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Workers Compensation Subrogation

A claims examiner for a workers compensation carrier receives a voice mail that an employee of their insured, ABC Heating and Air Conditioning, has just suffered catastrophic injuries as a result of an on-the-job accident. The injured employee, a married 31-year-old HVAC technician, has suffered life-threatening injuries after falling from a roof during a routine service call. The injured employee was alone at the time of the accident, and there were no witnesses to the fall. Projected compensation benefits are in the high six-figure range.

What at first blush appears to be a straightforward workers compensation claim may, in fact, be a claim with significant potential for subrogation recovery, provided the carrier can identify a third party who is legally responsible for the employee’s injuries.

Workers Comp Basics

Generally, a worker who is injured in the course and scope of employment may not pursue a direct civil action for damages against the worker’s employer. (See Cal. Lab. Code § 3602.) In exchange for the right to receive workers compensation benefits pursuant to the employer’s payment of such insurance premiums, the employee forgoes any direct right of action against the employer.

However, the liability analysis does not stop there, for in many instances a third party – not the employer – is responsible for all or part of the injuries sustained by the employee. This is when subrogation comes into play.

Subrogation Rights

The state Labor Code confers employers the right to pursue responsible third parties for recovery of any and all workers compensation benefits paid to or on behalf of an injured employee. (See Cal. Lab. Code § 3852.) For purposes of subrogation, workers compensation insurers are considered to be “employers.” (See Cal. Lab. Code § 3852(b).) The employer’s right to reimbursement from any proceeds recovered from a third-party tortfeasor takes first and full priority over any recovery by the injured employee. (Cal. Ins. Guar. Ass’n v. W.C.A.B., 112 Cal. App. 4th 358, 368 (2003).)

When evaluating the subrogation potential of any matter, counsel must assess the conduct of the potentially responsible third party. But that is only the first step. In addition, there must be a thorough review of the conduct of the injured employee, the employer, or both, for though any negligence on their part will not bear on the underlying workers compensation claim, it may drastically impact the subrogation potential against a third party.

Assessing Negligence

The law imposes a general standard of care; everyone is responsible not only for the results of their willful acts but also for any injury occasioned to another by their lack of ordinary care. (See Cal. Civ. Code § 1714 (a).)

Every person also has a duty to avoid exposing themselves to an unreasonable risk of harm. Thus, when the injured party’s conduct causes or contributes to his or her own injury, it is referred to as “comparative negligence,” and it reduces the amount that a third party tortfeasor will have to pay in damages. (See Li v. Yellow Cab Co., 13 Cal. 3d 804 (1975.) This principle is central to workers compensation subrogation claims because an employee’s negligence cannot be imputed to the employer for purposes of reducing the compensation lien. (Kemerer v. Challenge Milk Co., 105 Cal. App. 3d 334, 338 (1980).)

When both an employee and the employer seek relief from a third party, a delicate balance exists. In these cases, although the injured worker and his or her employer are pursuing the same defendant(s), they seek different remedies. The employee requests damages; the employer, however, seeks recovery of workers compensation benefits paid to or on behalf of the employee as a result of his or her injury. The law gives the employer a lien for those benefits, and the lien may be asserted in a number of different ways, each of which is discussed below.

As noted above, an injured party’s negligence may reduce the ultimate award of damages. In the subrogation context, some lawyers wrongly assume that any negligence attributed to the employee is automatically imputed to the employer for purposes of reducing the employer’s lien. But that is not so. Although an employee’s negligence will reduce his or her entitlement to damages, the employee’s negligence is not imputed to the employer to lower the amount of the compensation lien, because doing so would, in effect, grant the third-party tortfeasor a double deduction for the same employee negligence. (Kemerer, 105 Cal. App. 3d at 337-339.)

However, though employee negligence will not directly reduce the employer’s lien, it can have the indirect effect of reducing the “settlement pool” from which the lien will be satisfied. This result occurs because the total damage award will be reduced by any allocation of fault to the injured worker. Furthermore, an employer seeking reimbursement must first pay workers compensation benefits in an amount equal to the employer’s own percentage of fault multiplied by the injured worker’s total civil damages before it may recover any remaining portion of its lien from a culpable third-party defendant. (DaFonte v. Up-Right, Inc., 2 Cal. 4th 593, 599 (1992).) This mathematical calculation is commonly referred to as the “employer negligence threshold.”

An example: Assume the injured worker is awarded $100,000 at a civil trial. The worker is assigned 20 percent comparative negligence. The employer, whose lien totals $20,000, is assigned 10 percent fault. The two defendants at trial are each allocated 35 percent fault.

Under this scenario, the total award of $100,000 is reduced by $20,000, which represents the plaintiff’s negligence ($100,000 x .20 = $20,000). The employer’s “threshold” is then quantified by multiplying the amount of employer negligence (10 percent) by the injured worker’s total civil damages ($80,000), yielding a “threshold” of $8,000. Only the benefits paid above this “threshold” (i.e., $20,000 – $8,000 = $12,000) are recoverable by the employer. If the calculation leads to a result in which the employer has not paid benefits exceeding the computed “threshold,” there will be no lien recovery for benefits paid.

With the passage of Proposition 51 in 1986 (Cal. Civ. Code § 1431.2), a comparative-fault system was adopted in California that permits a concurrently negligent employer to obtain reimbursement for workers compensation payments made in excess of the percentage of the employer’s fault or liability. (Associated Constr. & Eng’g Co. v. W.C.A.B., 22 Cal. 3d 829 (1978).) Although a culpable defendant is only liable for its own percentage of noneconomic damages, joint and several liability exists for all economic damages, including the compensation lien. (DaFonte, 2 Cal. 4th at 600.)

Pursuant to Labor Code section 3864, third-party tortfeasors generally are barred from receiving indemnification from concurrently negligent employers. However, pursuant to Prop. 51, judgments against third parties may take into account the employer’s negligence, and the judgment may be reduced accordingly, thus affecting the amount of reimbursement to the employer.

Passive Employer Negligence

Employers may be negligent even in the absence of affirmative misconduct. Allegations of employer negligence often reference improper or inadequate training, supervision, and/or the provision of faulty or inadequate equipment or tools. Thus, even when the employer has not engaged in affirmative negligent conduct, a seasoned plaintiffs or defense counsel can make the case that the employer’s passive conduct – failing to properly train or supervise the injured employee – contributed to the accident such that the employer’s lien should be reduced in an amount commensurate with its negligence.

With these basic concepts in mind, it is now appropriate to identify and discuss several common mistakes made by counsel and workers compensation carriers in the area of subrogation.

– Overlooked potential. When faced with a factual scenario such as the one presented at the outset of this article, it is entirely possible that the claims examiner may conclude that no third party is at fault, or that it would be impossible to prevail in a civil suit absent witnesses or evidence, even if a potentially responsible third party is identified. However, as will become apparent, these conclusions may be premised upon a faulty or incomplete understanding of the applicable evidentiary standards that must be satisfied to prevail in an action to recover the employer’s lien.

The following hypothetical arises from an actual incident. Subrogation counsel was contacted on the day of an incident in which an employee was injured. On advice of counsel, a prompt investigation (consisting of a site inspection, photographs of the accident scene, and interviews with the employer, and others) revealed that unbeknownst to the customer (who owned the building), a tenant had placed a metal guard over the exterior roof ladder only days before the accident occurred in an attempt to prevent teenagers from accessing the roof after business hours. The tenant failed to advise anyone of this change in the condition of the premises. As a result, the employee had to gain access to the roof from inside another tenant’s store. The inside access was subsequently locked by mistake, trapping the worker on the roof. The accident occurred when the worker attempted to descend the roof using the guarded exterior ladder after having been trapped for several hours.

What first appeared to be a claim with no obvious subrogation potential evolved into a case in which it was possible to demonstrate that third parties caused or significantly contributed to the worker’s injury by (1) improperly guarding the exterior ladder (a code violation); (2) failing to advise the building owner, other tenants, or service personnel of the change in condition to the property; (3) trapping the worker on the roof by inadvertently locking the inside access; and (4) by installing what amounted to a tripping hazard. The lesson: In any claim, investigate thoroughly and studiously analyze the potential existence of third-party liability.

– Delay. It is settled law that when an employee receives workers compensation benefits necessitated by third-party negligence, the employer has three options to pursue recovery of its lien from the third party. (See Fremont Comp. Ins. Co. v. Sierra Pine, Ltd., 121 Cal. App. 4th 389, 396 (2004).) The first option is for the employer to file its own independent action against the negligent third party. Second, the employer may intervene in the employee’s existing civil personal injury suit. And finally, if there does not appear to be any employer negligence, the employer may simply file a notice of lien in the injured worker’s civil action. (This latter procedure comes with a caveat. An employer who files a notice of lien is not deemed to be a party to the employee’s suit. As such, the employer exercises no control over the case. If allegations of employer negligence arise and are proven, the employer is powerless to refute them.)

The statute of limitations for an employee or employer to commence suit arising out of an employee’s personal injury is two years. (Cal. Code Civ. Proc. § 335.1.) The statute begins running from the time of the employee’s injury, not from the time that benefits are paid to the injured worker by the compensation carrier. There is no time limit governing when an employer may intervene in the employee’s existing civil lawsuit. However, to the extent the employer intervenes late in the action, the injured employee’s attorney may be able to argue that to the extent his efforts have aided the employer in proving the negligence of a third party, a portion of his fees should be paid out of the employer’s lien recovery. (Cal. Lab. Code § 3856.)

Many compensation carriers make the mistake of waiting for the injured worker to commence suit and/or perform the necessary investigation. But regardless of who commences the action, delay is the enemy of subrogation recovery. That’s because memories fade, witnesses disappear, documents become lost or misplaced, and accident scenes change. Failure to act promptly and safeguard evidence severely decreases the prospects for a successful suit, be it for damages or recovery of the lien.

