Mistakes happen. It’s a simple fact of life and a simple fact of doing business. That’s why issues of insurance are so important for condominium managers and boards to take seriously. While it is easy enough to keep up to date on one’s own insurance, making sure the coverage of outside vendors and contractors is in order can be trickier. We all want to believe that our landscapers or snow removal teams or siding contractors are protected by insurance in the event of an accident, but it’s not always easy to be sure. And if coverage is not in place, that’s the kind of mistake that can lead to million-dollar problems for an association.
"You're always liable when you engage in any commerce or do anything," saysDavid J. Byrne of the Lawrenceville-based law firm of Stark & Stark."There's no way to avoid liability—that's the way life is. The condominium has a leaking roof and hires a contractor to fix it, and the contractor drops a piece of equipment on an owner's head, the condominium can get sued for that. It probably would win but it would still have potential for liability for some reason—what occurred, what the condo didn't do, what the association should have done, etc. etc."
As with anything, good planning and due diligence can prevent many of those mistakes before they happen. Knowing what to look for and what questions to ask when it comes to insurance and vendors can ensure a smoothand liability-friendlyworking relationship.
That diligence should start at the beginning. “You should not accept [an insurance]certificate that is handed to you by the contractor, because they can falsify those,” says Ann Hickman, a senior research analyst and editor of Construction Risk Management at the International Risk Management Institute, Inc., in Dallas, Texas. “What you should do is require to have it be sent to you from their insurance agent and have your name on it as a certificate holder. The agent who signs it is testifying these coverages are in force, as of the date that it’s issued,” she says.
According to Alex M. Seaman, senior vice president of Hub International Northeast, “The best place to start is with a certificate of insurance, which is standard procedure. Every contractor will know exactly what you are requesting. The certificate should include as additional insureds the co-op or condo association, the managing agent, and if work is being done in an individual unit, the owner of that unit. Typically, we recommend that this certificate of insurance be forwarded to the insurance professional on that building to review to make sure that the carriers and limits are adequate and dates are current.”
Once making sure the contractor has coverage, it’s important to check and recheck coverage. Just because a contractor has proper coverage when the paperwork is first signed does not mean that it still will be in place six months or six years down the road. Especially in today’s economy when so many businesses, both large and small, are cutting corners or coming up short on monthly bills, the possibility of a policy lapse by an otherwise reputable vendor is all too real.
According to J. David Ramsey of the law firm of Greenbaum Rowe Smith & Davis LLP in Woodbridge, "Some insurance professionals have estimated that as many as 50 percent of the insurance certificates delivered by contractors have been altered or created by the entity delivering the certificate. Hence, an association manager should consider checking with the agent whose name appears on the certificate to confirm that it was validly issued."
“I would make sure that you instruct your insurance agent or broker that you are to be advised if the insurance is canceled or lapses,” adds Joel Meskin, CIRMS, of Ohio-based McGowan & Company.“If the vendor’s services will continue beyond the effective policy period set forth on the certificate of insurance, then the manager or board should make sure a new certificate is provided when the new or renewed policy is in effect and should not allow work during any period where there is no demonstrable coverage in effect."
Even if the vendor seems to be covered head to toe in insurance, associations still should not rely solely on the vendor for protection. Most legal and insurance pros agree that associations should have workmen’s compensation insurance, though there are differing views on how that coverage fits in with the contractor's.
According to Byrne, even if a contractor is properly insured, an HOA can still be potentially liable if one his workers gets injured on the premises. “It would depend if the condo did anything wrong,” he says. “Is he an independent contractor, is he hired to do a job independently and not an employee? It would depend on whether the condominium is negligent."
"Even the smaller buildings, it's very unusual to have absolutely no workers even on a part-time basis," says Seaman. "Somebody's taking out the garbage. Some properties will claim to just have an independent contractor who takes out the garbage, but God forbid that guy hurts his back and has a permanent injury. He could have a million dollars or more in expenses coming out of the building fund. So it's very, very dangerous business. You have to maintain workers' compensation coverage."
When you're talking about an employee of a contractor who gets injured on the job, "That's a little different,” says Byrne. “In that regard, the employee is not an employee of the condominium.” But under certain circumstances, and HOA may be deemed a statutory employer for a vendor or a member of a vendor's crew. In that case, if someone gets injured, they can bring a claim against the condo and collect damages without having to prove negligence on the part of the association. They just have to prove they got hurt at work.
