California HOA Insurance Coverage & Requirements

What is HOA insurance?

HOA insurance, or homeowners association insurance, is a specialized form of coverage that plays a critical role in protecting the assets, interests, and financial security of a HOA and its members (the homeowners). While a wide range of insurance types exist to cover various needs, HOA insurance is unique to shared communities and common interest developments. The primary purpose of HOA insurance is to provide coverage against certain risks that could otherwise leave the HOA and its members vulnerable to significant financial loss.
HOA insurance serves multiple purposes. It covers the common property and areas of a community, such as pools, clubhouses, landscaping, and roads. These topics are discussed in detail throughout this blog. Importantly, HOA insurance policies also provide liability coverage protecting the HOA and its homeowners from risks such as:
In addition to these high-level topics, the specifics of what HOA insurance covers are typically outlined in the governing documents. For example, in a condominium, the association is typically responsible for insuring the entire building. This includes the basic structural elements of a building, as well as what is known as the "studs-in," such as the individual homeowners’ drywall and other elements.
The question of who benefits from the HOA insurance is one that should be carefully and intelligently reviewed. While this blog does not focus on dispute resolution, in California, the United States Court of Appeal held that under the plain meaning of Civil Code § 1375(a), the protection against loss or damage for both personal property and the general liability of the unit owner is automatically assigned to the HOA (Harris v. Glendale View Condominium Assn. , Inc. (2003) 106 Cal. App. 4th 699; see Civil Code § 4212(a) [loss or damage to a unit or exclusive-use common area "shall be deemed to be covered by the property insurance required to be carried by the association."].) In other words, you live in a condo development and your unit is covered under the HOA’s insurance. More importantly, you do not get to make a claim under the HOA’s policy if someone else damages your unit because the statute further provides that liability for the incident is covered by the individual homeowners’ insurance. The conclusion here is simple – If your HOA insurance is your only source of insurance coverage and you occupy your unit, this could place you at a significant disadvantage in the event of a loss or damage to your unit. If the HOA has insurance coverage for your unit but you also have insurance coverage for your unit, then you have just created double coverage for your unit, which in most cases, would entitle you to be indemnified twice for the same loss, which could hurt more than help you.
If the HOA has insurance for the common area and the unit owners also have insurance for their shared property, then you are on solid ground. In this scenario, double dip coverage has been avoided and you are all entitled to recover should a loss or damage occur.
In sum, HOA insurance covers the common areas and limited common elements of a community and protects the HOA and its associated members from losses such a fires, sinkholes, earthquakes, missing personal property, slip-and-falls, and other hazards. The HOA ultimately holds the insurance policy and the insurer pays out claims to cover the damages.

Legal requirements for California HOAs

When it comes to HOA insurance requirements, California has some of the most specific legal guidelines in the country. According to California Civil Code Section 5803, associations (as HOAs are called in the Sunshine State) must maintain a policy of comprehensive general liability coverage. While Section 5803 breaks general liability insurance down further into premises liability and personal liability, California’s Davis-Stirling Common Interest Development Act states that general liability coverage is sufficient if it includes both premises and personal liability.
The law also sets the minimum amount of coverage required. The total aggregate insurance for any one occurrence cannot be less than $1 million. In fact, most California associations will base their insurance coverage on the size and value of the community, along with the number of units. While there is no cap on the amount of coverage an HOA can purchase, there are limits on deductibles. While the law doesn’t specify the limits, associations practice due diligence by keeping deductible amounts under $5,000.
Associations are also responsible for ensuring that interior improvements and betterments of each unit are adequately covered under their insurance plans.
It’s important to note that if an association or unit owner carries their own excess coverage, the amount of insurance that can be purchased is unlimited.
California also does not allow associations to exclude directors and officers from HOA policies. If a position creates a liability exposure, they must be included in the association’s insurance policy. Not only must directors and officers be listed of an association’s policies, discrimination cannot be excluded or limited.

Insurance policies every HOA should have

Commonly, there are two types of "insurance" policies that most homeowners associations in California should have. The first policy is commonly referred to as a "master" or "property" policy, while the second commonly referred to as a "directors’ and officers" or "D&O" policy.
A master policy will generally cover against some form of damage or harm to the property itself such as from fire or another named disaster (such as earthquake or flood), which collectively with the common area coverages, usually referred to as a "walls-in" policy, provide the coverage needed to protect against damage to the common area of the association. It can also provide some liability coverage for the association.
The D&O policy covers the individual directors of the association as well as you, the property manager. The D&O policy generally provides coverage for claims for wrongful acts for the HOA’s directors and officers, including you and your employees. These claims can come in the form of harassment, discrimination, or violation of civil rights. Some policies also cover financial losses caused by an act, error or omission committed by you or someone else covered under the policy. However, most of these policies carry an exclusion for intentional misconduct, so it does not protect against intentional wrongs. They may also exclude pollution claims, criminal acts, among others.
Regardless, it is usually a requirement of the HOA insurance policy that the board of directors of an HOA ensure that (a) there is adequate insurance at all times and (b) the HOA must report to the insurer any changes (or anticipated changes) that will materially change the risk involved.