– Backseat mentality. Too often, compensation carriers adopt what can best be described as a “backseat” mentality. The employer, either by design or inaction, assumes a secondary role, relying on the other parties to develop the facts, evidence, and arguments that will form the basis for the action. By so doing, the employer often finds itself in a position where it cannot exert any control. The practical result is that the other litigants treat the employer as an afterthought; moreover, a “nonparticipatory” employer sends a message that it lacks confidence in the case, or worse, the case is not to be taken seriously. Consequently, the employer may lose leverage during settlement negotiations.

– Penny-wise, pound-foolish. Subrogation is necessarily a study in economics. The employer’s recovery is limited to the actual amounts paid to the injured employee and cannot account for increases in premiums or losses of profit. (Fischl v. Paller & Goldstein, 231 Cal. App. 3d 1299, 1304 (1991).)

All expenditures, recoveries, and settlements in pursuit of subrogation are evaluated in light of the size of the lien and future exposure to the carrier. A Pyrrhic victory in the form of a legal bill that rivals or surpasses the lien rarely results in warm feelings at company headquarters, and for good reason. Such a result evidences a lack of appreciation for the economics of subrogation; counsel should pursue only cases that are good candidates for significant subrogation recovery. Each case should promise an economic return that justifies the attorney’s fees and costs necessary to achieve it.

– Inexperienced counsel. The failure to retain a seasoned litigation attorney is the single biggest mistake compensation carriers make in the subrogation arena. As the foregoing discussion illustrates, this area of law is complex and requires crossover knowledge of workers compensation and civil tort law. But make no mistake, subrogation cases are litigation matters, not workers compensation claims. Accordingly, experienced and knowledgeable litigation counsel should manage them. Engaging seasoned, trial-ready subrogation counsel is the single most important step in identifying and maximizing subrogation recovery.


Insurance Deductible

Perhaps no single duty generates more angst for the average board member than the annual task of selecting the right Master Policy coverage for the community.  Unfortunately, buying the coverage is just part of the challenge, since the purchase decision is coupled with the added responsibility of making sure the association is able to qualify for coverage year after year.  That is a careful balancing act.  The Board wants to have the broadest coverage possible to protect against the large, unforeseen catastrophe, and yet not so broad that the community is in the untenable position of having had too many claims – making the project, from the carrier’s perspective, undesirable and potentially uninsurable.

The solution?  Purchase broad protection, but couple it with a higher deductible.

The reality is, condominium associations in California are beginning to show their age.  As the graph below from the Construction Industry Research Board (CIRB) indicates, a large number of apartment and condominium projects were built during an enormous multi-family housing boom, which occurred between 1983 and 1986 (see the red line below).  Condominium projects built during this condominium “golden years” are now between 23-26 years old.  Perhaps the word “golden” may be stretching it.  If the developer scrimped on quality (and many developers did), some of the interior components of those hastily constructed projects are starting to fail and fail in a most dramatic way.

Water claims in these older buildings are commonplace and, from an insurance perspective, expensive to adjust and repair.  In the average 1980-era condominium project, there are three-decade-old supply lines leading to the sink, toilet, washing machine, dishwasher, or ice maker.  These flexible lines, which have been exposed to constant water pressure day-after-day, are failing.  Since most CC&Rs place the maintenance responsibility for those supply lines on the individual unit owner, condominium boards are understandably looking for a way to shift the responsibility for the resulting damage to the individual unit owner without putting the Master Policy in peril.  A higher deductible will do just that.

It is important to be sensitive to the fact that underwriters at commercial insurance carriers are hyper-vigilant about water loss-plagued condominium projects that, over time, might eat into their employer’s profitability.  As a result, they express no hesitance to non-renew condominium projects that have experienced multiple water damage claims.  They consider the repetitive losses to be a reliable bell weather of the future.  “Two or three water damage losses is a good predictor of a much larger claim in the Association’s future,” an underwriter says.  “Let’s get off this account now, while we still can.”  Non-renewing for them has only one hurdle:   California Insurance Code requires the carrier to provide the association 60-days’ notice of their intent to cancel.

A higher deductible can help an association in three ways:

1.) A higher deductible shifts more responsibility back to the individual unit owner for claims that occurred either:

A.) as a result of the owner’s negligence; or

B.) for losses that occurred as a result of failure of the unit owner to maintain a portion of the unit that is their obligation to fix, repair or maintain per the governing documents.

2.) A higher deductible will provide the association with a modest premium savings for the short-term.

3.) A higher deductible will provide the association with a potentially significant savings over the long-term by preserving the association’s loss history and ensuring that these smaller events do not interfere with the association’s ability to purchase competitively priced coverage year after year.

Deductible Handling Procedure:

Deciding to increase your association’s deductible to $5,000 or $10,000 may be the right decision for your community, but before you make that move, be sure your Board has established a set of rules for handling the deductible.  If your association is like the average, about six out of every ten claims submitted under a property policy have occurred due to a unit owner’s negligence, or due to the failure of a unit owner to maintain their portion of the real estate.

Consider determining exactly who is going to be responsible for the deductible, and under what circumstances.  Then, be intentional about clearly communicating this change to the owners, so that they can modify their personal coverage, if necessary.  Here is an example of how some associations handle this important issue:



Unit Owner

If the loss occurs as a result of the negligence of the individual unit owner.
If the loss occurs as a result of a failure of a portion of the unit that is within the unit owner’s care, custody, and control (according to the governing documents).


If the loss occurs as a result of the negligence of the Association.
If the loss occurs as a result of a failure of a portion of the project that is within the Association’s care, custody, and control.


D and O FAQ

1.  What is a D&O policy intended to do?

 The policy is intended to protect directors and officers against allegations of wrongful conduct when they are acting as company executives.

2.  When does wrongful conduct have to occur to be covered by a D&O policy?

Typically, most policies cover alleged wrongful acts that have taken place prior to or during the policy period. However, some policies are negotiated to expressly exclude “past acts” coverage, so the actual language of the policy must be closely reviewed.

D&O insurance is not intended to be “burning building” insurance. If a potential insured is aware of an impending claim, it may be too late to go out and get insurance to cover it, unless the potential claim is disclosed and the carrier expressly agrees to take it on. First time D&O purchasers must reveal any information they have regarding known claims or related circumstances in the application process itself. Matters disclosed in the application process will usually be excluded from coverage.

3.  Who is insured under a D&O policy?

he simple answer is that directors and officers are covered under a Directors & Officers Liability policy, but this is not a complete answer.

While traditionally only the directors and officers themselves were covered under a D&O policy, today this may be expanded to include managers and other non-executive directors, employees, and the company itself.

What about the company itself, since it may be a defendant in many claims that could be asserted against directors and officers? Today, most D&O policies for publicly traded companies also insure the company itself but only for securities claims. Most D&O policies for privately held or not-for-profit organizations include coverage for the company for an array of claims (not limited to securities claims).

4.  Who can bring the types of claims typically covered by a D&O policy?

Claims can be brought by the company’s stakeholders (owners, investors, lenders, employees and securities holders, including bondholders). Claims can also be brought by customers, consumer groups, competitors, business partners (vendors and suppliers) and government enforcement regulatory groups.

5.  Why don’t companies simply indemnify their directors and officers?

Companies generally do indemnify their directors and officers. However, sometimes companies are financially unable to provide this monetary protection or are unwilling to do so for economic or political reasons. Without corporate indemnity or insurance, directors and officers would be reduced to relying on their own personal assets to pay for the costs of defense and any resulting settlement or judgment against them. Outside directors (those that are not also employed by the company) are usually very vocal about requiring D&O coverage before agreeing to sit on a corporate board.

6.  How does the policy’s limit of liability apply?

Usually, there is a single aggregate limit of liability that applies for all claims that fall within the terms of the policy. This means that the aggregate limit is the entire amount that the carrier is willing to pay under the policy and is not changed because of the number of claims, the number of insureds, or the accumulation of defense costs. Once this limit is exhausted, there is no more coverage available under the policy for any current or future claims. To the extent that the limit is exhausted (the carrier has made payments totaling the limit of liability) prior to resolution of one or more claims, the carrier has no further obligation with respect to those pending claims. This also means that the carrier has no further obligation in connection with defense costs that may continue to be incurred.

Defense costs apply first to the deductible or retention of the policy and then serve to exhaust the available limit of coverage. It is possible that the entire policy could be spent in the defense of a claim, with no coverage remaining for any possible settlement or court award.

7.  When does the dreaded issue of allocation arise?

Whenever there is a claim that is made against both insured directors and officers and uninsured parties, allocation will arise. (Uninsured parties can include: the firm’s accountants, attorneys, underwriters, etc.). In this situation, the insurance carrier will look to allocate the costs associated with the defense, settlement, and investigation of the claim made against the insureds from those same expenses generated on behalf of the non-insureds. Allocation most commonly occurs when the corporation itself is named as a defendant but is not insured under the policy. As mentioned above, the public company corporate entity may be insured under a D&O policy, but usually only for securities claims. If a claim is brought against directors, officers and the company by someone other than a securities holder (such as a competitor), then the carrier will not provide coverage for that portion of any defense costs incurred by the uninsured entity or any settlement or judgment allocated to the entity.

Allocation may also arise when everyone is an insured under the policy, but not insured for all of the allegations that are included in the claim. This happens if either part of the claim is specifically excluded under the D&O policy or it simply falls outside the terms of the policy, for example, when a director or officer is sued in a professional rather than managerial capacity (outside the terms of a D&O policy) or part of the claim arises under the Employee Retirement Income Security Act (specifically excluded).

8.  What is typically excluded under a D&O policy?

Standard exclusions include fraud, personal profiting, accounting of profits, and other illegal compensation exclusions, pending and prior litigation, prior (late) claim notice, bodily injury/property damage, pollution, insured versus insured claims and ERISA (the Employee Retirement Income Security Act of 197 4). Insurers may also include other exclusions based on their own claims payment experience, such as hostile takeover or captive insurance company exclusions.

Some exclusions pertain to areas usually covered under some other type of insurance. ERISA violations are usually covered under a Fiduciary Liability policy; property damage may be covered under a General Liability policy, etc.

