Insurance as Collateral (Part III)

Unquestionably, a requirement in today’s world - insurance - can be so complex that it often leaves us with many questions. This is the third of several insurance blogs to address various vital components of your community’s health. Please scroll down to read the previous two insurance-related posts for more details. 

Another common phrase in the insurance industry is “waiver of subrogation.”  To reduce confusion, some in the insurance industry may say “Transfer of rights of recovery against others to us.”  Clear as mud?  

“Subrogation” is when you give to the insurance company your right to collect for damages from someone else.  Why is this important?  If a contractor working for the Association assigns this right to his insurance carrier, that carrier can then look to the Association to reimburse any claim costs incurred defending the contractor on your project, when some of the blame for the problem may possibly have fallen on the Association.  So to prevent this, in your contract with a vendor, you will want to have this power waived - or a “waiver of subrogation”.

You should ask for a waiver in workers compensation and property insurance policies.  In the case of liability insurance, you normally do not obtain a waiver.   Courts have concluded that it is against public policy to allow an insurance company to subrogate against its own insured, including anyone added as an “additional insured.”  As long as the Association is diligent in securing and confirming its “additional insured” status (by insisting on receiving a copy of the additional insured endorsement), the waiver of subrogation is not a necessity.

Regarding workers compensation:  The standard WC policy does not allow the insured to waive subrogation.  Most insurers will agree to waive subrogation if requested, but often charge the contractor an additional premium for this. 

When requesting a waiver, be aware that some insurance policies void the coverage if the insured agrees to waive the insurer’s subrogation rights without receiving prior approval from the insurance company.  You should have the policies carefully reviewed when dealing with waivers of subrogation.

Insurance as Collateral (Part II)

Unquestionably, a requirement in today’s world - insurance - can be so complex that it often leaves us with many questions. This is the second of several insurance blogs to address various vital components of your community’s health. Please scroll down to read last week's insurance-related post for more details.

Insurance terminology sometimes makes our eyes glaze over, but there are several concepts that cannot be ignored - no matter their names.  The first and perhaps most important of these is “indemnification”.

Indemnify  can be simply thought of as a fancy way of saying “Sugar Daddy” – promising to provide financial security to someone else.   This obligation is frequently agreed to in situations where the work one party is doing is so intertwined with the beneficiary that the receiving party should obligated to extend this promise.  For example, when a homeowners association hires a management company, the manager becomes an agent of the association, and needs coverage and defense if sued while working on behalf of the association.  Of course, this does not apply if the manager is negligent or at fault or involved in criminal activities.

To have the necessary funds to provide or receive this defense, homeowner associations are interested in another special phrase:  “Additional Insured”.  This is used to describe a person or company that is not normally covered on an insurance policy.  The policy holder directs the insurance company to add this person or company as an additional beneficiary.   Only parties that really have a direct working relationship with the insured party will normally be accepted by the insurance provider.  A request for a contract to provide additional insured status to dozens of entities - from employees to successors - and assigns to government subdivisions is likely to be rejected by the insurance company, since many of these are only somewhat involved.

As proof that you have been added as an additional insured, do not make the mistake of accepting a certificate of insurance as proof – this summary document does not alter the terms of the insurance contract.  To be effective, a document called an endorsement has to be issued by the insurance company.  You need to see a copy of this endorsement.

Insurance brokers may try to convince you that endorsements are unnecessary.  You must respond by pointing out the verbiage at the top of the certificate, which will typically state something such as "This certificate is issued as a matter of information only and confers no rights upon the certificate holder. This certificate does not amend, extend or alter the coverage afforded by the policy below."

One exception to the above is when you are dealing with contractor’s professional liability coverage – the insurer will refuse to add you on this, as it does not want to pick up the Association’s professional liability hazards.  Professional liability policies are specifically underwritten based on the professional history of the contractor.

Finally, don’t depend on wording in your contract with the vendor to take the place of this “additional insured” endorsement.  The insurance carrier is not bound by such contracts, only by what is in the actual insurance policy.  Also, consider having the Association named in the policy as a Loss Payee, to protect your interests with respect to the repair or replacement of any damaged property or other amounts payable under the policy.  Being included as a Loss Payee means that any payment will have to include the Association as a payee or otherwise have your written authority to make payment to someone else.

Insurance as Collateral (Part I)

Unquestionably, a requirement in today’s world - insurance - can be so complex that it often leaves us with many questions.  This is the first of several insurance blogs to address various vital components of your community’s health. 

Our Company often receives questions related to the types of insurance claims communities could face and how often they occur.  Here are some recent real-world court awards involving homeowner associations:

• $12 million when a boy on a bicycle riding on the sidewalk was struck and killed while crossing a driveway.  The hedges were almost twice the size allowed by code and the stop sign was four feet shorter than DOT regulations.  The Association was liable for 30%, the management company 60% and the vehicle driver 10%.
• $5 million when another child suffered permanent injuries when his/her bicycle was struck near the community entrance.  There was a hedge and fence that obstructed view.
• $5 million when an intoxicated man suffered spinal injuries diving head first into the shallow end of a pool.
• $4 million when two children suffered mercury poisoning caused by a vendor discarding old thermostats in a dumpster.
• $1.3 million when an intoxicated man was injured when a handrail he was leaning on came off the wall.
  
