Water damage claims can be very expensive to deal with, cause untold frustrations and have the potential for a living nightmare within your HOA complex. While you cannot prevent every possible situation where water can cause damage; here's a list of simple steps every association can take to reduce/eliminate many causes of water damage issues.
Washing machine hoses. If your complex has a central laundry room or laundry rooms within the individual units check the hoses that connect the machine to cold/hot water. If the hoses are rubber (either black or gray) consider changing them as soon as possible to metal-braided (sometimes called "no-bust" hoses) hoses. The rubber hoses only have a useful life of between 2-5 years; beyond that it is only a matter of time before they fail causing a water gushing flood. Without a doubt the situation is easier to remedy if the complex has a central laundry room; the Board can just decide to make the expenditure and have old hoses replaced. It is a little more tricky if the laundry rooms are within each condo/town home. In this situation it is in the best interests of not only the unit owner, but also everyone in the complex to not have a massive flood caused by a broken washing machine hose. A little creativity may come into play here; perhaps offering a financial incentive or obtaining special pricing from a bulk purchase at a local hardware store may help motivate homeowners.
Plumbing connectors under sinks or to toilets. Take a look at these connectors; sometimes they made with lesser quality connectors like plastic or rubber tubing. Upgrade these to metal connectors if you don't already have them; make sure you use a competent, licensed plumber to do the job. As these connectors will be with the individual condo/town home units, same process as above for motivating homeowners to spend the money to get it done.
Sink/toilet back-ups. It's not a bad idea to have a competent, licensed plumber check/clean-out drain pipe systems periodically for the complex. When you think about all that should not be flushed down the toilet, put down a garbage disposal or allowed to drain into a sink you can only assume that a lot of pipe clogging is going on in a complex. Perhaps this could be a cost built into the annual maintenance budget; it should definitely be a newsletter topic to educate unit owners about what gets put down plumbing fixtures.
Landscape sprinklers. Need to be periodically checked for broken sprinkler heads and where water is being sprayed. The same would be true for rain gutters that either leak, overflow or deposit runoff in an incorrect manner. You should have a process to report sprinklers that are problematic.
In these difficult economic times "an ounce of prevention" should still be the philosophy of the Board to reduce the chances of a catastrophic problem in the future.
Sunday, April 4, 2010
Sunday, February 28, 2010
General Liability Coverage-How Much is Enough?
All master association policies should have general liability coverage to protect the association from situations where is may have liability to injuries or property damage: a guest sustains an injury falling on a slippery driveway; someone is injured on the playground equipment; someone drowns in the pool; the possibilities are endless.
Most standard policies will come with coverage limits of $1M per occurrence and $2M in aggregate, meaning that the upper limit for a policy period is $2M. Coverage limits go up from here, I've seen them as high as $30M in aggregate. What determines which coverage limit is right for your association? The right answer is "it depends;" there is no formula that works in every situation. To start with every association with <100 units should have $2M per occurrence; $4M in aggregate as a minimum to be afforded personal liability protections for unit owners under the Davis-Stirling Act. Associations with 100 or more unit should have minimum coverage of $3M per occurrence; $5M in aggregate to have Davis-Stirling Act protections. HOWEVER these coverage limits are minimums, there a many situations where your association could need more than the minimum amount of coverage.
Association board members are best advised to seek the counsel of a qualified attorney familiar with HOA issues to determine a general liability coverage amount for a specific situation. He/she will be familiar with the type of legal actions, claims and settlements associations have had to deal with. Generally, some factors that need to be taken into consideration include: total number of units within the association; amenities within the complex - pools, hot tubs, exercise rooms, playgrounds, etc.; percentage of units rented; condition of the premises; whether or not complex is mixed use, commercial businesses and residential living; and, history of claims/losses.
General liability coverage is a key coverage area that board members need to evaluate and determine a best solution for their association.
Most standard policies will come with coverage limits of $1M per occurrence and $2M in aggregate, meaning that the upper limit for a policy period is $2M. Coverage limits go up from here, I've seen them as high as $30M in aggregate. What determines which coverage limit is right for your association? The right answer is "it depends;" there is no formula that works in every situation. To start with every association with <100 units should have $2M per occurrence; $4M in aggregate as a minimum to be afforded personal liability protections for unit owners under the Davis-Stirling Act. Associations with 100 or more unit should have minimum coverage of $3M per occurrence; $5M in aggregate to have Davis-Stirling Act protections. HOWEVER these coverage limits are minimums, there a many situations where your association could need more than the minimum amount of coverage.
Association board members are best advised to seek the counsel of a qualified attorney familiar with HOA issues to determine a general liability coverage amount for a specific situation. He/she will be familiar with the type of legal actions, claims and settlements associations have had to deal with. Generally, some factors that need to be taken into consideration include: total number of units within the association; amenities within the complex - pools, hot tubs, exercise rooms, playgrounds, etc.; percentage of units rented; condition of the premises; whether or not complex is mixed use, commercial businesses and residential living; and, history of claims/losses.