9.  Wouldn’t an exclusion for fraud or personal profiting eliminate coverage for most claims?

While a large percentage of D&O claims include allegations of fraud or illegal personal profiting (or both), the simple allegation is not enough to trigger the exclusion. Most, if not all, such exclusions require something like a court determination of guilt or an admission of guilt before the exclusion can apply. Either the words “final adjudication” or “in fact” will be used in the exclusion to indicate how high the hurdle is for the carrier to apply these exclusions.

Defense costs incurred for such a claim are typically covered by the policy until such time as the wrongful conduct is determined to have “in fact” occurred, or until there is a final adjudication. This means that a settlement without an admission of wrongdoing usually does not trigger the exclusions. In the event there actually is a finding of fraud or personal profiting, those directors, and officers who are not found guilty continue to be covered even after others may have confessed or been adjudged guilty.

10.  What’s an “insured versus insured” exclusion?

A D&O policy is intended to function as third-party coverage or to insure claims made against the directors and officers by outsiders or third parties. It is not intended to respond to claims by the insureds themselves. (These are viewed as either insider fighting or collusive suits – things that the insurance carriers want to avoid}.

There are some exceptions to the application of this exclusion. The first makes an exception for shareholder derivative suits as long as no insured (including the company) assisted in bringing the suit in any way. The second typical exception is for wrongful termination suits by officers. More recent exceptions may apply to cross-claims or claims for indemnity. Each of these exceptions means that the exclusion does not apply in those circumstances – so there is coverage.

11.  When does a claim have to be reported to the D&O carrier?

It varies, but typically, the claim has to be first asserted or “made” against the insured during the policy period. This is why D&O insurance is generally referred to as “claims made” coverage. Some D&O policies also require that the claim be reported to the  carrier during the same policy period. This is referred to as “claims made and reported” coverage. Many carriers provide some degree of a reporting “tail” to allow a short period of time after the policy expiration in which to provide notice of claims that came in during the policy period.

12.  What happens if a claim is not reported in a timely fashion?

Courts have upheld the claims-reporting requirements of D&O policies, finding such requirements to be a condition of coverage. Since the reporting of claims is solely within the control of the insured, it is an obligation of the insured to act in a timely manner. Exactly what is “timely” may vary slightly among carriers, however. Many policies require notice as soon as practicable, as long as it is still within the policy period. Carriers and courts differ on what length of time is practicable. In any event, failure to provide timely notice can and will result in loss of coverage. What would be a covered claim can become uncovered if the reporting provisions of the policy are not strictly adhered to.

13.  What precisely is a ‘ claim” under a D&O policy?

The definition of a claim varies from policy to policy, and some do not define it at all. Generally, a claim includes any written demand alleging a wrongful act by a director or officer in his or her capacity as a director or officer, seeking monetary or non- monetary damages. This may be expanded to include investigative orders, grand jury subpoenas in actions that seek to hold the individual liable and other more esoteric events.

14.  What exactly does a D&O policy cover in terms of expenses?

A D&O policy will generally either pay or reimburse the company the costs associated with the defense, investigation, negotiation, and settlement (by way of a court determination or otherwise) of a covered claim. This includes attorneys’ fees, court costs, and filing fees. It may also include expert or other specialist fees that are consented to in advance by the carrier. Most policies include the phrase “reasonable defense costs.” Therefore, some carriers may object to some element of expenses as being unreasonable (either because the amount charged is excessive, the work is duplicative, or the services rendered were unnecessary). In all events, the carrier only pays for or reimburses those expenses that are consented to in advance. In addition to expenses, D&O policies cover judgments/verdicts and settlements. Although the actual term used may differ (some carriers cover “loss” while others cover “damages”), all typically cover any court award or settlement, plus defense expenses.

15.  What will a D&O policy usually not cover as loss or damages?

Covered loss will usually specifically exclude civil, criminal or punitive fines or penalties; exemplary or multiplied damages; amounts that are without legal recourse to an insured; or amounts that are uninsurable under the law. As with many other aspects on D&O policies, this can be modified by insurers. Many now agree to pick up certain fines and penalties and agree to provide coverage for punitive damages where insurable by law, especially for securities claims.

16.  Who selects defense counsel for a covered D&O claim?

It depends: for securities claims involving public companies many D&O carrier have a pre-set list of law firms that they require the Insured to use (with pre-set, usually advantageous, rates). For non-securities claims for publicly traded companies, the insureds can usually select their own defense counsel. Carriers without pre-set lists still retain the right to consent to the counsel chosen by the insured and look for counsel that can demonstrate experience in the type of litigation at issue.

Under most D&O policies issued to privately held or nonprofit companies, the insurance carrier has both the right and duty to defend claims brought against the directors and officers in their official capacity. This usually means that the insurance carrier gets to select counsel.

17.  What happens to coverage if the company is bought or merges into another?

Most D&O policies have what are generally referred to as “change in control” provisions. Most, but not all, policies state that in the event of a change in control, the policy will remain in force for the remainder of the policy period, but, and this is a big caveat: coverage will only be provided for claims involving wrongful acts occurring prior to the change in control.

Please note that some policies actually terminate coverage altogether at the time of the change in control. It is very important to know precisely how a specific policy would respond in such a situation.

Under the majority of policies, a change in voting control is the trigger for a change in control. Some also include sale of all or substantially all assets as a trigger. A filing for bankruptcy typically does not trigger the change in control clause, nor does a substantial change in the composition of the board.

18.  Can a D&O policy be canceled by the insurance carrier during the policy?

Historically, all D&O policies could be readily canceled by either the insurer or the insured. Many state insurance commissioners believed that this ability presented a significant hazard to the insured. As a result, many states limit the situations under which an insurance carrier can cancel a D&O policy and require these specific situations to be clearly identified and detailed in each policy. Today, D&O carriers are often willing to make their policies non-cancelable as long as premiums are paid. In these cases, the insured does not need to worry about being deserted when prospects are bleak.

19.  If my D&O carrier cancels or non-renews my policy, do I have any rights?

In addition to setting out the specific circumstances and time frames in which an insurance carrier can cancel or non-renew a D&O policy, most states provide the insureds with special protected rights in these situations. These rights can often be found in the D&O policy itself.

One such provision is the right to purchase an extended period in which to report claims that would have been covered by the policy before it was canceled or non-renewed. When these claims are first asserted and reported during this extended period, they are then covered under the policy terms and limits in effect prior to the policy’s termination. This extended reporting period (ERP) is often referred to as a discovery period. Some D&O insurers make discovery available when either the insurer or the insured cancels or non-renews.

20.  What’s the “hammer clause”?

Most D&O policies have a provision stating that insureds are not permitted to settle a claim without the carrier’s approval. This is particularly relevant if the insured expects the carrier to contribute to the settlement. On the flip side, the carrier is no t going to settle without the insured’s consent. However, if the carrier believes that a settlement is in the best interests of both it and the insured, and the insured refuses to consent, then the carrier can invoke a protective clause usually referred to as the hammer clause. Pursuant to this clause, if the plaintiff and the carrier are amenable to a settlement and the insured refuses, then the carrier limits it liability to the amount that the claim could have been settled for, plus defense costs incurred to the date of the proposed settlement. If the claim ends up costing more than it could have been settled for, the additional costs are not going to be covered by the insurance.















































Willis Executive Risks Practice 8



The Luis Gonzalez Case

Luis Gonzalez was a member of a painting crew when, in September 2005, he was injured working on a three-story condominium association called “3515-17-19 Sacramento Street Homeowners Association” in San Francisco California. The HOA contracted with Bruce Parsley to paint the exterior of the building. The Covenants, Conditions, and Restrictions (CC&Rs) of the HOA mandated that the HOA “shall acquire and maintain”… [w}orker’s compensation insurance to the extent necessary to comply with any applicable law.” However, when the HOA negotiated the painting contract with Parsley, he lied and said that he maintained both general liability insurance and workers’ compensation insurance. He also provided bogus documentation of non-existent insurance. The HOA relied on these false representations and “assumed” that since Parsley was insured, he must also be licensed.

Luis Gonzales was suspended in a bosun’s chair and working near the top of the building’s interior light well when the chair’s rigging snapped and dropped him approximately 20 feet to the bottom of the shaft. He suffered serious injuries to both shoulders and numerous fractured bones. Parsley, the employer, was cited by Cal-OSHA for workplace safety violations.

Luis Gonzalez applied to the Workers’ Compensation Appeals Board since Parsley had no insurance. As determined by the Heiman case, the hiring of an unlicensed contractor who is injured, or whose employee is injured, while performing work for an HOA, creates an environment in which different employment relationships may arise with respect to “employer liability for workers’ compensation or tort damages.” (Heiman v. Workers’ Comp. Appeals Bd. (2007) 149 Cal.App.4th 724, 734 (Heiman).) In the seminal opinion, State Compensation Ins. Fund v. Workers’ Comp. Appeals Bd. (1985) 40 Cal.3d 5 (State Fund), the Supreme Court concluded that a homeowner who hired an unlicensed contractor, who was injured when he fell from a scaffold, was required to assume the status of “employer” for workers’ compensation liability because section 2750.5 requires an independent contractor be licensed as a matter of law.

“Any person performing any function or activity for which a [contractor’s] license is required . . . shall hold a valid contractor’s license as a condition of having independent contractor status.” (Fernandez v. Lawson (2003) 31 Cal.4th 31, 40 (conc. opn. of Brown, J.).) It is well established that the language of the statute “creates a rebuttable presumption affecting the burden of proof that a worker performing services for which a contractor’s license is required, or who is performing such services for a person who is required to obtain such a license, is an employee rather than an independent contractor.”

The moral of this story: Even if an independent contractor lies to you about the existence of a contractor’s license or workers’ compensation coverage, it does not rule out the possibility that the common interest development could be found to be in an employee/employer relationship at the time of loss. A minimum audit payroll “no payroll” workers’ compensation policy, in the name of the common interest development, acts as an effective safety net against these sorts of claims. Workers’ compensation “no payroll” policies are readily available in California for minimum premiums as low as $528 to $606 per year*.

