Is My HOA Required to Keep an Insurance Policy?

This is a question we often get asked by new (and sometimes inexperienced) board members. And in most cases, the answer is almost always, "Yes."

But, why?

Before we get into the specifics, we need to cover a few basics.

First, why does an HOA have an insurance policy in the first place?

An insurance policy serves to protect the assets of the association in the event of an unforeseen circumstance. Associations are created to cover the costs for maintaining and replacing the common elements and limited common elements. Depending on the type of the association, these may include: streets, sidewalks, gates, fencing, roofing, exterior siding, window shutters, and possibly even patios or decks. This can vary greatly from one association to the next and is typically defined in the association's governing documents.

Some associations also have amenities - clubhouse, pool, tennis court, basketball court, playground, or a fitness room or gym.

The association must budget for the ongoing maintenance of these assets and their useful life. However, in the event of an emergency or disaster, the insurance policy will replace these assets.

In addition to the physical assets of the association, the insurance also serves to protect the association from liability of the board. Board members are ultimately responsible for the fiduciary responsibility of the association and at least one, if not more than one, may have access to the association's funds. Unfortunately, embezzlement and misappropriation of funds is quite common in the HOA industry and an insurance policy may help shield the association against the actions of a rogue board member.

In other circumstances, the board may inadvertently make a mistake that causes a loss to the association. In this case, the insurance policy (like Errors and Omissions, or E&O), may protect the association.

Then, there's also the matter of protecting the board from personal liability. A Directors and Officers policy, or D&O, is important and is something we recommend for board members.

My association doesn't have any amenities or real assets, so why do we have insurance?

Even though the association may not have any amenities, there is still some limited area the association owns and maintains, including entrance signs or monuments, or potentially wells, sprinkler systems, etc. There's also the insurance coverage for the board.

Regardless of the amount of assets the association owns, there is always at least some common property or asset that needs to be insured, as well as the board members themselves.

It's usually a matter of law

In many states, HOAs are required to carry an insurance policy and some even stipulate minimum coverages for liability.  In other states, the laws may be silent or may reference the association's governing documents.

In the absence of state law, the association's governing documents may also mandate the requirement. In this case, it's a legally binding document, and therefore, the association is required to have a policy.

Your association's governing documents will typically list insurance requirements and may even specify the types and coverage amounts.

In very rare circumstances, where both the state law and the governing documents are silent on the topic of insurance, then the association may be able to legally operate without insurance.

Even in such case, we heavily advise against it. In the event that a homeowner files a lawsuit against the board, then the board can become liable and could be responsible for paying all of the costs and legal fees from their own pocket.

What type of insurance is recommended for my HOA?

Well, it depends. As we stated earlier, every association is different and some have more assets than others to maintain. First, check your state laws and your association's governing documents. Those will tell you the legal minimums. We also recommend checking with an insurance agent or a broker.

While Numerus is not a licensed agent and does provide insurance quotes, we are happy to review your policy and make recommendations. We can also help refer you to a local insurance broker or agent who can provide more specifics and guide the board on the appropriate insurance policies for your specific situation.

If you have questions or would like to speak with us about how we can help your HOA, contact us today.

Be sure to subscribe to our newsletter!