Association Management: Insurance

Short answer. Yes. Long answer yes for 3 reasons.

Association Boards often ask the question – Why do we need workers compensation.

First, if you employ any staff such as a resident manager even if part time you almost certainly need it. To remove the need you would have to have a very strong contract with an “independent contractor that does not give the association the right to tell the contractor how when and where to do their job. An unlikely scenario and one to review with a labor lawyer FIRST.

Secondly, members of the board do from time to time odd jobs for the association. Buying janitorial supplies, changing light bulbs in the common areas, checking pool equipment, landscape walks, instructing vendors, inspecting buildings. We used to have an association in which two male directors at or past retirement age were walking g on the roofs and these were not flat roofs, inspecting for potential leaks. There are many tasks undertaken by directors some willingly some not and by committee members or members of the community appointed by the boards to a certain task force or study group.

Under the Labor code one section defines volunteers as a person who performs voluntary service without pay for a private nonprofit organization as designated and authorized by the board of Directors of the organization, who shall when the board of directors of the organization in its sole discretion, so declares in writing and prior to the injury, be deemed an employee of the association for purposes of this division while performing such service.

In other words if the board names the volunteers in a board meeting and outlines their duties or tasks that person becomes an employee while acting within that capacity. The ultra vires rule would apply, i.e. duties or activities not contemplated or anticipated might not be included such as visiting Disneyland with their family to treat them for the time Dad was “at work for the association.” So both board members and appointed volunteers are potential risks that may need to be covered.

 

Thirdly your governing documents may call for it.

 

The fourth and final reason is an insidious one. Some vendors may arrive on site with employees and may for one reason or another no longer have valid insurance. While management companies do some validation of insurances carried there may be times when a policy is lapsed, cancelled for non payment not renewed and the association is unaware. An injured employee or that contractor is likely to become an employee of the association, especially if the injury is severe and there seems to be no-one else willing to take care of him.  There was a roofer nearby who was outbidding most of his competition by not buying workers compensation insurance. The state found him fortunately before anyone was injured; or maybe that’s how they found him.

So the short and long answer when no actual employees are on staff to the question should we buy workers compensation is YES and YES.

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Under the Davis Stirling Act of 1985 volunteer directors and officers will not be personally liable is excess of the coverage of insurance specified if they meet the following criteria:

1. the act or omission was performed within the scope of the directors duties.

2. the act or omission was performed in good faith
3. The act or omission was not willful, wanton or grossly negligent
4. the association had in effect at the tome of the incident a policy or policies of insurance covering general liability and directors and officers liability of not less than $500,000 if the association had 100 or fewer members and $1,000,000 if the association had more than 100 members.

That said the association may be sued for more than these limits. Nothing in the act shall be construed to limit the association for its negligent act or omission or any negligent act or omission of any director. So a small association might be prudent to purchase insurance in excess of the mandatory limits of $500,000.

A blanket umbrella insurance policy increasing the underlying li8mits of $500,000 by a million or two would not cost too much compared to the costs of just defending a claim for a large sum. Sometimes a carrier will determine that the policy limits will be expended and they will offer to settle the claim for the policy limits to save further aggravation and the costs of defense and a trial plus possibly enormous awards. Buying larger limits will tend to avoid that albeit remote possibility. One exclusion that needs to be bought out of these types of policies is that of discrimination. California in particular dislikes discrimination so this form of additional coverage is extremely valuable and cannot be omitted. Directors do not normally choose to discriminate but many board of directors will make a decision that is particular to one individual or family only to reverse themselves in the future with a similar set of circumstances. Sometimes the action is simply the act of a new group of people leading the association with no malice aforethought. But the possibility of these types of acts is not uncommon.

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Under the Davis Stirling Act of 1985 a volunteer Director shall not be held personally responsible in excess of the coverage of insurance if the association held no less than $500,000 in general liability and errors and omissions insurance if the total number of members is 100 or fewer, or $1,000,000 if there are more than 100 members. It goes on to state that members of the association may also not be held personally liable if the association carries 2,000,000 if 100 units or fewer and $3,000,000 if there are over 100 units.  This provision protects an individual owner from being sued just because he or she is a member of the association and perhaps the plaintiff feels he or she has the means to satisfy the plaintiff’s claim. An individual owner may personally be liable for a negligent act or omission on their part. Similarly a director may be personally liable as a director if he acted not in good faith,  or willfully wantonly or with gross negligence or worse acted outside of his duties as a director. These limits however do not mean that the association may not be liable for in excess of the insurance limits. It simply limits the personal responsibility of both direct ors and its individual members. So an association may quite reasonably decide to purchase in addition to these obviously sensible underlying limits, an umbrella policy for several million more to cover the possibility of an extremely unfortunate accident or occurrence.