Meskin agrees. “In most states, regardless of fault or intent, if it turns out a vendor is uninsured, the association becomes the employer for the purpose of insurance,” he says. It does not matter what type of work is being performed or who is performing it. “If the vendor is uninsured, even if he provided a fraudulent certificate, the association becomes the insurer.”To offset this risk, condos can get something called zero employee workers’ compensation, which acknowledges that the association may not have any full-time lawn care or snow removal employees. But just in case, you’re still covered -- and the premium tends to be small.
Hold Harmless Clause
Another option for condo associations seeking to protect themselves from liability is the inclusion of an indemnification clause in a vendor's contract. This clause states that the condo will be held harmless in the event of a claim that arises. Say a plow hits a car and the owner sues the contractor and the association, for example. The vendor, because of the clause, would assume full responsibility and the association would be left out of the equation and thus protected.
But—and this is an important “but”—the association must make sure that the vendor has a contractually-assumed liability provision in their liability coverage, says Byrne. It’s not enough to just have a hold harmless agreement. Associations need to make sure that the vendor’s insurer allows that kind of clause and will honor it should the need arise.
HOA's also need to know their rights when it comes to notifications and terminology, Stark continues.“I see a lot of associations that contractually require a contractor to maintain a certain level of insurance and to name the association as an additional insured," he says, "but no one ever follows up to make sure that actually takes place. So then the contractor can cancel the insurance and the association will never know. If an association is named as an additional insured, then the contractor cannot cancel the insurance without giving the association notice. You also don't want the association to be a policy holder or to be named on the policy, because that's not additional insurance—that means you have no right to make a claim against the insurance directly.”
Another option when it comes to construction projects or other one-shot events is a product called Owners and Contractors Protective Liability Coverage (OCP), which is a policy that provides liability coverage for the insured for the negligent acts of contractors and subcontractors hired by the insured. “OCP is bought by a contractor for the benefit of his client [the condominium],” says Hickman.” “Its purpose and intent is to provide coverage for the condominium’s liability in connection with the contractor’s work if the condo association is sued by somebody or a claim is made by a third-party for injury or damage.”
What makes this form of coverage unique is the fact that although the contractor or vendor is the one who pays the premium, they do not have the ability to cancel the coverage. “The client is actually the named insured on the policy, so it’s not coverage for the contractor, it’s specifically coverage that is provided by the contractor for their client [the condominium],” says Hickman.
Hickman has one caveat about OCP coverage because of its expense, condos may carefully consider whether it’s worth carrying for smaller jobs. “There is a cost associated with this coverage, usually a percentage of the project, but there is a minimum premium that may apply,” she says. “You could be looking at a minimum of $750 to $2,000, and that typically gets passed back to the property owner [condo]. So anybody who requires an OCP policy needs to understand that they’re going to pay for that.”
"I don’t want to tell people what they do or don’t want to do, but they need to be aware that there’s going to be a cost associated with the coverage and they need to be prepared to pay that,” says Hickman.
Suffice it to say, it gets very complicated but OCP could simplify things for associations. The association’s insurance representative should be able to offer advice and specifics with regard to unusual policies and coverage such as OCP.
How Much Coverage?
With questions of what kind of coverage is necessary answered, the next question becomes, “How much is enough?” How much coverage should an association have? According to Meskin, the simple answer is, “It should be commensurate with the basic general liability limits.” The association’s insurance agent will be able to provide those amounts depending on the specific coverage requested.
According to Ramsey, "Typically we look for a minimum of $1,000,000 in liability coverage, although with certain smaller contracts with low risk potential we may accept a minimum of $500,000 in liability. Where there is a high risk potential we would seek more than $1,000,000."
What it all boils down to is the simple fact that insurance is too important an issue to be left to non-experts. Even if the new landscaper comes with impeccable references and an affable attitude, it is absolutely imperative to check all the crossed t’s and dotted i’s in his or her coverage. And it is vitally important to go straight to the source: the vendor’s insurance provider. Never skip steps, never trust that everything is fine without verifying information, facts and coverage.
The pros warn that associations should never sign any contracts with a vendor without having it reviewed by their lawyer first. A misplaced word, an innocent omission of phrase–seemingly inconsequential things could have serious and financially debilitating consequences for any association.
By being prepared, by consulting with experts and by taking some extra precautions including additional coverage, condo associations can protect themselves and stop mistakes before they happen. And there’s no doubt, peace of mind is always worth the extra effort.
Liz Lent is a freelance writer and a frequent contributor to The New Jersey Cooperator. Additional reporting by David Chiu.
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