• $1 million when an association failed to run a background check for one of its employees that turned out to have prior sexual predator convictions.
• $916K when the association failed to enforce covenant violations – allowing a person who was both a board and ACC member to place a mobile home and other structures on the property.
• $634K when a building exploded from a gas leak caused during digging.
• $381K when a person who had been injured five years earlier came back after he was of legal age and sued for injuries from falling out a window while a child.

In recent years, jury verdicts against all entities, not just HOAs, have risen by more than 50%.  To see more examples, visit www.iii.org and search for “jury verdicts”, or www.jvra.com and look for “Government Liability”.

Unfortunately, the risk is real for homeowner associations when it comes to legal claims.  Being proactive is the only acceptable choice.

Check back with us in the coming weeks for more insurance-related info!

Fraud - Don't Let It Happen to You (Or Your HOA)!

The staffing of a Board of Directors with volunteers always presents opportunities for theft.  In one community, two of the three Board members lived out-of-state and did not monitor the financials.  The third Board member regularly conducted odd jobs in the neighborhood, such as keeping the area around the compactor clear.  In his mind, his work should have been compensated, so he regularly used the Association’s corporate card to purchase various electronics for personal use.  It wasn’t until our firm was retained to provide management services that this was uncovered and stopped.

The two disengaged Board members did not realize that the Association could be held criminally liable, under the legal concept of imputed liability.  They also didn’t realize that they could be personally held responsible for failing to properly discharge their duty as Board members. 

This situation is an example of what can occur because of agency dilemma, which is created whenever there is an inherent conflict between motivations between Board members, the Board and homeowners, and the Board and vendors.  In each of these relationships, one party has information not easily accessible by the other.  To combat this, there needs to be processes in place so that no single party can make all the decisions without the influence, input or approval of others.

Monthly bank statement reconciliations are a must.  This ensures that, at least every thirty days, if a questionable transaction occurs, it will be spotted by someone not directly involved.  In instances of rampant fraud, the Board may decide to go to an expensive ‘positive pay’ system where a list of payments is submitted to the bank on a daily basis for comparison.  Reconciling isn’t something just for the Association to focus on:  Homeowners should be encouraged to regularly reconcile their own bank statements each month, even if assessments are only paid a few times a year.  While missing or misapplied assessment payments do occur, if this occurs frequently it may be a sign for certain fraud schemes. 

Annual CPA audits, even if only for a limited review of financials, are vital.  Something basic like the requirement that all reimbursement requests have actual physical receipts (issued by third-party vendors) helps deter false claims. Just knowing that these and other monitoring activities occur will deter many would-be fraudsters. 

Pressure for committing fraud often comes from family needs, personal debt or simple greed.   Feeling unfairly treated, ignored or unappreciated are also factors.  87% of those who commit fraud are first time offenders.   Four out of five fraudsters display the following red flags: 

·         36% live beyond their means

·         27% are experiencing financial difficulties

·         19% have an unusually close relationship with a vendor or customer

·         18% have control issues

·         15% are going through family stress

·         15% like to wheel-n-deal

·         13% are irritable, suspicious, defensive

The best defense is to have a clear and open method of reporting.  The tone set by the Board can either encourage or discourage an environment where fraud thrives.  Nearly one in ten cases is tied directly to poor tone at the top. 

Another defense is to setup a formal review process for potential Board members.  Does your Association have a nomination committee, or conduct any type of vetting of potential Board candidates?  Require resumes, a list of references, and be sure to actually contact these references.   When conducting the interview with the candidate, be aware that, according to studies conducted by psychologist Robert Feldman, on average people tell three lies during a 10-minute conversation.  Only half of these lies are detected.  "Trust-but-verify" is the best way to increase the odds when interviewing potential Board members.

Some behavior to watch out for during a nominating interview when discussing issues such as theft:  The candidate repeating each question; starting each response with “honestly” or “to tell the truth”; or answering each question with a question, such as “Why would I do something like that?”  Other warning signs are an unwillingness to end the discussion, displaying a lenient attitude toward real or hypothetical wrongs, paying very little attention to any paperwork presented during the meeting, noticeable changes in voice volume on certain topics, and leaning away from the interviewer.

While most of us who volunteer for Board service are honest and will do right, we must reduce opportunities for those who might be tempted to do otherwise.