The limitations for personal suite have a few rules attached to them such as the director must act in good faith and not in a wanton, willful or grossly negligent manner.

So now we have established minimum limits for both general liability and errors and omissions liability policies the excess amount is up to you?

$5,000,000?

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Short answer. If you have any money at all yes. Long answer. The need to buy and the basis of the amount you buy may be specified in your governing documents. Unfortunately some insurance and some management companies do not read the governing documents to determine first whether bonding is required and secondly if so what amounts should be insured. Associations do have difficulty deciding how much to insure for.. Once a year review the limits to ensure they are adequate in the event of a loss.

One guide might be the sum of all the different bank accounts at one moment of time PLUS  say 3 months of dues.

Imagine that there was $300,000 in total invested in certificates of Deposit and perhaps a money market account of $35,000 and checking account of $15,000 with monthly dues of  $8,000.

My recommended bond would be $374,000 call it $375,000.made up as follows. There are a total of $350,000 in the various checking and savings accounts including the CD’s and 3 months of dues would be another $24,000. This is a formulaic suggestion. Someone else might choose a different number based on other factors.

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A thorny question for your insurance broker. How do you determine the sums insured we need to guarantee full replacement? Every good broker has received that question time after time. And his good answer is “you pick the sum to be insured”. How helpful is that? They, of course, don’t want to be on the hook when a property is underinsured and the loss exceeds the sums insured nor do they want to over-insure as a competitor will beat them in terms of premiums with lesser sums insured. Most carriers use a service such as Marshall and Swift that tracks the cost of building materials by region and plots the cost of rebuilding in the event of a major loss such as fire. The broker if he’s good will Google the property if he cannot walk it, will calculate the square footage at risk add for certain additional features such as a clubhouse, use a Marshall and Swift valuation and derive a suggested sum insured. Board of directors should be careful to not select a quote in which the premium is lower while the data shows that the sum insured is also lower. Being fully insured is most important when a high rise is involved as the one building may indeed become a total loss as a result of an insured peril while an association with say 15 buildings, spread out, may reasonably expect not to loose all buildings even in a conflagration.  If several quotes all are using approximately the same sums insured you can feel fairly comfortable about the insured value. If they are far apart get each to explain how they arrived at the sums insured. One useful comment. Insurance companies will no linger guarantee full replacement value by many will offer some increase in the sums insured over the so called insurance limit as a buffer against underinsurance. Pay careful attention to that clause and its workings.

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The new Federal law was created and signed by the President on December 19, 2007 in order to reduce the number of fatalities and injuries to children caused by suction entrapment in pools and spas.  This act requires anti-entrapment drain systems to be installed in all public pools and spas.  Because Homeowner Association’s pools and spas are open to its member and their guests they are included and must follow the requirements of the Virginia Graeme Baker Pool and Spa Safety Act.

 

“The State of California amended Section 18942 and added Sections 116064.1 and 116064.2 to the Health and Safety Code requiring all swimming pools built before January 1, 2010, must retrofit with anti-entrapment devices no later than July 1, 2010.” 

 

Public pools and spas must be equipped with Drain Covers that comply with ASME/ANSI performance standard.   In addition, to having a drain cover or other anti-entrapment device that complies with this standard (ASME/ANSI), each pool and spa in the United States with a single main drain other than an unblockable drain shall be equipped, at a minimum, with 1 or more of the following devices or systems designed to prevent entrapment.

 

1. Safety Vacuum Release System (SVRS):  a vacuum release system capable of providing vacuum release at a suction outlet caused by a high vacuum occurrence due to a suction outlet flow blockage.
2. Suction-Limiting Vent System:  a suction-limiting vent system with a tamper resistant atmospheric opening.
3. Gravity Drainage System:  a gravity drainage system that utilizes a collector tank.
4. Automatic Pump Shut – Off System:  an automatic pump shut off system.
5. Drain Disablement: a device or system that disables the drain.

 

In addition, those Association’s that have completed a retrofit for their swimming pool and spa in accordance with the standards of the Virginia Graeme Baker Pool and Spa Act between December 19, 2007 and January 1, 2010 and have filed the required compliance statement with the California’s Department of Public Health prior to September 30, 2010 would not need additional retrofitting.

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