What Condo and HOA Boards Are Actually Responsible for When It Comes to Insurance

Three layers of rules

When it comes to insurance, a board answers to three sets of rules, in this order:

1. State law. Your state's condominium act or common interest community act.
2. Your governing documents. The declaration (sometimes called the master deed or CC&Rs), bylaws and rules.
3. Practical requirements. Mortgage lender standards, such as Fannie Mae's, which affect whether buyers can finance units.

When they differ, the stricter requirement usually controls. Your association's attorney can tell you how they interact for your community.

What state law typically requires

Many states have adopted condominium or community association laws based on two model acts: the Uniform Condominium Act and the Uniform Common Interest Ownership Act (UCIOA). Section 3-113 of those acts deals with insurance, and versions appear in states including North Carolina, Minnesota, Vermont, West Virginia, New Mexico, Missouri and Alabama. Other states, such as Florida, have their own frameworks.

Details vary by state, but the model provisions generally require the association to maintain:

• Property insurance on the common elements, and in condominiums usually the units themselves, against common risks of loss. The amount is generally the full insurable replacement cost, less deductibles, though some states use a different percentage. North Carolina, for example, sets the minimum at 80% of replacement cost.
• Commercial general liability insurance covering injuries and property damage connected with the common elements.
• Fidelity insurance against theft of association funds, in some states' versions.

The model acts also commonly provide that:

• "To the extent reasonably available" matters. The association must carry required coverage only to the extent it's reasonably available. That flexibility exists for markets where certain coverage is unavailable or extremely expensive.
• Owners must be told if coverage isn't available. If required insurance can't reasonably be obtained, the association must promptly notify all unit owners.
• Insurers must give notice before cancelling or not renewing. Notice goes to the association and to owners and mortgagees who've received certificates. The notice period is set by statute, such as 30 days in North Carolina.
• Damaged property generally must be repaired promptly, unless the community is terminated, repair would be illegal, or a high percentage of owners vote not to rebuild.
• Owners can buy their own insurance in addition to the association's.

Some states add more. Florida's condominium law, for example, requires associations to make their best efforts to maintain adequate property insurance and to have the replacement cost determined by an independent appraisal at least every 36 months.

What your governing documents add

The declaration usually has an insurance article. It often specifies:

• which parts of the property the association insures and which parts owners insure (the "bare walls" versus "walls-in" question)
• minimum coverage types and amounts
• how deductibles are handled and whether they can be charged to owners
• how insurance proceeds are used after a loss
• whether certain coverage, such as D&O or flood, is required

Read it before every renewal, and make sure your broker has a copy. A policy that satisfies the statute but not the declaration still leaves the board out of compliance.

The board's duties as fiduciaries

Board members and trustees owe the association fiduciary duties. In general terms:

• Duty of care. Act in good faith, with the care a reasonable person would use, based on reasonably available information.
• Duty of loyalty. Put the association's interests ahead of personal interests, and disclose conflicts.
• Duty to follow the governing documents.

Many states apply some form of the business judgment rule to association boards. Broadly, courts tend not to second-guess decisions that were made in good faith, on an informed basis, and within the board's authority, even if they turn out badly. What protects a board is a sound process, not a perfect outcome.

For insurance, a sound process usually means:

• relying on qualified professionals, such as a licensed broker and the association's attorney
• understanding the main options and trade-offs before voting
• checking the program against the statute and the declaration
• recording the decision and the reasoning in the minutes

What boards are not expected to do

• Become insurance experts. Boards are expected to ask good questions and rely reasonably on licensed professionals.
• Buy every coverage available. Boards weigh cost and benefit, within what the law and governing documents require.
• Guarantee outcomes. No board can promise a claim will be fully covered. It can make sure the decision was informed.

A practical annual checklist for boards

• Re-read the insurance article of the declaration and the relevant state statute section.
• Confirm the building limit is based on a current replacement cost estimate.
• Review every deductible in dollars, and confirm who pays it.
• Confirm liability, umbrella, D&O and crime or fidelity coverage are in place and adequate.
• Review the renewal options with the broker before the vote.
• Record the decision in the minutes.
• Notify owners of deductibles and any coverage changes that affect their own policies.
• If required coverage isn't reasonably available, consult counsel and notify owners as the statute requires.

Frequently asked questions

Can board members be personally liable for insurance decisions?

Board members can be named in lawsuits over their decisions, which is why directors and officers (D&O) coverage matters and why documenting an informed process is important. Whether liability attaches depends on the facts and state law.

Do these rules apply to HOAs as well as condos?

UCIOA-based laws cover condominiums, planned communities and cooperatives, but insurance requirements differ. In many HOAs, owners insure their own homes and the association insures only common areas. Check your state law and declaration.

What if our declaration and state law disagree?

Generally, a declaration can impose stricter requirements than the statute but can't waive the statute's mandatory requirements. Ask your association's attorney.

Is the property manager responsible for our insurance?

The manager often coordinates the process, but the legal responsibility sits with the association, acting through its board.

Sources

• North Carolina General Statutes § 47C-3-113
• Minnesota Statutes § 515B.3-113
• Vermont Statutes 27A § 3-113
• New Mexico Statutes § 47-7C-13, including the Uniform Condominium Act commissioners' comment
• West Virginia Code § 36B-3-113
• Florida Statutes § 718.111(11)(a)