A condo or co-op development is a community, but it's also a business. And like anyone else who runs a business, an association or board needs to protect itself with the right insurance. If someone slips in the community room and gets injured, he or she is as likely to seek a settlement, just as they would if they fell down in a supermarket. And just like individual homeowners, some associations do a better job of insuring themselves against those claims than others. Insurance is a tricky issue that can confuse even the most seasoned, conscientious board—even more so when the many types of specialty coverage are added to the more familiar concepts of umbrella and liability policies.

A Few Basics

"The association has bylaws which set forth the kinds of insurance that the community requires," says W. Gerould Clark III of Acordia in Morristown. "The board then hires a broker or insurance professional who goes out and finds those coverages. Those coverages are in the insurance cost of the budget for the association, and the individual members approve that budget. The ultimate payers are the individual unit owners, but the actual checks are written by the association."

Loosely defined as anything not covered in mainstream insurance offerings, specialty insurance encompasses a vast array of coverage options. As the insurance business has evolved over the years, it seems as though nearly every contingency has some sort of protection to mitigate it, from earthquakes to flooded basements.

"Co-ops and condos are like everybody," says Michael Zeldes, senior vice president of HUB International Northeast, an insurer with offices in both New Jersey and New York. "I've seen condos and co-ops that have all of the coverage they should have, and I've seen some that think they have all of it, but maybe in the fine print don't have what they think they have."

For co-ops and condos, there are two absolute must-haves in terms of insurance: property insurance and liability coverage. Property insurance covers the building itself in the event of fire or other destructive incidents. It can cover things such as the cost of replacing the building or loss of income from destroyed units, for example. Liability insurance covers the co-op or condo in the event that the building is sued for a trip or fall or other accident on site. That basic coverage will keep the building insured up to approximately $1 million.

"Those are your basic meat-and-potatoes policies," says Robert Mackoul of Mackoul & Associates, an insurance broker based in Long Beach, who adds that while the market for larger policies is relatively tight, "The market itself in general is softening. It's more competitive, and there are more companies willing to write policies for the medium- or smaller-sized buildings. [Property and liability] coverage is broader in the suburbs where there's more competition."

As important as those two areas of coverage are, however, most experts would agree that they aren't nearly enough. Finding the right balance is key. "You want to make sure you have adequate policy coverage," says MariAnn Cole of the Long Island Coverage Corp. in Hauppauge. "That means being neither over- nor underinsured.

The uncertainty involved in litigation means that having the right amount of coverage is just as important as choosing the right program. That's why an umbrella policy is key to the mix. As the name suggests, an umbrella policy "covers" other policies, adding to the usual $1 million to $2 million payout of basic liability, property, directors/officers policies and others.

When it comes to co-op and condo staff, worker's compensation coverage is also key, as is securing a fidelity bond or coverage that protects against employee dishonesty. If a manager absconds with hundreds of thousands of dollars, the board and the association's residents must be protected from that loss or serious issues—both legal and financial—will arise.

High Water Marks

As many New Jersey residents know all too well, the damage caused by rising water can be absolutely devastating. To defend against flood damage, homeowners associations located in federally designated "special flood hazard areas," or flood plains are required to carry separate flood coverage by the Federal Emergency Management Agency (FEMA)'s National Flood Insurance Program. The federal government absorbs a portion of the cost of flood insurance, so the burden does not fall entirely to the association.

For buildings and developments along the water's edge or outside city centers, having flood coverage is a must. "If you're on the water, you need it," Cole says. "Flood insurance is available to everyone, and the rates are stipulated by the federal government, so everyone gets the same premium prices."

"The primary part of that insurance is issued by an insurance company," adds Clark, "but the insurance company is contracted by the federal government to issue the policies, set the premiums, and that kind of thing."

Mackoul also suggests broad-form water coverage, which in addition to flood coverage provides protection against water and sewer back-ups—certainly a necessity in the city. "That kind of water problem can cause an awful lot of damage," Mackoul says. Those problems can include electrical damage and other destruction arising from basement flooding. Water coverage will protect against all of those issues that are not part of the standard building policy.

Breaking the Mold

Another insidious problem is mold, which is often the dreaded byproduct of a water leak or flooding. "Mold is the new rage these days," says Mackoul.

In the past, mold infiltration in a building didn't necessarily trigger a call to arms. Today, with more residents concerned about the potential health risks associated with mold, more buildings are testing the spores they find. "It's a concern these days, because if there's a lawsuit, it's going to have to be covered," Mackoul says.

An increase in the number of claims these days does not mean a rise in incidences of mold, however. Rather, increased awareness has led to increased action with more people preferring to err on the side of prudence rather than risk. "More people are tearing down walls to do tests than they did in the past," Mackoul says. "As a result, we have more claims."

And all those claim have had an enormous impact on the specialty insurance market. "There has been a wave of litigation that has swept the country," says Ken Lapatine, a principal shareholder at the Manhattan law firm of Greenberg Traurig LLP. "The number of claims against insurance companies regarding mold has skyrocketed. The people bringing these lawsuits are trying to hold someone responsible for the presence of the mold, whether it's the building owners, managers, construction industry or design professionals."

In response to the growing number of lawsuits, several insurance companies have eliminated mold coverage from their policies, claiming that mold-causing water damage is beyond their purview. That has pushed mold coverage into the realm of specialty insurance as well—and a subject upon which professional guidance is especially important.

