By Robert “Bob” O. Jester
Finance Advisory Committee Chair
As published in The View, October 2022:
Question of the month: Is it important to have the Finance Advisory Committee (FAC) conduct an annual insurance review for the Association?
The short answer is, of course, yes, but the real question is why is it important? When we discuss an annual insurance review, we are not referring to shopping for insurance or comparing insurance quotes. We are referring to the true need of reviewing the HOA’s current insurance coverage and getting a basic idea of what is insured, how it is covered and what insurance coverages might be missing as the needs of an HOA change with time.
Proper insurance coverage is an absolute necessity for a HOA, since without it, the assets of the HOA are exposed and at the same time the residents have potential financial exposure, since they fund the HOA with their monthly assessments. Most CCRs, including Sun City Shadow Hills (SCSH), require an annual review and the charter of the FAC requires it to conduct an annual review. In addition, it is necessary to make sure the coverage of the HOA meets all the required state law requirements.
The FAC and the Board must also ask “did the association make significant improvements or upgrade its property?”, which requires more coverage, or add new equipment to a department like maintenance, which again requires more coverage. Another question is always, has the HOA allowed a new unsafe condition to exist, whether it is temporary or permanent, that will present liability exposure in the coming year. In addition, we must always be concerned about “Mother Nature” and what she may throw at us that will cause damage to HOA property, notwithstanding our continuing concern with potential earthquakes.
All of these questions and concerns speak directly to the Board’s primary fiduciary responsibility to “protect, maintain and enhance the HOA property” and not having proper insurance coverage is a violation of that responsibility. Thus, the Board always must choose an insurance agency that “specializes” in HOA insurance coverages for our region.
California state law requires that an association maintain a minimum Directors & Officers insurance policy with a limit of $500,000 (Civil Code 5800) and a General Liability policy with a limit of at least $3 million (Civil Code 5805). Because the California legislature revises our laws almost yearly, the insurance broker, the Board, and the HOA’s legal counsel must be constantly on the watch for these changes so as to comply with the law and not expose the Board to personal liability for a failure of fiduciary duty. Plus, insurance policies of HOAs must comply with the other constantly changing guidelines of financial institutions, regulatory agencies either federal, state or local and certain outside vendors like Associa.
The FAC plays an important role in the annual insurance review by confirming what property needs to be insured and is the property insured for common hazards i.e., fire, water leakage, etc. The FAC looks at the exclusions and their impact on the needed coverages and reviews the applicable deductibles. The FAC must also ask does the coverage limits comply with the law, is there coverage for the Directors & Officers, has the HOA provided the required coverage in the contract with its administrative vendor, i.e., Associa? So, as you can see, there are a lot of questions which require careful annual reviews of the HOA’s insurance coverage for the protection of all of us not just the HOA.
I wish to thank our broker, Prendiville Insurance Agency, for their assistance in preparing this article, as they do specialize in providing insurance for HOAs and have the expertise that this association must have in this risk filled, litigious time for associations and their residents.
Contact the author at finance@scshca.com.