You can’t underestimate the value of insurance. In a simple analogy, operating a business—or the day-to-day business of a co-op or condo—without adequate insurance coverage is a lot like skydiving without a parachute. Needless to say, it’s a risky proposition.

The insurance industry spreads risks from the individual to the larger community, and provides an important source of long-term finance for both public and private sectors. The industry may also help eliminate risks, for example, as when fire insurance underwriters demand implementation of safe practices and/or the installation of hydrants and extinguishers in high risk areas.

As society has changed, the insurance market has adapted products and services to meet changing needs and to minimize the risk of doing business in today’s marketplace. The Internet makes shopping and comparing insurance options easier than ever before, but when a condominium board or homeowners association goes shopping for insurance they may well want—and need—to start the protection at the board level.

Getting Covered

In September 2012, new Federal Housing Administration (FHA) regulations were introduced that pertained to all new and established condominium projects with 20 or more units. Those properties are now required to carry fidelity bond insurance to protect their board and other building administrators; a policy may be expanded to cover the property management firm as well.

Florida Statutes 718 and 720 also require condo and HOA associations to have and maintain fidelity bond insurance, respectively, says Barry Scarr, the president of SCARR Insurance Group, which has offices in Seminole, Ft. Lauderdale and Sarasota.

Lee Burke, the president of Burke, Bogart & Brownell, Inc., an independent insurance agency in Boca Raton, explains that fidelity bond is a form of crime insurance. “It is intended to protect against financial losses caused by the dishonest acts of employees, or those running a business,” he says. “Depending upon the wording of the bond, it may cover or be extended to cover non-compensated officers and directors, as well as volunteers. It protects or reimburses for the dishonest acts of employees.”

Paul Mack, the president of Mack, Mack, & Waltz Insurance Group in Deerfield Beach echoes Burke’s comments. “Fidelity or crime coverage protects the association’s funds from dishonest acts committed by the board, property managers or a third party,” he says.

Of course, the first line of defense against administrative misdeeds is having good administrators. Burke stresses the importance of having educated and experienced board members in place. “I have seen boards fail to maintain state-mandated insurance because they did not want to spend the premium dollars,” he says. “I've also seen boards ignore professional advice and guidance because of personal agendas. Serving on the board of directors for a community is an honor, a fine community service, and a serious business and personal responsibility. Being a board member is not fun. Folks who do not understand this should volunteer for committees and let others take care of the business side.”

Twofold Protection

The good news on fidelity bond insurance is twofold; number one, there's the protection it provides, and secondly, it is relatively low cost. Mack notes that most policies average less than $1,000 annually, but Burke points out that there are a few factors that can influence a community's premium. Those factors can be the number and nature of those persons being bonded, the financial controls or lack thereof, in place, and the coverage limits of the bond, he says. For example a typical 100-unit condominium association may pay an annual bond premium of under $1,000 for $50,000-$100,000 in protection. The FHA requires a minimum coverage of at least three months assessments plus reserve funds.

Kevin Davis is president of nationwide insurer Kevin Davis Insurance Services, based in Los Angeles. He emphasizes the need for fidelity or crime insurance. Board members are volunteers, he says, and they may not understand the legalities or nuances of handling millions of dollars in funds.

“Living in community associations, there is little oversight for people handling funds—even the reserve account funds, which should never happen,” he states. “It is important to have a comprehensive crime policy that provides the best protection for the community association and the property manager.”

Usually, most fidelity bond claims allege some type of economic loss. Some crimes happen in plain sight, and then in retrospect everyone feels a bit foolish for not noticing. Davis offers an amusing take of this type of criminal activity when he shares his “wheelbarrow story.” He tells the story of an employee who left the job site every day with a wheelbarrow full of sawdust. Certain he must be stealing something hidden under or related to the sawdust, those in charge searched the sawdust but never found anything. When the employee was safely retired, he admitted to stealing—not the sawdust, but the wheelbarrows!

Additional Coverage Requirements

While fidelity bond insurance goes a long way towards protecting a board and a community, Directors and Officers insurance (D&O) is a necessary addition to any community insurance package. D&O insurance provides coverage for the decisions the board of directors make on behalf of the shareholders and unit owners. Not everyone will be satisfied with the decisions made by the board, and it is entirely possible one or more residents will file suit against the board.