*Workers’ compensation policies are subject to annual audit and premiums may exceed the quoted minimum premiums if uninsured or unlicensed contractors are reported at the conclusion of the policy period.



Minimize Your Risk

Today’s community managers must be versed in multiple areas, including finance, insurance, real estate, landscaping, law and human resources.

With this wide scope of responsibilities, it is often a daunting task to make sure the community manager is properly protected against claims, lawsuits and allegations of acts, errors, and omissions that damage the clients and third parties.  No matter how well educated, trained, experienced and careful community managers are, there is a high probability that one day they will be sued. Moreover, there’s no way to insulate managers from all exposures.

However, if managers take a methodical approach to their risk-management programs, protection can be maximized.

Many managers mistakenly believe they have adequately shifted all their risk to clients. When I ask community managers if they have errors and omissions (professional liability) coverage, they answer most often is that errors and omissions coverage is not necessary. They say it is unnecessary for three reasons:

  • The manager’s management agreement with the client provides the manager with a “hold harmless” provision or an indemnity agreement.
  • The client’s general liability policy provides coverage for incidents at the managed property.
  • If the client is a community association, the community Association’s directors’ and officers’ liability policy will provide coverage.

Managers should have these three forms of protection, but they are not adequate to maximize coverage. The manager must add the best available errors and omissions coverage. Also, managers must make sure that the association’s general liability and director’s and officer’s liability policies provide state-of-the-art coverage.

Pieces of the Risk Management Puzzle

  • Corporate Entity Protection. The protection that can be obtained through formalities of a corporate entity or a limited liability company must be evaluated by the individual community management company and principles.
  • Written Management Agreement. A professionally prepared management agreement is a keystone to the manager’s risk-management program. By having it prepared by the attorney, the manager is, to a degree, spreading the risk to the attorney. It is most important that the attorney also have professional liability cover- age.
  • Hold Harmless and Indemnity Agreement. The first problem with hold harmless or indemnity agreements is that they are just that: indemnity agreements. Indemnity provisions, unlike an errors and omissions liability policy, do not normally provide a defense obligation. The manager must pay out of pocket to defend a lawsuit or fight a claim. Assuming the manager pays $5,000 to $10,000 to extricate himself or herself from the lawsuit, he or she can then seek reimbursement from the client.

Another problem with indemnity agreements is that in most cases they are “general indemnity” provisions.

In many states, they will not extend to the manager’s active negligence. Thus, managers without foolproof indemnity provision could end up liable for both defense and indemnity.

Although these are used with indemnification and hold harmless provisions, they should be part of the agreement. However, the manager should consider a mutual-indemnification agreement.

  • Community Manager General Liability Policy. Most management companies will have some form of office package policy or premises liability policy. Although this generally will not provide off-premises coverage, it is important. Many property managers do not consider whether the general liability policy also provides coverage for what is known as the “personal injury” offense. This generally provides coverage for claims of defamation, wrongful eviction, malicious prosecution, abuse of process, invasion of right of privacy, and discrimination. Many package policies issued to property managers may not provide this coverage. This is critical coverage to include.
  • Community Manager Errors and Omissions Coverage. With the exception of possible protection by an indemnity agreement, there is no coverage for the property manager under the managed-property policies when the association or the managed property owner sues the property manager for errors or omissions in providing services to the client. Even with the protection of an indemnity provision, manager could be confronted with having to provide their own defense and out-of-pocket legal fees.
  • Community Manager Employment Practices Liability Policy. A community-management company that has its own employees or hired independent contractors requires employment practices liability (EPL) coverage, which provides a defense and indemnification to the employer if it is sued for employment-related claims including wrongful termination, sexual harassment, and discrimination.

Without an EPL policy, costs to defend this type of litigation could be crippling to a management firm. Moreover, if there are proven allegations, there could be an exposure of punitive or exemplary damages.

Tenant Discrimination. Tenant discrimination is sometimes offered within the errors and omissions coverage, or as an additional coverage or policy. As discrimination claims increase, this becomes a significant exposure. This may not be critical in community associations if there are no renters in the community, but if managers have portfolios that include apartment buildings or other commercial properties, this is a coverage that must be investigated.

  • Community Manager Fidelity / Crime Coverage. Fidelity coverage is also known as employee dishonesty coverage. The management company must have this coverage if it handles the funds and financial transactions of associations. Associations should demand that the management company carry enough coverage for all the monies of all the managed associations. The management company also should insist that each association have its own coverage.

In addition to fidelity coverage, there should be third- party crime coverage, which would offer protection if a non-employee steals from an association.

  • Community Association General Liability. The managed property’s general liability policy is a critical piece of the manager’s risk-management program.

The general liability policy is a standard industry form that includes the “real estate” manager within the definition of insured. This is something that must be confirmed. If the manager is not the one obtaining the insurance and responsible for renewals and payments, it is important that the manager monitor and confirm payment and know what steps to take if the insured lets the policy lapse. It is also important for the manager to make sure the client has an excess liability policy for higher limits.

The key coverage provided by the general liability coverage will be for claims of bodily injury or property damage that results from the manager’s work. This is probably the biggest area of claims against the association and the community manager. These claims are generally excluded under the errors and omissions policy and the community association director’s and officer’s policy. The manager should be protected under the association policy. Rarely will an insurer association obtains a policy with a definition of “employee” that includes both the property management company and the property management employees. This is significant because the manager’s policy will not cover the management company principals.

Employee Handbook. Have duties, obligations, rules, and regulation set forth in a handbook. Do not assume the employees are trained or will use common sense. The more you train and educate your employees, the less exposure you will have.

There are significant resources available in this area that obviate expense as an excuse.  Insurance carriers will provide counsel with employment law firms, as well as many forms, guidelines, and manuals, for free. Workers’ Compensation Insurance. Workers’ compensation coverage is required for any employer based on state requirements.

  • Auto Liability Policy. As with workers’ compensation coverage, auto liability coverage is a mandated portion of the insurance puzzle.
  • Umbrella Liability Coverage. The manager should make sure the association has not only state-of-the-art primary coverage but also a state-of-the-art umbrella policy that follows all the underlying policy cover- ages. It is not enough to purchase or recommend umbrella coverage. Ensure that the coverages are complete. When the manager is an additional insured on the association policies, it is only as good as those coverages are.

Each manager’s liability must be evaluated on a case- by-case basis. This is where calling upon professionals necessary.


The Martha Ruoff Case

On Friday, June 25, 2010, Martha Ruoff passed away.  Yes, that is “Ruoff” – a name familiar to nearly everyone in the common interest development community.  If you do not know, Ms. Ruoff experienced an extremely unfortunate accident at a condominium project which resulted in a gut-wrenching lawsuit and landmark appeal: Ruoff v. Harbor Creek Community Assn. (1992) 10 Cal.App.4th 1624,13 Cal.Rptr.2d 755.  Martha was a guest at a condominium project on August 9, 1988, when she slipped and fell down a stairway in the common area of the 152-unit complex.  Martha never recovered.  In fact, for twenty-two years she was cared for by her devoted husband and family.

Enough years have elapsed since the event that we tend to refer to the Ruoff case casually, but it was truly a terrible incident. Martha fell backward, landing at the bottom of the stairs, her foot wedged in a gap between the side of the building and the edge of the stairs. Comatose and bleeding, she was transported by ambulance to the hospital and admitted to the intensive care unit (ICU) where she was treated for multiple skull fractures. Due to complications, she underwent partial amputation of her left thumb, index and middle fingers. A month after the accident, doctors inserted a feeding tube. A month later, a shunt was inserted in her spine for draining fluids. Martha remained in a coma. A tracheotomy tube, inserted at the time of the accident, was not removed for two and one-half months. After 107 days in the ICU, Martha was transferred to the Rehabilitation Institute of Santa Barbara, where she underwent treatment and therapy for eight months after which the Ruoffs were no longer able to pay for the institutional care.

Financially wiped out, her husband moved Martha home, where he personally cared for her. She was unable to bathe, dress or feed herself. Her prognosis included “permanent memory loss, gait disturbance, incontinence and other severe neurological abnormalities.” As cited in the Appeal Court decision, her only communication abilities were described as “babble.” She required 24-hour-a-day care and did for the rest of her life. Her husband sued Harbor Creek to cover the resulting medical expenses which had exceeded $750,000.

At the time, Harbor Creek Community Association only maintained $1,000,000 in general liability coverage – but the damages were far in excess of their liability coverage.  The Association’s attorney argued that $1 Million was “sufficient.”   An Appeals Court, however, determined that not only was the liability insurance woefully inadequate, but individual owners were personally responsible for the shortfall:  “The individual owners within Harbor Creek, as tenants-in-common of the common area, are subject to the same duties to control and manage their property as are other property owners.”

The Ruoff case sent shudders throughout the common interest development community, leaving industry professionals to wonder how the Appeals Court could justify piercing the “corporate shield” to go after the separate interest holders?

In response to this ruling, in 1994 the governor signed Senate Bill 2072 which added Section 1365.9 to the Civil Code.  This code section provided that no person, solely by reason of an ownership interest in a common interest development, shall be personally liable to any person who suffers injury, property damage, or loss arising out of use of the common area provided that the association manages and maintains the common area and the association maintains a general liability insurance policy in the prescribed minimum limits.

This law provides that any action in tort arising out of the alleged acts or omissions of the managing association of the common interest development must be brought against the association and not against the individual owners of the separate interests provided the association has maintained one or more policies of insurance with specified coverage in specified minimum amounts.  The minimum prescribed limits for a General Liability policy are:

(A) At least two million dollars ($2,000,000) if the common interest development consists of 100 or fewer separate interests.

(B) At least three million dollars ($3,000,000) if the common interest development consists of more than 100 separate interests.

