AT A LOSS FOR PROTECTION

LOSS ASSESSMENT COVERAGE:
IT CAN COVER THE COSTS OF SPECIAL ASSESSMENTS--WHICH ARE INCREASINGLY COMMON--YET MANY OWNERS DON'T CARRY IT.

Special assessment is an unmentionable word for many community associations. Boards of directors, however, are starting to mention that word more frequently. As boards wrestle with a variety of unforeseen problems--natural disasters, roofing and plastic plumbing defects, newly discovered environmental hazards--they are often faced with the unpleasant option of assessing their neighbors.

Few associations and homeowners realize that the loss assessment coverage (LAC) of an insurance policy covers certain types of special assessments. LAC can be found in individual unit owner's and homeowner's policies (called HO policies). Some policies include it; in others the owner must request it. LAC covers special assessments levied by an association for sudden, accidental events. If a hurricane damaged a community clubhouse, for example, the LAC could cover special assessments for repairs. Or if a visitor was injured on common property and sued for damages, the LAC could pay the related special assessments. Special assessments for maintenance and capital replacement projects, or for ordinary events--such as snow removal--would not be covered.

In any HO policy, owners can obtain different amounts and types of LAC. To find it in a policy, check the index or the attached endorsements. Frequently, the limits are listed on a declarations page. When LAC is built into the basic policy form, the coverage typically appears among the "supplemental coverages." If it is an elected coverage. it's usually an endorsement--a separate document appended to the policy. Ask your insurance agent for specifics on limits, rates, and other provisions.

PROVISIONS AND CONDITIONS

To determine if insurance covers a certain scenario, apply a four-step test. Ask yourself:

• What's covered?
• What's it covered for?
• What's the value?
• What are the conditions?

Imagine you're in a car accident. Is the car covered? Is it covered for accidents that are your fault? What is the amount you'll be paid? What are the conditions--does the policy cover you if you crashed the car in a drag race?

This four-question test applies to any insurance issue. With LAC, it helps ascertain what types of special assessments will be covered. Consider the following:

1. What it covers. Loss assessment insurance covers the common interests that an owner--the policyholder--shares with other owners. This usually includes common property and the liabilities associated with it and various association activities. The objects of coverage include a common lobby, limited common element decks, a community gatehouse, an association board of directors, an authorized association committee, or an individual member acting in a duly authorized association capacity. LAC covers costs assessed to owners resulting from damage to common property. It does not cover the property itself.
2. Covered causes of loss and injuries. An HO policy insures the owner's property against fire, lightning, vandalism, windstorm, and other perils (known as broad form perils). Likewise, the LAC will ordinarily cover special assessments for the damage. It will not cover routine events, such as special assessments for snow removal (any more than it would be covered under an HO policy).

Special assessments for liability also are covered. For example, if the association levies a special assessment to cover a bodily injury suit--resulting from an accident on commonly owned sidewalk, for example--the LAC would respond.

The types of events (perils, accidents, covered negligences) that are covered seem to vary from one policy to another; more so than with the object of coverage. For liability, an HO policy that provides the standard bodily injury and property damage liability may also extend LAC to less common injuries such as defamation, personal injury, or even discrimination and other rarely insured suits.

If an owner buys a specialty policy for losses normally excluded in an HO policy, the speciality policy may provide LAC, which covers special assessments for these losses. Unit owner flood and earthquake policies, for example, may include an option to buy coverage for assessments due to floods and quakes. Most HO policies do not cover assessments for these causes.

Check your LAC carefully. Policies vary widely in terms of the accidents or events that they cover. Owners should ask about the broadest LAC possible. As a rule, the more liberal the underlying HO policy contract, the better the LAC. Remember: LAC never applies to assessments for maintenance or capital replacement. It's triggered by sudden, accidental events--the types of events that customarily trigger insurance.

4. Limit and value issues. When common areas are damaged and the association levies a special assessment, the LAC--assuming the damage is covered--pays the owner's share. It pays only to its limit, however. A limit is the most that would be paid for any covered loss. Many policies have a default limit of $1,000; higher limits are available at a modest cost. One carrier targeting high-valued homes routinely extends a $50,000 limit.Then there's the deductible. Most LACs are subject to the HO policy's deductible. Although liability losses ordinarily have no deductible, with LAC the deductible applies. This is because the LAC responds to a financial obligation assumed by a homeowner. It is not a liability loss per se. If the association assesses every owner $2,000 for a covered assessment, the owner with $50,000 in LAC will be entitled to $2,000 minus the deductible on that owner's policy. This shows why associations should not rely on owner LAC to pay for accident damage it fails to insure. An owner won't be compensated until the assessment exceeds each owner's individual HO deductible. And most owners will not be pleased with paying deductibles or presenting claims to their individual HO carriers for problems that are the association's responsibility.
5. Conditions of LAC. LAC contains some unusual provisions. Usually a LAC requires a special assessment to be levied against all owners. LAC will not typically respond to an exposure assigned to less than all owners. The coverage trigger on the LAC is also unusual. The coverage trigger determines which policy in a series of policies--issued over consecutive terms--will address a potential claim. On an HO policy, for example, the coverage trigger is usually when the accident or claim occurred. The 1996 event triggers the 1996 policy, not the policy in effect in 1997 when the claim is presented. This is not the case with LAC. The date of the assessment, not its underlying cause, is the trigger. The 1997 assessment goes against the LAC in place in 1997, even if the assessment stems from a 1995 liability suit. Given the time it takes to discover the loss--and the time it takes to assess owners--a loss assessment claim will probably be covered by a policy that wasn't in effect when the event occurred.

