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Risk Management review for Community Associations

When one brings up the subject of risk management, it is not long before the discussion turns toward insurance. This is for good reason, since insurance is a large part of any risk management program for an organization.

The problem arises when the organization relies too heavily on insurance, and ignores the other important elements of a risk management program. It is therefore important to recognize that insurance alone will do nothing to either eliminate a hazard or reduce that hazard.

As an example an Association Board identifies trespassing onto Association property as a potential hazard/liability. The Board decides to take action and posts "no trespassing" signs. After a period of time, it becomes evident that the action taken by the Board has not served to eliminate the flow of trespassers. The Board chooses next to contact the local police for their assistance with the continued trespassing. The police assistance appears to eliminate roughly 50% of the trespassing incidents. The Board convenes again to discuss the issue and decides it is necessary to form a homeowners committee to help identify the trespassers. The trespassers can now be met with or sent a letter advising them that the Association does not allow trespassing on Association property and to please find another route to their destination.

At this point the Association seems to have eliminated 80% of the trespassing traffic, thus reducing the hazard. All efforts have been exhausted to eliminate the hazard entirely. The Board's next step is to determine how to protect themselves (financially and legally) should a trespasser injure themselves on Association property. Most likely the Association would want to purchase General Liability Insurance which transfers the responsibility to the insurance carrier should a lawsuit be brought from an injury sustained on Association property.

By looking at all possible solutions to the hazard/liability posed by the trespassing, the association has eliminated 80% of the hazard and reduced the chances that an incident will occur which would require the Association to file a claim with the Association's insurance Company.

This type of an approach for any hazard/liability identified by an association will eventually have a positive influence on both the cost and availability of insurance. When planning a risk management strategy it is important to take the long term view as this is where an Association will come to recognize the impact of their efforts.

Another area that all associations need to address is the area of adequate coverage for contractors doing work on the association property. Each contractor should be required to carry both general liability and workers compensation coverage listing the Association as an additional insured. Also, each contractor should be required to sign a contract with the Association agreeing to indemnify and hold the association harmless for any injuries they may cause. Some Associations are taking this approach one step further and advising that all contractors, even those working for individual unit owners, follow the same requirements (as listed above). As with any contract it is imperative that the Association's attorney reviews it to explain the ramifications of certain provisions and how to best protect the association through contractual transfer.

Finally, although many Associations have never filed a Directors and Officers liability claim, it is important to recognize the classic liability claim scenarios for Association boards. Following is a list of the most common Directors and Officers liability claims.

  • The Board's failure to adhere to by-laws
  • The Board's failure to property notice elections
  • The Board's failure to properly count votes/proxies
  • Challenges by members regarding power granted the Board by by-laws
  • Improper removal of Board Members
  • Decisions by the Board resulting in physical damage to the association property
  • Challenges to assessments
  • Approval of variances, generally by an architecture committee
  • Breach of fiduciary duty
  • Challenges to decisions of the Architectural Review Board
  • Questions or challenges regarding easements
  • The Board's failure to maintain common areas
  • The Board's failure to property disburse funds (i.e. insurance proceeds)
  • Defamation by the Board of a member
Recognizing the situations, which have historically turned into a liability claim for other Association Boards, will certainly be helpful to your Association as you review and potentially enhance your overall risk management strategy.

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