Since the 1970s, American neighborhoods have been increasingly governed by homeowner associations (HOAs)(source 2). Condominium or apartment buildings and subdivisions are often run by an HOA led by a board of directors comprised of a small group of volunteer homeowners (source 1). The nature of an HOA's responsibilities can be broad, ranging from establishing an annual budget and collecting dues or fees to maintaining common areas, enforcing rules or regulations, and more. With much to do and a wide variety of preferences under their prevue, HOAs often cannot please every homeowner.
Sometimes the displeasure of a homeowner around issues of maintenance, safety, or habitability can result in lawsuits against governing board members. One of the driving forces behind a recent increase in lawsuits and resulting Directors and Officers (D&O) claims has been a side effect of the COVID-19 pandemic. Prolonged lockdowns in 2020, an uptick in remote work, and the resulting economic downturn have caused homeowners to spend more time in and around their homes and communities over the past few years. This has resulted in a greater awareness of issues that can irritate owners. Subsequently, homeowners have also expanded their understanding of association processes, which has also led to an increase in complaints about associations and their board members.5 Whether it’s a nuisance claim or one with sharper teeth, without adequate D&O coverage, a lawsuit against HOA board members can leave them responsible for paying legal costs, expenses, and even damages, making adequate D&O insurance a must for every HOA.1
In addition to homeowners keeping a closer eye on association activities, the 2021 collapse of Champlain Towers South in Surfside, Florida, pushed insurance carriers to more closely scrutinize association maintenance and business practices. In the year since the Surfside condo building fell, buzzwords around the HOA or condominium association industry have included: reserve study, deferred maintenance, and engineering study.5 Eye-opening for insurance companies, it became a turning point for the HOA D&O market. Within 24 hours of the collapse, a proposed class of all condo owners in Chaplain Towers South filed an initial complaint, naming only the condo association as a defendant. However, subsequent suits added the property manager, engineers, architects, inspectors, and the owner of the adjacent building. As of May 2022, a $997 million settlement had been proposed to compensate for injuries and wrongful deaths resulting from the condo collapse.4 While the marketplace had already started to shift 8-12 months prior to the tragedy, the fall of Surfside accelerated the market’s reaction, causing carriers to tighten their belts, ultimately pushing more HOA D&O business into the E&S marketplace.
Following the Surfside collapse, many standard market insurance carriers have considered further policy limitations and exclusions. Industry-wide, for both single-family and condominium associations, the number of insurers and available policy limits has been trending down over the last few years. The policies that remain are available at a higher rate and with lower policy limits that may not be truly sufficient for an association’s needs.5 Agents with accounts that have remained in the standard market to date should expect terms to change significantly and be aware that the risk of non-renewal is high. Premiums of $2K for standard HOA coverage is now a thing of the past. Higher retentions and premiums are typically required for those transitioning to the E&S market. The busy season for HOA D&O submission is typically May – June each year, especially in Florida, as agents work to get wind coverage in place before the official start of hurricane season. However, E&S brokers are currently seeing a spike in requests for coverage and higher request volume beyond the beginning of summer.
When seeking coverage, it’s important that agents help clients understand what D&O policies typically cover and exclude. The majority of D&O policies pay for legal costs and fees related to defending HOA board members against a legal claim, as well as any subsequent judgment amount. However, D&O policies can vary regarding coverage for legal costs in the event of a settlement. Some policies may cover a board member's breach of fiduciary duty, but exclude negligent or fraudulent acts, as well as actions knowingly taken in violation of governing documents or state law.1
D&O is designed to protect the balance sheet of the entity and the personal assets of directors and officers; however, Excess Side A DIC can also be leveraged as another layer of personal protection against exclusions that could be triggered by a D&O claim. A properly-worded Excess DIC Side A policy, which always has fewer exclusions than a private D&O policy, also typically includes broader terms, conditions, and other coverage features that are provided only by Excess/DIC Side A insurance. However, an Excess/DIC Side A policy responds only when the company does not indemnify the director or officer for a particular claim at issue such as derivative action, falling out of favor, unclear/disputed law, or public relations risks.
In addition to understanding the parameters of coverage, it’s also vital that HOAs and condominium associations, stay up to date on regulatory changes. Nearly a year after the Surfside condo collapse, the Florida House passed Senate Bill 4-D during a May 2022 special session. The new law requires stricter inspection rules for condos that are three stories or higher, requiring recertification or a “milestone inspection” after 30 years and a subsequent building inspection every 10 years after, or after 25 years if the building is within three miles of the coast. The law will also require condo associations to maintain adequate reserve funding — determined by a formula — to make vital repairs and keep up with maintenance needs. Condo associations will also be required to keep all safety and inspection records on hand and provide them to prospective buyers or renters.3 There are no laws governing HOAs or condo associations at the federal level. Requirements can vary by location and it’s important that governing boards operate in adherence to all applicable state laws and regulations to help mitigate exposure and the risk of uncovered claims.
HOW AGENTS CAN HELP
Rising insurance premiums mean HOAs, condominium association boards, and retail agents would be wise to work closely with their insurance broker to obtain the best policies available. Association boards and their professional team should be mindful of shopping based on policy quality rather than just price, as cheaper policies may result in inadequate coverage. During the process, the board should also consult with their legal counsel to ensure they are meeting all requirements of the law with their policy choices and have a sufficient amount of coverage in the event a claim is filed.5
When developing submissions for condo boards, those structures that are over 40 years old will need to provide a 40 or 50-year certification. It’s possible to obtain coverage even if those certifications aren’t favorable; however, a detailed plan and timeline for necessary improvements as well as architectural or structural survey reports are needed to help underwriters become comfortable with a risk. Five years of currently valued loss history should be included, and if an insured has prior claims, explaining what occurred as well as the current claim status is important. On larger accounts, providing financials to illustrate current reserves as well as any short or long-term debt covenants that must be upheld, is also helpful.
The HOA D&O marketplace is tightening, often requiring higher premiums and retentions to obtain adequate coverage that governing boards can be confident in. While HOA D&O business may eventually shift back toward the standard market, that movement isn’t expected in the foreseeable future. In order to streamline the underwriting process, agents should encourage clients to gather all necessary information and develop a thorough submission that paints a clear picture of the policyholder’s exposures and risk management plan. Contact your local CRC Group producer to learn how we can help your HOA clients achieve the best possible outcome in today’s marketplace.
- Will Barnett is a Broker with CRC Group’s Boca Raton, FL office and Director of the Professional Executive Group.
- What HOAs Need to Know About D&O Insurance, Nolo. https://www.nolo.com/legal-encyclopedia/what-hoas-need-know- about-do-insurance.html
- HOA Statistics, IProperty Management, April 23, 2022. https://ipropertymanagement.com/research/hoa- statistics#:~:text=65.1%25%20of%20new%20homes%20completed,South%2C%20up%208.4%25%20YoY
- How Florida Laws Changed After the Surfside Collapse, 10 Tampa Bay, June 24, 2022. https://www.wtsp.com/article/news/politics/florida-law-changes-surfside-building-collapse/67-670b59be-e487-431b-8977-43d5f7b83fae
- $997 Million to Settle the Surfside Condo Collapse Class Action, Winston & Strawn LLP, May 25, 2022. https://www.winston.com/en/class-action-insider/997-million-to-settle-the-surfside-condo-collapse-class-action.html
- Three Reasons Why the Cost of Insurance is Increasing for Condominium Associations, RMWBH Attorneys and Counselors at Law, July 27, 2022. https://rmwbh.com/three-reasons-why-the-cost-of-insurance-is-increasing-for-condominium-associations/