A final condition: many loss assessment provisions have a special lower limit when it comes to how much certain losses, particularly a master policy deductible or earthquake damage, might be absorbed. The limit on loss assessments coverage might be $50,000 but the policy may not pay more than $1,000 of an assessment for a master policy deductible. Some HO carriers do this to protect themselves against large exposures where they have limited rating or underwriting controls.

Consider the National Flood Insurance Program. Its LAC--titled as a building coverage--does not respond to assessments for the master policy deductible nor to assessments for the master policy's co-insurance penalty.

VARIED EXPERIENCES

Some owners report generous, prompt settlements through LAC. Others report delay, denial, and confusion. There are several reasons for this.

Over the last 25 years, LAC has evolved significantly. When associations and their exposures were new, LAC coverage was phenomenal. One old policy simply covered "losses for which you are assessed"--there were no restrictions on the coverage. Such liberal coverage grants are long gone.

Varied experiences also occur because most individual claims are small--and most insurance representatives are inexperienced with LAC. Most losses will be well under five figures--small amounts compared to what an insurance company normally sees. Claims at this level are often handled by newer representatives and may not be scrutinized by supervisors.

Many agencies have draft authority for these smaller amounts, too. Draft authority means an insurance carrier grants an agency the right to issue checks and settle claims. The representative sees a letter assessing an owner--perhaps creatively drafted to suggest ready reimbursement--sees a coverage called "loss assessments," and issues a check without verifying the object of coverage, the covered event, who was assessed, or any other provisions. The owner who receives payment on such a claim will certainly hold bragging rights over the less fortunate neighbor whose insurer researches each dimension of such a small claim.

Another reason for delays and confusion is that the LAC covers many of the same losses as an association master policy. LAC is just secondary. Once a LAC claim is submitted, a claim representative would probably want to know why the loss was not compensated under the master association policy. If the master policy is held up over a coverage dispute, the loss assessment will probably be subject to the same dispute. Unless the master policy has a more restrictive scope of coverage or has exhausted its limits, the LAC is unlikely to respond either. Delays derive from the close parallel between what is insured on the master policy and what is insured on LAC. A problem on one probably means a problem on the other.

Another dilemma: some assessments might be covered under another section of a HO policy other than LAC. This often happens when an association assesses its master policy deductible against only the unit owners who receive the benefit of master policy proceeds or those who are responsible for a loss. One provision of the LAC is that all owners be assessed. Such limited assessments fall outside LAC, but may be covered elsewhere, such as in the so-called "Improvements and Betterments Coverage."

An HO policy's liability coverage might cover special assessments for accidental damage to association property if the owner was liable for the damage. Issues such as these should be addressed by the owner's insurer. Remember--special assessments might be covered outside of the LAC. LAC hardly replaces a carefully planned risk management or insurance program.

Be careful. No association should rely on LAC for insuring its various obligations. Associations have a clear duty to maintain adequate coverage; not to pass on losses to owners. And unfortunately, many condominium owners do not carry any hazard insurance, much less LAC; many owners in planned communities do not have the LAC rolled into their HO policies. Yet with special assessments becoming more frequent, every owner in a community association should consider this valuable protection.

SAMPLE LOSS ASSESSMENT SCENARIOS

Loss assessment coverage (LAC), which is found in many individual homeowner policies, covers special assessments levied by an association for sudden, accidental events. Here are some typical scenarios that show how LAC would or would not respond:

• A 100-unit community is ordered to pay $2.5 million in damages for a slip and fall accident in the parking lot. The association has $2 million in bodily injury liability coverage. It assesses each member 1/100th of the $500,000 shortfall. Each unit owner submits a claim for $5,000 to his or her carrier for reimbursement under the LAC. A homeowner policy (HO) with a $10,000 limit for LAC and a $500 deductible will pay $4,500 ($5,000 minus the HO policy's $500 deductible.)
• A 10-unit community association has a $ 10,000 deductible for windstorm damage. A hurricane destroys its buildings and the carrier pays to replace them, except for the $10,000. The association assesses each member their share of the loss. One owner is charged with a $995 assessment. The owner's HO policy has a $500 deductible and a $5,000 LAC with a $1,000 deductible sub-limit. This particular owner will be paid $495. An owner with a $1,100 assessment and the same LAC provisions would be paid $600. (Deductibles generally come off the loss, not the limit.)
• A 3,000-unit community with extensive landscape damage from windstorm assesses each owner $300 to restore the greenery. In this case, the LAC is unlikely to respond. While landscaping may be covered property under LAC, windstorm damage to landscaping is not likely to be a covered cause of loss--just as it is not covered in the master policy or HO policy.