Condo Media - February 2014 - 40

COVER STORY
COLUMN NAME

Assumption 6. Your insurer
will select the attorney to
represent you in a disputed
claim.

Polices vary on this point, Rosen says.
Some insurers insist on making the
choice as a condition of covering the
legal costs; others will allow associations to choose their own counsel but
will pay only the insurers' rate, requiring the association to pay any difference; and some will allow associations
to choose their counsel but cover the
defense costs under a "reservation of
rights," which means the insurer can
insist on repayment of the legal fees if
it turns out that the claim isn't covered.
Because insurers may not always be
willing to pay for the best qualified
attorney to handle a particular case,
associations sometimes prefer to make
the selection. (Although insurance
may pay any damages, boards still are
legitimately concerned that if plaintiffs
prevail, others might be inclined to
file similar suits against the association.) Another way for boards to "skin
that cat" and protect the association's
interests is to let the insurer select the
attorney - thus, guaranteeing payment
of the legal fees - but retain an attorney of their own to monitor the case,
Rosen says. The association will incur
some legal fees, but the insurer will still
cover the largest share of them.

Assumption 7. Your policy
limits will provide adequate
coverage for any likely claim.

That's certainly the goal, but the result
isn't guaranteed. The adequacy of the
coverage will depend, obviously, on the
size of the claim and, crucially, on the
policy limit. Buy $3 million in coverage
for a building that will cost $4 million
to replace, and you'll be facing a sizable
gap if a fire destroys the structure -
not to mention lawsuits for failing to
purchase enough insurance. How the
policy limit is structured will also affect
the adequacy of the coverage, Rosen
notes. If the limit is $1 million per
claim, then three claims of $1 million
each would be covered; if you have an
40

Condo Media * February 2014

aggregate limit of $1 million, then the
$1 million claim for the first loss would
leave you without coverage for the
other two.

Assumption 8. An umbrella
policy will cover losses in
excess of the limits on your
primary policy.

That's precisely what an umbrella
policy is supposed to do and yours will
- provided that it is written to "follow
the form" of the primary policy, which
means it will cover the same claims in
the same way with the same definitions,
limits, and exclusions, Rosen says.

Assumption 9. The insurance settlement will provide
the funds required to pay all
claim-related expenses.

Imagine that your board has just
received a settlement check from the
association's insurer for the entire
amount of the $250,000 claim filed
for a fire that damaged the clubhouse.
"Terrific," you think. "No out-ofpocket costs for the association at all."
But what about the fee the association's manager will charge - justifiably
- for the substantial work involved in
managing the claim? And what about
the fee you'll have to pay the insurance
adjuster who helped you obtain that
satisfactory settlement?
"People forget about these charges,"
says Glenn Montgomery, vice president
and co-founder of Brownstone Insurance, but they can add substantially to
the claim-related expenses.

Assumption 10. The claim
filed for damage caused by a
failed septic system will pay
to repair or replace the septic
system, too.

If a fire damaged the septic system,
your policy would pay to repair or
replace it. But a system failure wouldn't
be covered unless you have a separate
policy protecting mechanical equipment. Given the substantial cost of
replacing major equipment - elevators, septic systems, HVAC systems,

etc. - some associations might want to
consider this coverage. The older the
equipment and the lower it is on the
board's list of repair and replacement
priorities, the more appealing the insurance is likely to be.

Assumption 11. All water
damage is covered.

Property owners repairing the damage caused by Hurricanes Katrina and
Sandy could tell you differently. Many
discovered that their policies covered
damage from wind but not from winddriven rain. Similarly, many Vermont
condominium owners discovered their
policies didn't cover the devastating
flooding caused by Tropical Storm
Irene, requiring separate flood insurance that few had.
Water damage can also be caused by
the backup of water and sewer systems - another risk that most policies
don't cover or cover only minimally.
Jeff Grosser, CPCU, vice president of
the Rodman Insurance Agency, advises
boards to ask if the coverage is available
and consider increasing the limits, if
that is an option.

Assumption 12. The association doesn't need insurance
for "X, Y, or Z" because the
cost is too high, the risk is
small, or "it will never
happen to us."

The nature of insurance is you don't
need it until you need it, when you will
need it very much. Making informed
insurance decisions requires balancing
the price of the insurance against the
likelihood of a loss and the cost to the
association should it occur. Grosser lists
several coverages many communities
overlook or decide (often incorrectly in
his view) they don't need.
* Workers' compensation. Just
because the association doesn't have
employees doesn't mean this coverage is unnecessary, Grosser says. It
would protect the association against
claims for damage caused by an uninsured contractor (who claimed to be

Condo Media - February 2014

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