Workers Compensation Insurance for Homeowner Associations

Workers compensation insurance provides coverage to workers who are injured on a job; it prevents the situation where a worker has to sue his/her employer to recover costs associated with a work-related injury. So why would a homeowner's association need worker compensation insurance: an association typically does not have employees and the service providers used are required to provide a certificate of insurance? While this may be true consider this: 1) most CC&R documents state that an association should have workers compensation coverage; and, 2) a certificate of insurance can provide a false sense of security as the service provide may have given you a certificate months ago yet allowed their policy to lapse recently due to non-payment of premium. Particularly during difficult economic times the later can occur frequently as service providers such as pest control, roofers and painters can face premiums that are on the higher end of the rate range to begin with.

Not only does the coverage serve as a back-up against unknowingly using an uninsured service provider; board members and authorized volunteers performing duties on behalf of the association can also be covered. There are situations where board members tasked to complete monthly safety/complex inspections sustain an injury while carrying out these duties. Most of the time these minor injuries are not a big deal and never get reported; once in awhile they are turned into a "Federal" case.

Your association master insurance policy does not contain workers compensation coverage as a standard feature; it is an optional coverage. Board members would be prudent to have this optional coverage; the cost ranges from $550 to $1,000 per year. Anticipating potential problems before they happen is always a good policy.

Fannie Mae Guidelines-Part 3

This post concludes a series regarding 2009 changes to Fannie Mae lending guidelines that impact lender review of association master insurance policies. This third impact area is the most ambiguous as the guidelines published to-date do not specify what Fannie Mae considers acceptable.

Lenders will be looking for building ordinance coverage contained within an association's master insurance policy. With regard to building ordinance coverage there are three parts - A, B and C; lenders will interested in part C. To provide a brief background the concept of property insurance is to rebuild a dwelling the way it was when it was originally built. A problem comes into play when times goes by and the city or county passes new building codes to improve energy efficiency or fire safety; examples would include higher insulation requirements, more fire resistant roofing materials or more energy efficient windows. The dwelling coverage contained within an association master policy is not designated to pay for these changes to building code; building ordinance coverage C is meant to cover these costs. Building ordinance coverage C usually comes standard with a minimum amount of around $5,000 and can be increased to fit circumstances. Usually the older a building is the more building ordinance coverage C is needed; for example a 100-unit complex that is 25-years old may require $1.5 million or more in coverage to comply with building code changes that have been mandated since the original build date. Taking this example,if a complex had a need for $1.5 million in building ordinance coverage C but only had $5,000 in actual coverage you can see there is a major financial gap that would have to be made up with special loss assessments imposed on all unit owners. To circumvent this special loss assessment scenario, lenders will be looking for adequate amounts of building ordinance coverage before approving a loan to someone who wishes to purchase a unit.

One building code requirement that can really ramp-up costs are interior fire sprinkler systems; some cities/counties now require them for all new condo/town home complexes with more than four units. This fire sprinkler systems can add $15,000 or more (per unit) to rebuild costs.

Property managers and HOA board members would be prudent to review association master policies for building ordinance coverage C limits to avoid unnecessary delays in funding of loans for prospective incoming buyers. If you have an inadequate amount of building ordinance coverage C; it will cost more to bring it in-line with where it needs to be. Work with your insurance agent/carrier to determine the correct amount of coverage. Just to give you some scale of the issue; 8 of 10 association master policies we review have INADEQUATE amounts of building ordinance coverage C!

Fannie Mae Guidelines-Part 2

This is a continuance of my prior post on Fannie Mae lending guidelines that impact buyers/sellers of condominiums and town homes. Prior to the issuance of revised guidelines last year a lender had no interest in whether or not buyer had unit owner coverage; now unit owners will be required to have coverage prior to the close of escrow just like a buyer of a single family home must provide evidence of insurance before escrow can close.

As this new requirement will cost the buyer additional money it may seem that the long-arm of the government has once again extended its reach beyond where it needs to be. However, this development is a positive for all of those who reside in condo or town home communities; let me explain. All community associations are required to have a master insurance policy that protects the complex and association. However, in the event of destruction of one or all buildings in a complex most association master policies only cover the rebuilding of the exterior of the building. Individual unit owners bear the responsibility of rebuilding the interior of the unit - drywall, flooring, kitchen cabinets/fixtures, interior walls, etc. If a unit owner does not have an individual policy or his/her policy does not have the coverage to rebuild the interior this financial burden falls to the savings of the unit owner. Depending on the size and amenities of the unit this bill could range from $40,000 to $150,000+.

An example of how the current situation negatively impacts associations let's say a building containing eight units is a complete loss due to an accidental kitchen fire. The association master policy provides money to rebuild the building exterior and six of eight unit owners receive monies from their individual unit owner policies to rebuild the interiors of their units. Unfortunately two unit owners did not purchase an individual unit owner policy (the national average is 25% of unit owners do not have coverage) so they will not be receiving a settlement to rebuild. If they are like most people they may not have the personal savings to fall back on either; so you have the very real possibility of these two unit owners walking away from their homes and foreclosing. For the association there is a loss of monthly dues and other issues that come with having empty units. Do the math on a 300-unit complex where 25% of unit owners are caught short; it is not a pretty picture.

All unit owners should check their individual insurance policies to make sure they have a coverage called building property (some carriers call it dwelling). Many unit owners who have policies have no or insufficient building property coverage because they bought strictly on price. The key question here is do you have enough coverage to rebuild the interior of the unit the way you have it now? Some associations has master policies that provide coverage for both the exterior and interior of the building; it's best to check with your agent to determine exactly what is covered.