While this code section’s intent is to “offer civil liability protection to owners” in common interest developments, it is naïve to believe that maintaining the prescribed limits is sufficient.   If Martha Ruoff’s accident provides us with any lesson at all, it is that health care is expensive and if long term, round-the-clock care is necessary, settlements can easily reach the multi-million-dollar range.   Martha’s husband was not being greedy; he was just trying to receive compensation for a nurse 24 hours-a-day, seven days a week for the rest of Martha’s painful and troubled life.

Plus, the “immunity” isn’t absolute and may be providing a false sense of security.   If there is a judgment in excess of the aforementioned prescribed $2 Million or $3 Million limits, the association will still be liable for the rest of the judgment.  The protections granted by the civil code Section 1365.9 only extend to the owners as individuals.  There can STILL be a special assessment levied against each owner in the project for any shortfall.  Moreover, like any other special assessment, if this one is not paid the Board can foreclose.  For this reason, boards should be encouraged to maintain liability limits well in excess of the prescribed limits – and owners within the development should be encouraged to have sufficient loss assessment coverage to protect against a shortfall.


Attorney Audit of the Community Association

Insurance Puzzle

You are sitting there surrounded by a couple of octogenarian retirees in Bermuda shorts and black shoes and socks, one a former life insurance agent and another a retired Chicago attorney.

Also around the table is a mother with her nine-month-old fusing in her lap, a middle-aged couple in matching sweat suits and a nice looking young man in a suit. You pinch yourself and yes it is true, you are sitting in the Bay View Condo Association club house in front of the association’s new board of directors.  You have been asked as the association’s counsel to attend the board meeting to review and discuss the association’s insurance program.

Apparently, the condo insurance has been handled by the prior board president’s son-in-law who is All Farm agent, a captive agent of an insurance company. The son-in-law specialized in homeowner’s insurance, auto insurance, and life insurance. The board is not confident that the insurance program is appropriate for all their exposures. The good news for the condo is that it was not impacted by the most recent hurricane, it has had no claims, and the cost of the insurance has been quite inexpensive. You immediately recall the comment you heard at a recent errors and omissions seminar where the speaker put up the slide that stated: “ignorance is bliss until there is a claim.”

Why does an attorney for the community association need to understand the client’s insurance program. Two of the key reasons are (1) clients are budget driven entities that do not in the normal course budget for nor anticipate litigation and (2) a significant element of the board’s fiduciary obligation is the purchase of insurance needed to protect the association’s greatest assets, the common elements Accordingly, when an association is presented with a loss or claim, or facts or circumstances that could reasonably give rise to a claim, or loss they will look to is its counsel for direction. As a result, it is imperative for the counsel to know what is covered, which policy is applicable, when must a claim be made and how must a claim be made. This knowledge will help maximize cover- age and minimize out of pocket expense to the client.

Failure of counsel to be knowledgeable of the client’s insurance product could negatively and irreparably impact the client and could even lead to professional negligence.


The Convergence of Individual and Common Interests Counsel’s first obligation is to understand the community association risk. Condominium and homeowner’s associations are legal entities similar to other commercial risks. However, these risks also have their own unique elements. The community association is unique because it is entails a group of individual members, many unsophisticated, with their own “individual separate” legal interests while sharing “common” legal interests with the other members of the association. The common interest can be as simple as a set of paint color guidelines for a group of 20 homes to a complex set of conditions, covenants and restrictions for a 20 story 200-unit high rise with multiple shared amenities.

Notwithstanding the multiple manifestations that the common interest development may take; these entities have an identifiable common denominator.

These are legal entities that are normally set up as a Not-For-Profit corporation. These legal entities most often have “articles of corporation” (legal formality), “by-laws” (the operating manual) and “covenants, conditions and restrictions” (the association rules).

Since these are legal entities, they do not operate on their own, so they need a management team which is normally the board of directors. The by-laws dictate who manages and how they manage. The CC&Rs are the rules the board enforces. In theory, when an “individual” chooses to move into a specific community association, they agree to comply with these governing documents.

These governing documents and the management of a community association are not absolute. For example, in Florida, as in most other states, there are state laws and regulations that supplement the association’s governing documents. What many association boards do not realize is that they may follow the association’s governing documents to the letter and intent of the rules, but if they are contrary to the state laws and regulations, the best of intentions are insufficient. The board will be presumed to know the law.

Tip: Why should an association’s legal counsel be concerned with these issues? Like the association board, the legal counsel will be presumed to know what the association’s governing documents and the state laws say, or don’t say with respect to insurance requirements.

THE INSURANCE PUZZLE: Where do you Begin?

Existing Program: The place to begin is to understand the scope of the community association that you are counseling. The natural place to start is with the existing insurance products and program in place. How- ever, this is only the “start.” Counsel should never assume that what the client has in place is adequate.

That is part of putting the puzzle together, but it is not the end of the process. The best tool counsel could have is a community association insurance specialist to assist in a review.

Governing Documents and Statutory Requirements: The second step after reviewing the risk and the existing program is to review the association’s governing documents to identify the insurance requirements.

Once you understand what the documents require, do not be lulled into a false sense of security. As many of us know, governing documents were very often created by a developer years if not decades ago. They may be outdated from a legal compliance standpoint, and they may not make sense for the specific association, especially if they were cookie cutter documents. Once you make sure you understand the requirements of the governing documents and if those requirements make sense, you must determine if they comply with state requirements. Although the association may feel comfortable with the adage that ignorance is bliss, as a professional this is not a defense.

Experts: At this point, if you do not have experience in the area of community association insurance, this is the time you become an expert, seek a community association insurance professional, a community association legal professional and join the corresponding industry trade groups that will give you the resources you need. It is never too late to master a niche. It is estimated that there are approximately 310,000 community associations in the United States and despite the economy, the number is growing.

The Puzzle Pieces: The community association whether a condominium or a single family homeowner association has a general common denominator forming the basis of the insurance puzzle. On the one hand, the association is a general commercial risk.  On the other hand, the community association has the overlay of members with individual legal interests separate from the common interests.

THE INSURANCE PUZZLE: Analyzing the Pieces

Step One – The Property Exposure

In a perfect world, the rainbow leading to the pot of gold in analyzing the property exposure for a community association is an existing current Reserve Study.  Probably one of the most important tools for a community association is a reserve study. This will identify the association’s physical exposures, the condition of the exposures and the life of the elements within the scope of the study. This tool enables the association management team, normally the board of directors and the community manager, to properly maintain the association’s physical and real property assets. This in turn will obviate many of the other potential issues that can arise among the individual association members.

Tip: If an association does not have a study, or has one that is outdated, the best advice you can provide is to recommend that the association obtain one.

The next step in analyzing the property exposure depends whether it is a Condominium where the individual association members share the dwelling in common or whether it is a single family homeowner’s association.   This again is where the association’s governing document becomes critical. For a condominium, this step includes the determination of the extent that the association’s governing documents re- quire the “master policy” to provide coverage.    This is generally broken down into four different options.

Bare Walls – the association is only responsible up to the inside of the drywall Single Entity – the association is responsible for betterment and improvements as set forth in the original built plans.

All In – the association is responsible for the unit owner’s betterment and improvements.

Silent – the governing documents have no express requirement.

The key to understanding the extent that the master policy must provide coverage leads to advising the association as to what it may recommend that the individual unit owners should carry in their policies, especially with respect to improvements and betterment coverage.

The property puzzle also includes the following items that tend to be issues in many community associations:

Property Value: appraisals & audit.

One issue to keep in mind is that associations hear what they want to hear when it comes to property value as the lower the appraised value, the lower the cost of property coverage. The related issue is that if at the time of loss if the appraised value is not accurate, it could have an impact on the recovery for loss, including the possibility of co-insurance penalties for not maintaining a certain level of insurance to the appraised value.

Replacement Coverage: actual cash value, full re- placement cost or guaranteed replacement cost.

Building Ordinance: critical for older buildings.

Loss of Use or extra expense coverage. Flood, Windstorm, and Earthquake. Boiler/Machinery: mechanical breakdown All Risk: broad form, basic form.

Out buildings.

Step Two – General Liability Insurance

The general liability policy is well known to most counsel as one of its key indirect benefits is that it is the life blood of many attorney’s and their law firms and it is the basis for providing associations with defense to claims brought against it for potential liability. However, we should not let ourselves be lulled into a false sense of security where a little bit of knowledge could be dangerous. The community association has some clear although not complicated issues. Again, we need to look to the governing documents for any express requirements and compare them to any statutory requirements.

Definition of Insured: Very often, there are pro- grams that offer general liability coverage that is quite competitive. What must be first do is make sure we have an adequate definition of insured. One caveat is to make sure that the definition of Insured does include the real estate manager as does the ISO form. As many of these associations are in fact managed by a community manager and since most of the associations agree to “indemnify” the managers, this is a critical issue to be confirmed. It is also important to make sure that the definition of “insured” will also extend to “volunteers” who should include directors and officers, committee member and other volunteers providing services to the association pursuant to the authority of the board of directors.

Personal Injury coverage: Another key issue under the general liability coverage is the existence of personal injury coverage. Anyone who lives in the world of community associations know that the issues of defamation, invasion of privacy and wrongful eviction offenses become issues much more than we would hope. This also ties into directors and officers and umbrella coverage as these policies are often without this coverage or are following form or excess of these coverages.

Workers Compensation Coverage: An issue that is becoming important in many states is the inclusion of workers compensation coverage, especially minimal policies for those associations that have no employees. Many WC policies do not cover directors and officers, committee members or volunteers. There are a number of markets that now provide minimal policies in this regard. The role of counsel is very critical here as many associations just do not understand that if a subcontractor they hire does not provide workers compensation coverage, even if they lie about having it, will lead the association exposed to this coverage.

Automobile Liability Coverage: Most associations do not have auto exposure, but this is clearly a risk that must be evaluated. Even if there are no titled vehicles, there are issues of “hired” and “non-owned” vehicles which could give rise to exposure.

Step Three – Directors & Officers Insurance Audit

The association is a legal entity that is managed by a board of directors. To convince the best individuals to sit on these boards, it is imperative to provide them the best and broadest coverage. The reality of the D&O coverage is that it is the one coverage that has the greatest divergence in coverage between the various products on the market. This is also a coverage that causes many agents great consternation.