Getting The Lead Out

The other key hazard that can affect an HOA's insurance profile is lead paint. According to the New Jersey Department of Health and Senior Services, more than 5,230 children in the state tested positive for lead in 2003—a number everyone would like to see drastically reduced, and which has implications for the boards and landlords of the units the children live in.

"Children are tested in school for lead poisoning," Zeldes says. "If they test positive, their parents could say, 'They got the lead poisoning from the unit.' If it's a condo unit, it may be the homeowner's responsibility, [depending on whether it was original paint, or if the paint was added by the present or previous owner.]" Buildings need coverage against lead because if a child living in a subleased or rented condo unit tests positive for lead poisoning, and the unit owner doesn't have insurance coverage for lead exposure, the family could go after the association.

"Those renters can come after people saying, 'Our child got lead poisoning in this condominium,' and if the person they're renting from doesn't have [the right] insurance, they can go after the board," says Zeldes.

New legal requirements regarding lead paint went into effect in New Jersey this summer. According to the Department of Community Affairs' Division of Community Resources, the owners (and boards) of multi-family properties should be aware that the new regulations will be enforced during the five-year cyclical inspections performed by the Bureau of Housing Inspections. "As part of their inspection," says the DCR, "these properties must now be either certified as lead-free, or must meet lead-safe maintenance requirements. New Jersey has the most comprehensive inspection program in the nation for multi-family dwellings, and in the next five years, more than 850,000 dwelling units will be inspected for lead safety." Property owners in buildings with five or more residential units can apply to DCA for remediation loans to remove lead paint hazards beginning September 1, 2005.

And although lead paint hasn't been used in new construction since the 1970s, it's still advisable to get input from your attorneys to assess your potential exposure. But what if you could prove in court that your building was built in 1995, long after lead paint was outlawed. Wouldn't that be enough to convince the judge?

"The answer is probably," says Zeldes, "but I don't know if you want to stake your entire budget on 'probably.'"

Other Extras

Of course, water and mold aren't the only things that can seep into a building and cause trouble. Sometimes, the problem isn't even organic—or a matter of something infiltrating the building from outside. Building systems themselves can develop problems, and for those instances, protection provides protection for the loss of essential machinery, such as boilers and elevators.

Environmental coverage is another necessity that a building or development should secure, so that if, for example, a leaky heating oil tank should cause fuel to seep into the surrounding soil, the HOA won't be held personally liable for the clean-up effort.

"The costs for cleaning something like that up could be hundreds of thousands of dollars," Mackoul says. "It's important to have enough coverage to get the job done right."

When other building repairs are needed, basic property coverage may not be enough. Something called building ordinance coverage will provide the extra cushion some buildings need in the event of fire or other major destruction.

Employment dishonesty coverage is also useful. It protects boards in the event of fraud, such as a manager collecting fees from owners and then pocketing the money.

On the other side, Clark says employment practices liability can cover complaints from employees as well. Not every association needs this, but if your association has employees, it's something to look into.

"Some associations have employees and some do not," Clark says. "Employment practice liability means the board would be covered if the employee was wronged."

There's also the option of increasing your liability or umbrella coverage to handle unusual claims—it's not specialty insurance per se, but a way of covering yourself and your community in the event of something unusual. For example, says Zeldes, what would happen if your HOA's recreation room was used for a party, and an assault were to take place there? The building could be held responsible.

"In this case they'd say, they were having a party and there's no security. The doors weren't locked, and anyone can get in this community room, and because it wasn't a secure place, the board of directors is at fault. That's the kind of thing that happens and that why extra insurance is important."

Sign Me Up

With all the coverage options available, it may seem difficult to determine exactly what your board needs. Association boards should examine their insurance needs at least once a year, and include a look at past coverage in that assessment. "Always pull out the prospectus and see what was required in the original coverage," Cole says. "You have to maintain whatever was in the book originally."

It's also important to look at how the policies are written. "Various carriers write building policies in different ways," Cole continues. "Building value is the bulk of what the carrier is going to look at when it comes to determining the policy. They don't want to under- or over-insure." It's vital to make sure that the policy is written in the way that will protect each individual building and its assets best.

Not all buildings will be able to procure all types of insurance at the best possible cost. "Each carrier has their own set of guidelines," Cole says. "Some have limitations on a building's value. Some look at past histories. There are a lot of variables."

The past matters, too, when preparing for the future. If a development has had problems in the past, and has shown a propensity for procrastination and apathy in handling potential risk, that can be a problem. "Buildings that aren't kept up or that have had prior problems may find their ability to get coverage impacted," says Cole.

And, while it seems as though just about every contingency under the sun is covered by someone, that's not always the case. There are certain standardized exclusions to any policy - including things such as war and acts of war—that every insurance buyer will run into.

The key, though, is to get as much coverage as you can to cover as many of your needs as possible. What it comes down to in the insurance arena is that it pays to know what coverage you have, what you need, and what else you should look into getting—both in peace of mind and an improved bottom line. Every HOA is different, and each have their own unique coverage needs, but with the help of a professional insurance advisor, your association can make sure all the bases are covered.

Anthony Stoeckert is a freelance writer and a frequent contributor to The New Jersey Cooperator.