General liability coverage is a key coverage area that board members need to evaluate and determine a best solution for their association.
Friday, February 19, 2010
Fidelity Bond Coverage
New Fannie Mae rules introduced in late 2009 indicate that associations with 20 or more unit are required by regulation to have fidelity bond coverage as part of the association's insurance program. While it may be tempting to omit this coverage for smaller associations I would recommend that ALL associations carry it. The reasons are simple: 1) the coverage does not cost that much; and, 2) even in good economic times volunteers responsible for the cash at all manner of non-profit organizations occasionally do clean out the treasury and head for places unknown!
Fidelity bond coverage protects your association's day-to-day and reserve funds by reimbursing the association if someone takes the money and runs. While Fannie Mae has rules about how much coverage an association should have I'll make it simple; think of the maximum amount you might accumulate in both day-to-day and reserve accounts over the years before you have a big expenditure like a re-roof - the highest total amount should be your coverage limit.
Board members should try to visualize what life would be like if the association's treasury were cleaned out and they had to start over from scratch. This is not a pretty picture for any association! All the more reason to make sure your association has fidelity bond coverage and in the right amount. Give this item some scrutiny during your annual review of the association's master insurance policy.
Fidelity bond coverage protects your association's day-to-day and reserve funds by reimbursing the association if someone takes the money and runs. While Fannie Mae has rules about how much coverage an association should have I'll make it simple; think of the maximum amount you might accumulate in both day-to-day and reserve accounts over the years before you have a big expenditure like a re-roof - the highest total amount should be your coverage limit.
Board members should try to visualize what life would be like if the association's treasury were cleaned out and they had to start over from scratch. This is not a pretty picture for any association! All the more reason to make sure your association has fidelity bond coverage and in the right amount. Give this item some scrutiny during your annual review of the association's master insurance policy.
Sunday, January 24, 2010
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.
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.
Sunday, January 10, 2010
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!
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!
Saturday, January 2, 2010
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.
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.
Sunday, December 27, 2009
New Fannie Mae Guidelines
Fannie Mae recently set in place revisions to lending guidelines that will impact people who desire to purchase or sell a condominium or town home. While there will be anticipated changes to income verification, appraisal process, etc., the revisions I will discuss focus on the association master insurance policy. Lenders will be required to scrutinize association master insurance policies; purchase/sales transactions can be delayed if the master policy does not comply with these revised requirements. Association board members and property managers would be prudent to review master insurance policies in light of these new guidelines.
Fidelity Bond. This insurance coverage can either be part of the master policy or a separate coverage; it covers association monies in situations where they are used in an unauthorized manner and no recovery is possible. Associations with 20 or more units are required to have fidelity bond coverage. There are two ways to calculate the required fidelity bond amount for a homeowner association: 1) highest bank balances available in all accounts including working and reserve funds; or, 2) minimum of three-months of dues from all units; only allowed if the CC&Rs contain specific language to limit account access. Most associations are subject to the fidelity bond coverage amount described in #1 above. If your highest bank balance is $150,000 and your fidelity bond coverage amount is $125,000 your association will not comply and may be required by a lender to increase the coverage amount. It is easy to be in non-compliance here as the bond coverage amount may not have been checked in a few years.
The poor economy has had a negative impact on many homeowner associations with unit owners who cannot pay their monthly dues and those subject to foreclosure. Associations can be of great help to those who want to sell or buy by eliminating any gaps in coverage in master insurance policies these new guidelines may create; and thus, not creating a bottleneck in the buy/sell transaction process.
I will discuss two other changes to Fannie Mae guidelines as they related to association master insurance policies in future postings... Stay tuned!
Fidelity Bond. This insurance coverage can either be part of the master policy or a separate coverage; it covers association monies in situations where they are used in an unauthorized manner and no recovery is possible. Associations with 20 or more units are required to have fidelity bond coverage. There are two ways to calculate the required fidelity bond amount for a homeowner association: 1) highest bank balances available in all accounts including working and reserve funds; or, 2) minimum of three-months of dues from all units; only allowed if the CC&Rs contain specific language to limit account access. Most associations are subject to the fidelity bond coverage amount described in #1 above. If your highest bank balance is $150,000 and your fidelity bond coverage amount is $125,000 your association will not comply and may be required by a lender to increase the coverage amount. It is easy to be in non-compliance here as the bond coverage amount may not have been checked in a few years.
The poor economy has had a negative impact on many homeowner associations with unit owners who cannot pay their monthly dues and those subject to foreclosure. Associations can be of great help to those who want to sell or buy by eliminating any gaps in coverage in master insurance policies these new guidelines may create; and thus, not creating a bottleneck in the buy/sell transaction process.
I will discuss two other changes to Fannie Mae guidelines as they related to association master insurance policies in future postings... Stay tuned!
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