Stand Alone v. Endorsement: Although this is a generality, it appears that most D&O endorsements in package policies do not provide adequate coverage for today’s community associations. Today’s D&O policy needs to cover the following:

Defense of Monetary and Non-Monetary Claims Defense of Failure to Maintain or obtain Insurance Defense of Third Party Contracts.

Full Prior Acts Coverage

Definition of insured includes Past present and future directors and officers; Committee members; Volunteers; Employees, including leased employees; Independent contractors; Spouses; and, Domestic partners Discrimination Coverage, including third party discrimination.

Personal Injury coverage including Defamation; Wrongful eviction.

Invasion of right of privacy Employment Practices Coverage.

Property Manager included within Definition of Insured.

Consent to Settle Clause, preferably with soft hammer clause.

The exclusions of the D&O policy creates a gap in coverage in the event that the association has employees and provides a “defined benefits plan,” sometimes referred to as the ERISA exclusion. This gap is filled with a somewhat misleadingly titled policy known as a “Fiduciary” policy. As we know, the key duty of the board is a fiduciary policy; however, a Fiduciary policy is really for the purpose of filling the gap of the referenced exclusion.

Step Four – Fidelity and Crime Insurance

The challenge of the fidelity/crime coverage is two- fold. First, many package policies include sub-limits of employee dishonesty coverage. Second, the corresponding premiums are so low that many do not have the patience to spend time on the product. One thing to keep in mind is that this coverage is very often a moving target. This is a first party coverage and what is being insured is “what” the association has. In this regard, an accounting must be done to determine what the association has in all accounts and investments.

The association should also be cognizant of windfall deposits such as insurance proceeds and the collection of special assessments that go beyond the normal precede accumulation of associations.

The state of the art association fidelity/crime policies contain the following coverages:

Employee Theft Forgery or alteration audit.

Inside the Premises – Theft of Money and Securities Inside the Premises – Robbery or Safe Burglary of Other Property.

Outside The Premises Computer Fraud Funds Transfer Fraud.

Step Five – Umbrella Liability Insurance

The umbrella liability policy is becoming a much more important part of the community association puzzle as the times we live in becoming more and more litigious. There are a couple of keys to the umbrella coverage. First, what limits are sufficient? Second, what does the umbrella coverage actually provide?  Again, many people do not look closely at the coverage because they are convinced that the umbrella policy will never be triggered.

What must also be kept in mind is that limits in and of themselves are not sufficient. Most umbrella policies are “following-form” policies meaning they follow the terms and conditions of the underlying scheduled policies. If those policies do not provide adequate coverage, the umbrella is just proving higher limits of inadequate coverage. In addition, umbrella policies also include their own exclusions that may be in addition to the underlying policies. Specifically, be cautious that they do not exclude D&O, EPL or coverage for managers.

THE INSURANCE PUZZLE: Your Client’s Duties & Obligations

As an attorney, the bottom line is that you are hired to protect your client’s assets. As much as your client may respect, appreciate and adore you, there are very few that enjoy paying your fees and costs. If a client indicates that she or he does like paying you or does not mind paying you, you can bet pretty much that it is a direct result that you saved them so much more money or otherwise preserved their assets that after they pay you, they are still coming out ahead. Accordingly, the roll of counsel is to do whatever he or she can to pass on the cost of your services elsewhere, which more often than not is to an insurance carrier.

As we know, insurance is a contract and the insured’s consideration to obtain a defense or indemnity under the terms and conditions of the policy is to pay a premium and to comply with the policy “conditions.” Accordingly, as counsel, although you are not a party to that contract, it is critical for you to understand what those conditions are. The community association like any other insured purchased insurance to protect its assets. The assets are either physical assets such as those above covered under a “property” or a “fidelity/crime” policy, or financial assets that could be reduced in the face of potential liability exposure that would be covered under a “directors & officers” policy or a “general liability” policy.

The duties and obligations are “conditions precedent” to the insurer’s obligation to either “pay a loss” or to provide “defense or indemnification” under the terms of the policy. Most of the conditions are quite straight forward and are set forth in the policy. For example, in a property policy, the basic “Duties In The Event Of Loss or Damage” is as follows:

Notify the police if a law may have been broken.  Give us prompt notice of the loss or damage. Include a description of the property involved. As soon as possible, give us a description of how, when and where the loss or damage occurred.

Take prompt steps to protect the Covered Property from further damage …

Provide complete inventories of the damaged and undamaged property.

Permit inspection, including examination of books and records.

Provide a sworn proof of loss within 60 days of the insurer’s request.

Submit to an examination under oath.

Under a General Liability policy you will find this condition normally under the Duties In The Event Of Occurrence, Offense, Claim Or Suit.”

You must see to it that we are notified as soon as practicable of an “occurrence” or an offense which may result in a claim.

There are additional conditions that can be reviewed, but for the purpose of this article, we will focus on the notice provisions.

The biggest issue for counsel to be aware of is that there is a potential ”trap for the unwary.” This trap arises in the context of a liability policy where the insured is looking for the insurer to pay for its defense. Under most liability policies that are defense obligation policies, the insurer maintains the right to select counsel to defend the insured, and with some various exceptions, no defense obligation is triggered until “notice” is provided to the insurer.  However, although I am sure it does not apply to any one reading this article, sometimes, counsel does not contemplate the potential coverage that a client may have prior to “starting the clock.” As a caveat, there are sometimes timing issues that require immediate action, but as a general rule, both sides of a suit want there to be covered on the table, and although there are exceptions, most plaintiffs or claimants will allow time to get coverage in place.

The consequence of not making timely notice is the issue of “pretender” defense fees and costs. Very often, they will not be covered. We all understand that both insureds and counsel may believe that a matter can be resolved quickly and expeditiously, but some of the most innocuous types of matters turn out to be night- mares for everyone involved.

Another trap for the unwary is the “Claims Made and Reported” policy. In the “occurrence” policy, the trigger of coverage is the date of the occurrence. In the claims made policy, the “wrongful act” that is ultimately the origination of the potential loss or liability is not the trigger of the policy. In very general terms, there are three elements that must be considered in the claims made policy:

The Wrongful Act – often the decision made by a board of directors that is being complained about by a claimant such as a refusal to approve an architectural variance.

The Claim – normally a “demand” by a claimant that the insured do or not do something such as a demand that the board changes its decision about an architectural variance decision it made or a demand that the association not proceed with a capital improvement as it is not authorized to do so.

The Notice – this is the notice given to the “insurer” regarding a “claim” made during the policy period regarding a “wrongful act.”

It is all about the timing. Did I mention that it is all about the timing? In the typical D&O policy which is where the community associations will most like find a Claims Made policy, the Wrongful Act must occur during or prior to the policy period. The Claim must be made during the policy period. The Notice of the Claim must be “reported” to the insurer during the policy period or the discovery or extended reporting period if applicable.



But the Complaint is Frivolous

“It is a groundless complaint; it will go away soon according to our property manager or attorney – why should it impact our insurance?”

As a practical matter, if the insurance carrier is involved, expenses will be incurred.  Once expenses are incurred, there is an impact on the insurer’s costs for providing the insurance, regardless if the complaint is frivolous, false, or fraudulent. A natural consequence is that the cost of the insurance itself in general, will rise and in specific for the individual association.

The challenge is: how can the community association or condominium minimize the claims and resolve them as expeditiously as possible without the necessary involvement of the Directors’ & Officers’ Liability Insurance, (D&O) thereby keeping insurance costs down? By not involving the D&O Insurance, the association keeps its insurance down. By keeping the insurance down and by keeping it free of minor claims, the premium will be more stable and predict- able allowing the board to properly budget and to avoid surprises.

D&O Insurance, like general liability insurance, should be viewed as insurance for substantial matters and claims and not as a means for handling the day to day affairs of the Association. Unfortunately, many community associations have looked to their Non-Profit D&O insurance far too often and too prematurely.

The mandate of the board of directors is to work with the associations at large to ensure that the association complies with the goals of the association. One reason associations are too quick to turn to their insurance for these issues, we believe, is the custom and practice of insurance professionals and agents to recommend these associations to carry unnecessarily low deductibles. In the end, we believe that this is, in fact, a dis- service for the association. In fact, when we take an anonymous poll of our over 4,000 sub-agents, the vast majority agree with our analysis but indicate that their insureds are just too used to the low deductibles.

As a side note, we must admit that from a premium generation standpoint, we do not necessarily mind the lower deductibles because we can justify higher premiums. The premises of this article, however, is what can be done to minimize the cost of insurance for the associations and what can be done to create stability and predictability for the associations in budgeting for insurance.

To better understand this issue, let’s take a look at an issue I believe each one of us can relate to as individuals. How many of us carry $500 or $1,000 deductibles for the collision portion of our auto insurance? Why do we do this? We do this because although it is not easy, we can personally handle and absorb these losses without having to involve our insurance, thereby keeping our premiums down. In personal auto context, we as consumers clearly understand the cause and effect of this issue. Why then would a community association carry a $1,000 deductible for its D&O insurance where there are many association members to help absorb the higher deductible?

Doesn’t the same type of analysis apply to our community association? It is hard to imagine that a community association cannot absorb a larger deductible to accomplish the same thing we do on a personal level. In fact, the logic should apply more readily in the larger context.  For example, if you have a 100 unit Condominium and there is a $1,000 deductible, this would be $10 per unit. We spend this much for a couple of coffees or a fast food lunch. If the association carried a $10,000 deductible, each unit, in worst case scenario would be assessed with a $100 charge in the event of a substantial claim, and that would only occur if the association failed to maintain a reserve for such contingencies.