Davis shares a hypothetical situation of an emotionally-based conflict that could result in a lawsuit. Let's say a resident has a potbellied pig as a pet. The documents allow pets but the board states there is a violation of the documents because a potbellied pig is technically not a pet: It’s breakfast! The unhappy resident files a claim against the board for breach of fiduciary duty and harassment.

Additional examples Davis says are claims concerning the right to use vertical blinds versus horizontal blinds, parking in the visitor’s parking area, or aesthetics, such as what color to paint your back deck. “These claims are unique to community associations, are emotionally based, and usually not the result of a financial loss.”

Claims for breach of fiduciary duty, violation of the conditions, covenants and restrictions (CC&R’s) and breach of contract are all claims that are driven by emotions and usually, no financial loss is alleged, states Davis.

“Non-monetary damage claims have been the number one source of claims for community associations over my 30 years in this business. Fighting over the right to have a pet, your parking space, or the right to hang a flag in your front yard is a major problem and continues to be. This coverage is critical and must never be excluded or silent.”

D&O Protects Board Members

“In general,” Burke adds, “D&O insurance protects against claims alleging negligent activities by those making management and financial decisions. D&O is effectively malpractice protection for individuals responsible for making business decisions.” Most policies are very broad and extend coverage to the board and other volunteers/committee members recognized by the association,” says Mack.

“D&O is peace of mind insurance,” says Davis. Community association board members make decisions, and problems arise when unit owners, other board members, renters, contractors, or management doesn’t like a decision the board made and files a claim. D&O insurance funds the defense and pays any settlement.”

Burke says that D&O claims generally fall under several common premises: “Discrimination, failure to follow association rules or governing documents, failure to follow state law, failure to use good judgment, or the prudent man rule, and misuse of association funds. D&O premiums are generally inexpensive, and generally, a common expense of the association,” he says.

Davis says it’s important to understand that there is no “standard” D&O policy. “They generally fall into two categories,” he explains. “Bundled D&O policies are usually added as an endorsement to the property and liability coverage. The cost is generally lower, but the coverage is very restrictive. A stand-alone D&O policy designed for community associations will extend coverage to volunteers, committee-members, community association managers and employees.”

And, one size will not fit all when it comes to D&O. Stand-alone D&O insurance is designed specifically for community associations. “It’s important to stay away from D&O policies not designed for community associations,” said Davis. He explains that for- profit corporations or not-for-profit D&O policies have specific exclusions that will eliminate coverage for many community associations because of an association’s unique exposures.

Mack recommends an association purchase these types of policies through an agent who specializes in community association insurance. “There are excellent D&O programs available in the marketplace for those agents who know where to find them,” he states.

According to Scarr, D&O coverage is paid for by the association. Premiums are typically $1,000 to $3,000 and are based on the total number of units in an association, as well as its loss history, he adds.

If a board is looking to contain costs, Mack recommends looking to deductibles and coverage options to reduce the overall cost, but he cautions that associations must review individual policies with their insurance agent. That way, they can understand any risk they may not be insured against. “There are several competitive programs in the market, so shopping around from time to time is not a bad idea,” he suggests.

Follow Sound Advice

All experts agree, criminal actions are not protected and negligent actions will ultimately be decided by the court system in due legal process. In the event a decision is challenged as being made in “good” or “bad” faith, the insurance company will use claims examiners to investigate the loss.

Burke suggests an excellent way for an association to keep premiums down is by good governance including following all state rules and the advice of professionals. He also cautions that D&O policies are not standard contracts, and it is important for clients to deal with a professional agent who is familiar and experienced in the D&O arena.

“There is a need, due to the increase in D&O claims, for an association to choose only a very broad comprehensive D&O policy designed specifically for community associations. Some people understand the importance of board service, but many do not. People should be qualified to be board members. Being well-intentioned and concerned is not sufficient. You need experience, some degree of common sense/intelligence and the ability to check your ego at the door. Far too often individuals run for a board position because of trivial reasons.”

Burke offers one last suggestion for governing an association, “Board members have a legal obligation to act in certain ways and follow certain laws and rules. Good judgment, common sense, and always, always doing what is right for the community is the best advice for a board member.”

Operating a fair, open, and judicious board is the first line of defense against any lawsuit—and a good D&O policy and fidelity coverage can help provide the protection your community needs.

Anne Childers is a freelance writer and a frequent contributor to The South Florida Cooperator. Editorial Assistant Enjolie Esteve contributed to this article.