Section 5805 protects the individual members of the HOA from being sued personally just because they are HOA members, so long as the HOA has at least $2,000,000 (100 or less members) or $3,000,000 (over 100 members) in liability coverage. HOAs should discuss with their insurance broker and legal counsel what amount of liability insurance is appropriate, since an allegedly injured party could seek damages beyond the limits of the insurance, and that financial impact on the HOA could still later be passed along to all the members in the form of a special assessment.

Directors and Officers Insurance adds a layer of protection for the unpaid volunteer directors who are making important decisions each year, and who are exposed to lawsuits from unhappy homeowners. Civil Code Section 5800 provides for immunity for HOA directors so long as the HOA carries at least $500,000 (100 or less residences) or $1,000,000 (over 100 residences). This should really be a non-negotiable item for every HOA director in California – make sure the HOA has that insurance in place before joining the board. Just like with general liability insurance, discuss with the broker and legal counsel the recommended coverage levels, as many HOAs may find larger limits of coverage more desirable.

Individual owners should have their own homeowner insurance policies, insuring their lot or unit from liability and from property damage incidents. Many condominium associations have little or no responsibility to restore a unit beyond bare walls ready for fixtures and finishes, and the condominium owner without an “HO6” insurance policy may find themselves in dire circumstances if the HOA property insurance does not cover finishes, fixtures, or belongings inside the unit.

Fidelity insurance insures against losses from dishonesty by persons handling HOA funds. In 2018 Civil Code Section 5806 was enacted, requiring all HOAs to have such insurance covering directors, officers, employees, and the management. The insurance amount must match or exceed the total of the HOA’s combined reserves account balance and three months of HOA assessments.

Earthquake insurance is often a subject of discussion in HOAs due to the potential high damage from major seismic events and the insurance’s high cost and high deductible. Some HOA CC&Rs require such insurance, but most do not. Even if the final decision on such insurance is within the board’s authority, consider taking time to first disclose to the members the pros and cons.

Workers compensation insurance is a good idea for HOAs, even those which apparently  have no employees. The definition of “employee” was substantially broadened in 2020, so someone who might have been an independent contractor in 2019 might be an employee in 2020. HOAs should check with their insurance broker about having a minimal workers compensation insurance in place. Injured employees are mostly limited to the workers compensation insurance benefits if that insurance is in place.

For more helpful insurance information, visit the California Department of Insurance at www.insurance.ca.gov. Look in the “consumers” section for much helpful information and many information guides.