To further understand this concept, we should identify what appear to be the most common claims that are made against the Directors and Officers of a typical nonprofit community association board. The following are the most common types of claims:

The Board’s failure to adhere to by-laws

The Board’s failure to properly notice elections The Board’s failure to properly count votes/proxies

Challenges by members regarding power granted the Board by by-laws

Improper removal of Board Members

Decisions by the Board resulting in physical damage to the association property

Challenges to assessments

Approval of variances, generally by an architecture committee

Breach of fiduciary duty

Challenges to decisions of the Architectural Review Board

Questions or challenges regarding easements The Board’s failure to maintain common areas

The Board’s failure to properly disburse funds (i.e., insurance proceeds)

Defamation by the Board of a member

When we stand back and look at these types of claims in an objective manner, it is truly hard to believe that the types of disputes giving rise to these claims cannot be resolved short of insurer involvement or the need for litigation. The fact is that many of these can be resolved. The reality is, however, that the associations are not motivated to resolve these issues on their own, due in large part to the low deductibles. Specifically, the association realizes why they have insurance.

That is the inherent flaw. This should not be the reason for the D&O insurance. The D&O insurance should apply where the association truly cannot itself resolve the matter. Moreover, very often, the property manager or managing agent is too quick to submit this to the insurer to stay out of the mix. This is a key job of the property manager, to manage and to be the professional staff for the board.

The nature of the D&O policy is that the insurers spend money in defense and claims expenses, not indemnity. The Directors and Officers in most cases act in the utmost good faith and within their fiduciary capacity. However, there will always be someone who does not agree with the decisions being made, there will always be someone who believes they are being treated differently than others, and there is always someone who believes that their board is acting in its own best interest. Rarely is that the case. We believe that if those who make these frivolous complaints understand that they will be absorbing some of the expense for their complaints may be less motivated to be quick to pull the trigger and will be more likely willing to try and resolve the issue.

In addition to the increase of deductible, which we believe will help develop problem-solving mechanisms for the association, we believe that the instigation of an alternate dispute resolution provision is another method of minimizing the unnecessary use of insurance and the minimizing of costs.

What I propose is that the association asks itself: Why do we have a minimal deductible? The association should also ask the property manager and insurance professional why they have the low deductible. After asking these questions, the association should determine whether it would be in its best interest to increase the deductible both for problem-solving and cost saving measures. We believe that the need for the low deductible is a bad habit whose time has come and gone.

The Insurance Puzzle

A key obligation of the association board is to protect the assets of the association.  One of the primary elements of this responsibility is insurance, but many volunteer board members have limited experience with insurance.  They are only familiar with purchasing personal auto, home, and life insurance.  Most know the limits and the price, but few really take the opportunity to understand coverage until they have an uncovered loss.  Many are swayed in their insurance shopping because they are “in good hands” or are protected by “good neighbors.”

Once volunteer board members are elected, however, many become intimidated by insurance. This article will help demystify insurance and provide a better understanding of the association’s needs and provide some tools that are useful to use to carry out this obligation.

Why a Community Association?

Most individuals chose to live in a mandatory community association to protect their two greatest assets, their home, and their lifestyle.  Homeowners believe that the community association can better protect these assets than they could do as individuals.

How Does the Association Protect Assets?

First, the association is normally a legal entity. Second, it must (if a legal entity, and should regardless) have bylaws which serve as the operating manual for the association. Third, the declaration of covenants, conditions and restrictions set forth the rules and restrictions created to preserve the association’s assets. Next, the association needs a management team which in the normal course is a board of directors, and finally, the association needs the funds to enable the board to manage.

How Does the Board Determine the Cost of Management?

This is done by the development of a budget. The first step should and often is a reserve study which is the cornerstone to an association’s preservation. This is the heart through which the life blood of the Association pumps. Some associations do not have a reserve study contending they are too small or cannot afford it, and others have other infrastructures set in place which may incorporate the benefits that a reserve study would provide. The key is to know what exists, what is necessary to maintain it and how much that will cost. At the end of the day, association members need to plan to avoid surprises.

How Does the Association Cover Non-Budgeted Costs?

There are really only two ways to cover non-budgeted costs. The budgeted costs are funded by general fees and assessments. No matter what association you live in and no matter how well you manage the association, “stuff” happens and non-budgeted costs and expenses will arise. This will manifest either as a repair or improvement that is required before its expected time or the result of a loss or casualty. These unexpected costs are covered either by insurance (if insurable) or a special assessment.

What is the Board’s Obligation?

In most states, the association has a “fiduciary” obligation, and in other states, some statutes may only place a duty of ordinary care on the board. The fiduciary duty includes the duty of loyalty and the duty of care. The duty of loyalty requires that the board put the interests of the Association above their own and disclose and avoid any conflicts of interest.

The duty of care requires the exercise of the care, diligence, and skill that an ordinary, prudent person would exhibit under similar circumstances.  This means, at a minimum, paying attention to the substantive matters brought before the board, attending meetings, asking questions, challenging assumptions, following up on issues that may not have been resolved, consulting with experts if needed, reading and understanding materials and reports given to the board.

Accordingly, the board cannot delegate the task of obtaining the appropriate insurance for the association.

To Understand Insurance is to Know Claims

To understand what types of insurance an association needs requires the board to know what type of claims, losses, accidents, and exposures that an association may encounter. To know the nature of community association risk is key to exercising its obligation.

Some common claims include:

  • Election dispute claim
  • Economic loss claim for wrongful eviction of unit owner’s tenant
  • Demand by unit owner to compel association to purchase flood insurance
  • Building fi re due to a barbeque grill on a balcony
  • Discrimination claims
  • Bodily injury and medical costs for slip and fall on the common area
  • Property damage claim due to the improper calibration of the security gate
  • Challenge to Architectural Review Committee decision
  • Challenge to board rule requiring dog owners submit their pet’s DNA
  • Emotional distress damages due to discriminatory application of rules
  • Water damage claim from faulty washing machine hoses
  • City demand to remove diseased trees that the association’s arborist claim are healthy

What Does It Mean for the Board to Shop for Insurance?

First, what it does not mean to shop insurance. Recently, while I was at a local association trade show, I asked a board president if he would like to dis- cuss insurance. He said no because that is what they pay the community management to do. I doubt he will give that answer again.

Delegation of the insurance responsibility to a non-insurance professional may itself be a breach of the board’s duty. Yes, the board can consult experts, but it cannot delegate the task. It should be noted that most management agreements require that the association indemnify the management company if it is sued. Therefore, if the management company, which is typically not a licensed insurance professional, makes a mistake, it is not accountable to the association. For management companies, they should not be assuming that responsibility as their errors and omissions policy in most cases expressly excludes claims arising out of insurance issues.

Puzzle Piece No. 1:

MUST DO: Find an Insurance Professional that Specializes in Community Associations.

Most people do not hire a real estate attorney to handle a medical malpractice case or hire a cardiologist to per- form knee surgery. Why then would a board hire an insurance professional who does not specialize in community association insurance? Unfortunately, there is no short cut, and if the board members do not want to do their homework, they should resign from the board. What they need to do is find an insurance professional who has a proven track record. Get responses to the following in writing, the hesitation to do so should raise a flag.

  • How many associations have they insured?
  • How many management companies do they work with?
  • Do they participate in CAI?
  • Have they asked to review the governing documents?
  • Have they asked to review your reserve study?
  • Have they asked about appraisals?
  • Have they explained how each policy works?
  • Have they requested to personally meet with the board?
  • Have they offered to bring in other insurance specialists?

MUST AVOID: Point of Sale Price

Community associations are budget- driven entities. However, boards should not look at the bottom line while wearing blinders. “Stuff” happens and there are casualties, hazards, and accidents that happen that a reasonable person cannot always anticipate. This is why the association purchases insurance. In the insurance world, like in many purchasing opportunities, you get what you pay for; this is not an ab- solute, but a rule of thumb. Insurance carriers do not give you something for free. Accordingly, if one policy is materially less, there is a reason.

I once received a phone call from an association president, who was also a very successful attorney. She said an insurance agent told the board that he would give them higher limits for a lower premium. That was in fact true. Unfortunately, the higher limits came with coverage restrictions. The good news was they saved $400. The bad news was they incurred over $100,000 in defense costs for claims the new policy did not cover.

Puzzle Piece No. 2

MUST DO: Understand the Puzzle

The board must endeavor to understand the association’s insurance requirements.

First, the association must know what types of insurance and limits are required by the governing documents? Second, are there statutory requirements that differ from the governing documents? Third, has the board done an audit of the common elements of the association knowing what needs to be insured and what does not? Fourth, has the board done an audit on the potential liability exposure of the association? Fifth, do you have current valuations of the common elements? Finally, are any association members doing things that increase potential liability for the association?  Such as Neighborhood Watch, swimming lessons in the community pool or pee wee football practice on common elements.

MUST AVOID: Inappropriate Delegation

The board must not delegate the insurance responsibility to anyone else. Yes, the board can delegate some re- search, the setting up of meetings and clerical issues, but it cannot delegate its duty to review, ask questions and due diligence necessary to understand insurance.

The Insurance Puzzle

The board must review the entire insurance puzzle; there is no short cut. The only short cut is the use of a community association insurance specialist. The details of the puzzle will not be explored in depth in this article, but the following are the general types of insurance that may or may not be required for your association. Each puzzle piece has key corresponding questions.

  • Property Coverage
  • General Liability Coverage
  • Directors & Officers Liability/Employment Liability Insurance
  • Fidelity/Crime Insurance
  • Umbrella Liability Insurance
  • Workers Compensation
  • Windstorm/Earthquake/Flood
  • Fiduciary Coverage\Unit Owner Insurance Needs

-Single Family Homeowner policy

-Unit Owner HO-6 policy









The Truth about Errors and Omissions

A number of myths circulate regarding property manager exposure in the community association industry. We will call these the “Teflon Myths,” since managers who believe them seem to think nothing sticks to them. The first myth is often brought up when I ask a property manager if he or she has errors and omissions coverage. The answer I am most often given is that “errors and omissions coverage is not necessary because my management agreement with the community association provides me with a hold harmless provision or an indemnity agreement.” The second myth that is often proffered is that “the community association’s directors’ and officers’ liability policy will protect me.”  The reality of these myths is that, as with most myths, although they make great stories, they are not quite accurate.

