Fidelity Insurance – Is Yours Adequate?

September 6, 2012

By Curtis G. Kimble.

What would your association do if you discovered tomorrow that the association’s bank/investment accounts had been completely emptied by a board member and it was obvious that the association would not be getting the money back?

Levying an immediate and large special assessment wouldn’t solve all the problems this situation would create and is an incredibly hard pill to swallow for homeowners in this circumstance.  The association’s fidelity insurance is the key source of hope here.  Fidelity coverage is often called “employee dishonesty” coverage, and that phrase sums up its purpose quite well.  It protects against theft or embezzlement by employees or officers of a company.

However, one important issue could prevent the insurance company from paying out under your policy – volunteers.

Utah law now has detailed insurance requirements that apply to policies issued to Utah homeowners associations (HOAs).  These laws specify the property and liability coverage required for an HOA’s master policy.  But they do not require or mention fidelity coverage.

So, very often, the coverage of an association’s fidelity insurance policy or bond will simply mirror the fidelity coverage required by the association’s CC&Rs.  This is because insurance companies often make coverage determinations based on what coverage the CC&Rs require.  However, many CC&Rs were not written with an adequate understanding of fidelity coverage in an HOA context, so they simply require fidelity coverage in the same form as any company or corporation would carry.

The problem with that is that typical fidelity coverage for a company only covers paid employees, not volunteers.  This is a square hole and round peg situation.  HOAs are not typical companies or corporations.  HOAs are generally served primarily by volunteer officers and directors, and their fidelity coverage needs to reflect that.

So, CC&Rs have to be carefully written to require coverage of volunteer board members and officers and any other volunteers handling the association’s money.  Additionally, a board should be careful to ensure that their policy for fidelity coverage includes an endorsement modifying the coverage to include volunteers.

If your association is professionally managed, it is important to understand that a property management company’s own fidelity coverage does not necessarily protect a client homeowners association, it protects the management company itself from loss of its own funds.  So, the association’s fidelity coverage should also include coverage for the property manager handling association funds.  This is also typically done through an endorsement (which is like an addition or addendum) to the original policy.

Condominiums maintaining or applying for FHA certification (so the units can be purchased with FHA-backed loans, which account for a majority of purchases today) should be aware that FHA requires an association to carry fidelity coverage in an amount no less than three months aggregate assessments plus reserves.  That amount of coverage is good practice for any association.  Fannie Mae and Freddie Mac also have requirements for fidelity coverage.

Finally, it’s also important not to confuse fidelity coverage with director’s and officer’s (D&O) insurance, which protects the association when it is sued for the “wrongful acts” and decisions of its board of directors or officers, and which is also crucial for every association.


Can the Insurance Industry Put Profits Above Good Faith Claims Handling?

January 9, 2012

By Curtis G. Kimble.

In Utah, an insurance company has an obligation to act in good faith in all aspects of claim handling.  “The implied obligation of good faith performance contemplates, at the very least, that the insurer will diligently investigate the facts to enable it to determine whether a claim is valid, will fairly evaluate the claim, and will thereafter act promptly and reasonably in rejecting or settling the claim.  …  The overriding requirement imposed by the implied covenant is that insurers act reasonably, as an objective matter, in dealing with their insureds.” (Billings v. Union Bankers Ins. Co., 918 P.2d 461 (Utah 1996)).

The consequences to an insurer breaching these obligations can be significant.  As the court in the Billings case said, an “insurer who breaches the implied covenant by unreasonably denying the insured the benefits bargained for may be held liable for broad consequential damages foreseeably caused by the breach, damages which might include those for mental anguish” and may include attorney fees incurred as a result of the breach.

On the other hand, when an insured’s claim is fairly disputed by the insurer and it is truly debatable as to whether the claim is covered under the policy, the insurer is entitled to debate it (deny the claim) and cannot be held to have breached the covenant of good faith if it chooses to do so (even if the claim is denied and then later found by a court to be a properly covered claim).  An insurer who has a legitimate dispute with an insured over a claim must act reasonably and in good faith, but they are entitled to have the dispute resolved before having to pay the claim.

The problem arises when the insurers don’t act reasonably, promptly, fairly or in good faith.  A problem that some would say has increased dramatically since the mid-90’s.

As this article explains, “a new system to boost the bottom line” took over the insurance industry in the mid-90’s, where, rather than adjusting claims the traditional way, which gave claims managers wide latitude to serve customers reasonably and fairly, “insurers embraced a computer-driven method that produced purposefully low offers to claimants.”

Those who took the low-ball offers received prompt service, while those who didn’t had their claims purposefully delayed with the strategy of making such claims so expensive and time-consuming that people would just give up.

This strategy “put profits above all,” and has apparently worked in that regard. Allstate made $4.6 billion in profits in 2007, double its earnings in the 1990s, an increase which came through “driving down loss values to an average of 30 percent below the actual market cost.” In other words, the strategy has been to pay dramatically less on claims. A strategy that, in practice, is in direct opposition to the legal obligation of insurers to diligently investigate the facts to enable it to determine whether a claim is valid, to fairly evaluate the claim, and to act reasonably in rejecting or settling the claim.

Again, the article can be found here:  Insurance Claim Delays Deliver Massive Profits To Industry By Shorting Customers.

All consumers who buy insurance, HOAs and homeowners included, should take note of these issues and be prepared to push back when an insurer breaches its obligation to diligently investigate, fairly evaluate, and act reasonably and in good faith in any aspect of claim handling.

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