Rodent Control - It's A Community Effort

This article was provided to us by our friends at Team Pest USA. Great info regarding common rodents dealt with here in our area! For more info, please feel free to contact Team Pest USA at info@pestusa.com. They also provide great info on their website - http://www.pestusa.com/

Rodent Control – It's A Community Effort

House Mouse

Rats we have issues here in Georgia with what are called “commensal rodents” - examples: House Mouse, Roof Rat and Norway Rat. Commensal means to “share ones table” - so the like to live where we do and they quickly adjust to our community. Rats can survive on just an ounce of food but require water daily - so when they enter a community, they are attracted to bird feeders, people feeding stray cats, improperly maintained dumpsters, terrain such as ponds and creeks, Juniper ground erosion cover, grills left un-cleaned, trash cans and even stacked wood. In this day and age, with many units being left vacant due to foreclosure, it is very common for these units to contain old appliances left with food in them, etc. Zero to little air flow is an indication to the rodent species that they can begin to set up a colony and create a home right in the unit or in any accessible attic.

Norway Rat

Roof Rat

A community effort works best, where everyone in the neighborhood takes steps at the same time to prevent rats from entering the buildings and to remove their food and shelter. If rats are living in and around your association, here are several items to consider at the first sign of noises in the attic or walls.

Thorough Inspection from a TRUSTED professional

In an HOA or Condo/Townhome Community where a board association is established, many times taking time to make a decision can cost thousands of dollars even permanent life-threatening damage.

Hearing sounds

• Check attic spaces at any time (during the day or night) if noises are evident. Keep it dark and listen for any scurrying sounds. If you have a black light shine it and see if urine illuminates.
• Listen for scratching and or gnawing sounds.

 

Check your surroundings                                            

• Inspect for holes around the slab, rocks, next to sidewalks and Juniper beds. You will see an entrance and an exit hole. Mostly the one found OPEN is the exit. Rats will typically cover the entrance with debris.
• Inspect your bottom doors, windows, corner baseboards and wires in the attic for gnaw marks and droppings.
• If your garage or attic has a lot of stored bins, pull them back off the wall a couple feet to see if you have droppings and/or holes chewed open.
• Check the Hot water heater or the drip pans of AC units for fresh (dark) droppings 

Entry Points Located

By doing the inspection you can determine how vulnerable your home is to infestation

• Protrusions in the walls or foundations, from electrical lines and pipes not sealed.
• If you can see sunlight around your doors and windows and roof lines then your home is OPEN for business.
• Daily deliveries and even parked cars for a long period of time 

Get the Rats Out and Keep Them Out

Here is a simple approach to accomplishing this task. Once rats move in it can be a challenge to break what we call in the industry "Creating a Generation Gap"!

• Keep dumpster areas clean. Restrict Gas Grills or require that grills must be kept inside and cleaned. Eliminate bird feeders. This is the number one cause in communities. Keep all debris from being stacked in back yards. Keep lawns mowed. Don’t leave food dishes out on the patio. Clean up pet fecal matter from walking areas.
• Keep external storage units sealed and all shelving up at a height of 18 inches above the floor. Clean behind all appliances once a quarter. Outdoors - restrict trash cans and trash from back yards and wooded areas. Be sure to pile wood and other yard materials in plastic bins and away from the structure. Keep weeds under control under stairs and make sure bare spots are sodded and/or landscaped.
• Install the proper sealers for all doors exposed to the exterior. Seal all open gaps on the foundation and siding. Seal all vents if the structure is a crawl/basement (to prevent gnawing) with sheet metal or hardware cloth. This makes a proper seal around all the pipes and wire openings into the structure with pieces metal that are gauged to not allow rats (that cannot easily gnaw through metal).

Controlling the Rats

There are basically two methods to control rodents and keep them away. Keep in mind that both need to be performed by a trained professional.

LIVE Traps. Examples - Vector Wooden snap traps, T-Rex Spring loaded plastic traps and heavy weighted glue boards. In order to monitor the activity you may first need to place several glue traps in areas where you think (based on droppings or smells) that rats are traveling. Rats are color blind and see only blurred images, so place the boards in areas against walls, as the rats use their whiskers to get from "Point A" (the NEST) to the food source. Keep glue boards out of the reach of children, pets and cleaning agents! Keep all of your food in plastic containers and check all boxed foods for chewing and droppings in/or around the items. 

Rodenticide. These are mainly anticoagulants - meaning the rodents will bleed to death internally. You can buy all types of rodenticide on the internet and even at the grocery store. The good news is that the Lethal Dosage is typically a lot safer than one would think. However all poisons should be administered by a professional at all times. They need to be contained in a child proof container. Once placed, they need to be checked, cleaned and refreshed at a minimum of every 30 days. Rodenticide, once placed into a rodent box, has a shelf life of about 30 days. Much depends on the weather, heat and consumption of the rats themselves. Rat boxes don’t kill rats. The stuff inside is supposed to. If you don’t use a good product that the Rats “want to eat” then even the stuff inside might not work. Google "Bell Labs" and visit their website for all the MSDS and Labels for product usage.

Rodent Control

Once rodents are observed it needs to become a community concern.

Our Company has been called in on new infestations where the HOA/homeowners have already called the health department. The HOA's or homeowners' goal needs to be to emphasize prevention first - not wait until a problem already exists to take action. If rats set up a colony, its important to start killing them faster that they can reproduce. This is a key step in control and possible elimination. Once a problem exists, it may take years to not only control the rats - but (of infinitely more importance) to move them to another area.