Uncovered Coop Property and Casualty Claims?
Your D & O Policy Might Not Protect You -
Policy Audits Can Help

Michael S. Hale, J.D., CPCU, AAI
Melissa L. Hirn, J.D.
Insurance Coverage Attorneys

Editor’s Preface:  During the Co-Op legal update classes presented at the Annual conference, we strongly advised Boards and Management Agents to conduct “insurance audits” to ensure that each Co-Op has the right protection against lawsuits and claims.  Please read the following article as it contains vital information. Randall A. Pentiuk, Esq.

Would your D & O policy cover a claim against the board members for purchasing inadequate insurance coverage which exposed the cooperative?  In our years of experience as insurance consultants we have seen many D & O policies specifically exclude coverage for decisions relating to insurance.  This could mean disaster for you as a board member.

Whether or not your D & O policy would cover you, board members and officers should review their business insurance policies carefully and consider obtaining the advice of an independent insurance consultant to assist in that process.

In our years of work mostly on behalf of policyholders we have seen major uncovered disasters involving cooperatives, condominium associations, and community living associations that could have been prevented. Some of these claims have been in the millions of dollars.

Under the laws of most states, an insurance policy is to be interpreted as any other contract.  Unless there is an ambiguity, courts are required to enforce the plain meaning of the words in the policy contract. 

Company insurance buyers are assumed to have read and understood their insurance policies and are bound to their terms and provisions.  We have found that even if they do read their policies, business representatives usually do not always understand the intricacies of the coverage not to mention the optional endorsements which might be available.  This is complicated ground to tread to say the least and deserves considerable attention by cooperative boards of directors.

At the time of an uncovered claim, many cooperatives come looking to their agents for answers and the most common defenses are 1) you should have read your own policy and told us if you had any questions and; 2) we were mere order-takers and did not owe you any duty to advise you of coverage adequacy or gaps.  We know this because we have served as experts in hundreds of cases involving insurance agents throughout the country and these are the most common defenses.
 Although there are many things that a coop can do to protect itself, here are ten recommendations:
Evaluate the agent – is the agent an order-taker or a true advisor?  If the insurance is being quoted every year, you might be setting the tone that you want more of an order-taker who quotes price.  This is usually a mistake.

Evaluate your property insurance limits every year and do not rely upon the insurance agent to set the values.  Instead, obtain an outside appraisal.  Even with an appraisal, factor in the costs of debris removal and the fact that rebuilding expenses are almost always higher in emergency conditions.  Be certain that there are “blanket” limits as opposed to individual limits for building and contents by location.

Do not tolerate coinsurance penalty provisions on property insurance policies.
Look carefully at named insureds to be certain that no entity names are missing.
Avoid protective safeguard warranty provisions in property insurance policies which could negate coverage in the event a fire sprinkler system or alarm system did not work.
Be sure you have adequate limits of insurance for additional rebuilding and delay costs associated with ordinances or building codes.  One recent claim we were involved with had over $5,000,000 in losses in this area.

Maintain auto liability insurance even if the coop owns no vehicles.  This is important because representatives such as board members, officers or employees can drive in their own vehicles on behalf of the coop, creating liability exposures.
Be sure the coop’s umbrella policy does not have an absolute pollution exclusion which would bar coverage for liability for injuries from fumes or carbon monoxide.
Carefully evaluate contracts with contractors and vendors to transfer risk and to assure that their coverage is primary.

Hire an independent insurance consultant to objectively review policies, proposals, endorsements, contracts and otherwise advise on exposures.  Those who are not trained in the complexities of insurance are not likely to know the questions to ask.  Note that sometimes negotiated savings can reduce the costs of the consultant.

It may be time for an audit of your business insurance program.  This can help protect the board in showing due diligence and also in potentially addressing any coverage gaps that were not known.  The intricacies and options make the process of purchasing insurance a complicated one to say the least.  Obtain an expert to help you. *