The first problem with a hold harmless or indemnity agreement is that they are just that: “Indemnity” agreements. Indemnity provisions, unlike an errors and omissions liability policy, do not provide a defense.

Accordingly, after the property manager has spent his or her own money to defend an action, the agreement with the association will allow the property manager to go back to the community association and request reimbursement. There are many problems with this. First, the property manager must seek reimbursement from the hand that feeds him or her. This will definitely be an uncomfortable process. Second, community associations are budget driver entities that probably have not planned for such reimbursements. Therefore, the association will most likely have to take steps to approve and issue an assessment against the members. This, in turn, will undoubtedly give rise to animosity from members who believe the property manager should not be reimbursed if they were at fault. In the end, this is not a pretty road to traverse.

Another problem with indemnity agreements is that they are in most cases “general indemnity” provisions, and in most states, they will not extend to the property manager’s active negligence. Thus, property managers that were not savvy enough to have a foolproof indemnity provision will end up liability for both defense and indemnity.

The next myth is that the property manager will be fully covered by the community association’s directors and officer’s liability policy. Unfortunately, there is a big hole in the D&O coverage in virtually all policies. That gap is when the community association itself sues the property manager.  Under these circumstances, the property manager is going to need his or her own coverage.

Another factor that has led to the need for property manager errors and omissions coverage is the fact that comprehensive general liability policies routinely exclude professional services or other professional liability coverage. Specifically, underwriters began to sustain significant losses from professional liability in the mid-1970s. As a result, professional services exclusions became standard exclusions in the general liability policies that property managers generally purchased as part of their business packages.

Property managers must also take into consideration the reality that we live and work in an increasingly litigious society combined with heightened performance standards being demanded of professionals. Property managers, like other professionals, must look at errors and omissions coverage as the cost of doing business and incorporate this into their pricing.

Finally, businesses routinely require firms and individuals have evidence of professional liability coverage as a prerequisite for engaging their services. In fact, a community association that does not require this of its property management company is not being wisely counseled.

The intent of this article is to provide an introduction into the following areas:

  • What are the key exposures for community association property managers that give rise to the need for insurance?
  • What is generally covered by a property manager errors and omissions policy?
  • What are some of the larger issues confronting property managers that may impact the availability and cost of errors and omissions coverage?
  • What are some of the more common property manager errors and omissions claims?
  • What steps can be taken to minimize property manager errors and omissions claims?

Property Managers Key Exposures

To understand what you need to know about property manager errors and omissions coverage, it is first helpful to review what some of the main exposures for the community association property managers. The following are the key exposures we see as underwriters of property managers’ errors and omissions coverage:

  • Misrepresentation or miscalculation of the financial strength of managed properties.
  • Inaccurate record keeping or tax preparation for man- aged property.
  • Failure to adequately perform due diligence before hiring subcontractors.
  • Failure to provide a written description of services to be performed for the community association.
  • Abuse of discretionary authority provided to property manager with regard to capital improvement or repairs.
  • Management of properties that are not in compliance with statutory and regulatory requirements for persons with physical handicaps.
  • Inadequate budgeting for property managed.
  • Abuse of authority in drafting check or money management activities performed by property manager.
  • Failure to perform proper background checks on prospective tenants.
  • Entering improper indemnity or limitation of liability agreement.
  • Personal injury including libel, slander, and invasion of privacy.
  • Failure to report insurance claims in a timely manner.

This is not an attempt to exhaust the potential exposures of community association property managers. Rather, the intention is to bring up some of the more common exposures to put the insurance issues into context.

What’s Covered?

Like most professional liability errors and omissions policies, most property manager errors and omissions policies are “claims made” policies. What this means is that:

  • Coverage under the policy is triggered when a “claim” is made against an “insured”
  • For a “wrongful act”
  • Which happened during or prior to the policy period
  • But after the retroactive date (unless the policy is a full prior acts policy)
  • Resulting in “loss”

The claim is a demand on the property manager to do or refrain from doing something – for example, a demand to reimburse the association for a tenant who skipped out because they were a bad credit risk and the property manager did not do a proper background or credit check. The alleged wrongful act was the improper credit check. The alleged wrongful act occurred during the policy period. Thus, the policy would be triggered to provide a defense for the property manager.

As indicated above, the typical claims intended to be covered by the association manager error and omission policy are the following:

  • Mismanagement of property claim brought by the property owner
  • Failure to process eviction notice properly
  • Personal injury claims including libel, slander or other defamation
  • Inadequate background checks while tenant screening
  • Failure to perform proper tax filing services on behalf of the property
  • Inadequate record keeping

To address these types of claims, the intent of the property manager errors and omissions policy is generally to contain the following:

  • Coverage for wrongful acts of the insureds arising out of the rendering of property management services including development and implementation of management plans, securing of tenants and management of tenant relations, processing evictions, implementation of loss control, management of contracts, feasibility of studies, personnel administration, and record keeping
  • Coverage that applies to liability of the insureds’ wrongful acts of any person for whom the insureds are legally responsible
  • Any claim for personal injury as defined in the policy is covered, such as libel or slander, malicious prosecution, or unlawful entry or other breach of privacy
  • Claims for both monetary and non-monetary relief including formal administrative or regulatory proceedings
  • Coverage for punitive, exemplary or multiple damages (where insurable by law.)
  • Defense coverage for an illegal profit claim
  • Defense coverage for a fraud/dishonesty claim
  • Knowledge or acts of one insured person are not imputed to another insured person
  • Ninety-day automatic extended reporting period
  • If the claim is settled through mediation, the retention will be reduced by 50 percent or $10,000, whichever is less
  • Policy is non-cancelable unless the insured fails to pay the premium
  • Insurer must give 60-day notice of non-renewal or new terms
  • Will not exclude management of property as long as ownership interest by insured of managed property is less than 20 percent
  • Coverage for defense costs associated with any actual or alleged discrimination

The typical exclusion for community association errors and omissions policies are:

  • Owned entity exclusion applies where the managed property is owned by the insured, but only if owned corporation is more than 20 percent owned (if privately held) or more than 10 percent owned (if publicly traded)
  • Illegal profit exclusion applies only if it is established in a final adjudication by a judge, jury or arbitrator that the insured gained illegal profit, remuneration or advantage; acts or one insured person are not imputed to another insured person
  • Fraud exclusion applies only if it is established in a final adjudication by a judge, jury or arbitrator that the insured committed fraudulent or criminal acts with actual knowledge of their wrongful nature or with intent to cause damage; acts of insured person are not imputed to another insured person
  • Bodily injury and property damage exclusion
  • Failure to maintain or obtain insurance exclusion

Common Claims

What are the most common community association manager claims? The intended claims sought to be covered under the policy were discussed above. By far in our experience as underwriters of this genre or risk, the most common claims being brought against property managers are discrimination/harassment claims. What is most frustrating from an underwriting standpoint is that these are generally avoidable type of claims. The claims very often result from inadequate training of employees or monitoring of employees.  The typical policy will provide a defense to these types of claims, but will not pay out any indemnity.

Another common claim is libel or slander. Community associations are generally high-maintenance organizations filled with a lot of emotions. Accordingly, the property managers, as the professional staff, generally are put in the middle of these issues. Sliding is difficult to avoid, and property managers very often are accused of siding, which often turns into allegations of libel or slander.

There are a number of misconceptions regarding the property manager errors and omissions policy. The key misconception corresponds to the most commonly denied claim. The community manager errors and omissions policy does not provide coverage for bodily injury or property damage claims. This is an exposure that needs to be covered in a general liability policy.

Another misconception is that the community association errors and omissions policy, as opposed to the community association directors’ and officers’ liability policy, does not include employment practices cover- age. This is a coverage that must be purchased separately.

Steps to Minimize Claims

As discussed, the most common community association errors and omissions claims are based on discrimination and harassment. One way to avoid such claims is to understand the breadth, magnitude, and reach of various fair housing and other discrimination laws.

For example, the Fair Housing Laws:

  • Prohibit sale, rental and financing of dwellings, and other housing–related transactions based on race, color, national origin, religion, sex or family status
  • Title VI of Civil Rights Act of 1964 prohibits discrimination on the basis of race, color, or national origin and activities receiving financial assistance
  • Section 504 of the Rehabilitation Act of 1973 prohibits discrimination based on disability in any program receiving financial assistance
  • Section 109 of Title I of the Housing and Community Development Act of 1974 prohibits discrimination on the basis of race, color, national origin or religion in programs and activities receiving financial assistance from Community Development and Block Grant Pro- gram
  • Title II of the Americans with Disabilities Act of 1990 prohibits discrimination based on disability in pro- grams, services, activities provided or made available by public entities. HUD enforces this act as it relates to state and local public housing, housing assistance and housing referrals
  • Architectural Barriers Act of 1968 requires that buildings and facilities designed, constructed, altered, or leased with certain federal funds after September 1969 must be accessible to and usable by handicapped persons
  • Age Discrimination Act of 1975 prohibits discrimination on the basis of age in programs activities receiving Federal financial assistance

The challenge with continued violations of the Fair Housing Law include the fact that there is no cost to plaintiffs for any out of pocket expenses to file fair housing complaints. Accordingly, community managers must be up to date on fair housing laws as well as continued education for employees. Race, national origin, disability and children/family status are the most common fair housing violations.

The best advice for avoiding manager errors and omissions claims is to participate in CAI and its certificating programs and educational opportunities. The first thing that an employee of a manager will say when being deposed in a lawsuit is: “I was never trained on that issue.” The second thing the employee will say is: “I was never told about that law or requirement.” The ignorance of your employees or yourself is not a defense to most of these claims. Community association managers are professionals and are expected to have the experience, training, and expertise to carry out his or her duties and obligations.

Notwithstanding the best training, education, and expertise, the one thing that is for sure – right up there with death and taxes – is that you will experience a claim no matter how good you are. That is why you need errors and omissions coverage. With the cover- age, you can have full comfort that you can fight the claim.