Common insurance coverage for HOAs

HOAs buy insurance for the common area in the community that they’re responsible for maintaining and responsible for insuring. Most of the time, it just makes sense to have a master policy that covers the common area in the community rather than requiring individual unit owners to buy their own insurance. The HOA purchases this common area insurance for the benefit of all of the unit owners since they have the primary responsibility for maintaining the common area. This master insurance policy covers property damage (such as fire, earthquake, wind, water, and so on), legal liability for accidents (such as slip and fall injuries to a guest in the common area), and liabilities arising out of board members making decisions and taking actions in good faith.
These condominium and HOA insurance policies have the same type of coverage. The cost of the insurance and who pays for it depend upon whether the HOA is a condominium (in which case insurance is mandatory) or whether it’s a planned development.

Extra recommended HOA insurance policies

Beyond the foundational coverages, other types of insurance are usually recommended for HOAs, although California law does not require them. Those additional policies include the following:
Directors and Officers Liability ("D&O") Insurance. This insurance protects associations against lawsuits premised on alleged wrongful acts of association directors and officers. It is not uncommon for associations to find themselves embroiled in litigation arising out of a board decision or action that allegedly violated some statute or another requirement. Some insurance companies will issue an endorsement to the policy known as Employment Practices Liability Insurance ("EPLI") and this adds another layer of coverage for wrongful acts of employment practices action, including alleged harassment, discrimination, wrongful termination, and other class action employment claims.
Umbrella Liability Insurance . Umbrella Insurance is recommended to provide extra protection when the coverage limits on the policies required to be held under Civil Code section 5806 or 5807 have been exhausted.
Earthquake Insurance. Many HOAs purchase Earthquake Insurance to help mitigate the devastating impact of an earthquake. Earthquake Insurance may include coverage for certain specified damages plus loss assessment coverage which provides a loss assessment amount that an insured must pay in excess of their own individual policy coverage limits as assessed by a policy writing insurer.
Flood Insurance. Many HOAs in flood areas purchase Flood Insurance. Like earthquake coverage, flood insurance may include coverage for certain specified damages plus loss assessment coverage which provides a loss assessment amount that an insured must pay in excess of their own individual policy coverage limits as assessed by a policy writing insurer.

How to choose an appropriate insurer

Choosing the right insurance provider for an HOA can be as important as the actual policy purchased – if not more so. Selecting this provider requires careful consideration of several different factors.
Cost is always a high priority when making insurance decisions. A board may feel pressured to select an insurance company based solely on the premium. The board needs to balance premium costs versus the required coverage. While, for example, obtaining general liability insurance at the lowest cost possible may seem like the most equitable approach in the short term, the HOA board needs to consider significantly increased risk of litigation in the event of a slip-and-fall accident. Injured parties are increasingly aggressive in seeking legal remedies for loss and injury, and if the HOA does not have proper coverage, it could well lose all of its assets.
Coverage options are another key factor in the selection process. While all policies carried for the benefit of an HOA will need to comply with the Davis-Stirling Act, not all policies comply, or do so adequately. In fact, directors-and-officers coverage, which protects the HOA directors and officers from personal liability, is usually the most difficult to secure, and therefore potentially the most costly.
When selecting a carrier for insurance, the board should chose one that has a strong reputation. Likewise, it is important to choose a carrier that serves HOAs specifically, as this is the type of insurance it will understand best. The carrier should also have an established office staff with experience and expertise, as well as a financial background and a good reputation in providing quality customer service.

Maintaining compliance with insurance laws and regulations

Staying compliant with insurance requirements and updated with changes in California laws is vital for any HOA. Non-compliance can lead to disputes, insurance claims denials, legal liabilities, and higher costs in the long run.
HOA boards can ensure ongoing compliance by seeking legal counsel, attending relevant seminars, and participating in HOA manager networks. Some ways to stay current include:
While California law may establish broad requirements, it’s crucial to review insurance policies annually to ensure that they align with both the law and the needs of the community. During these reviews, boards should consider: Updating the HOA’s governing documents, considering emergency reserves changes, and encouraging transparency with the members are all important. In a transparent manner, boards can ensure that issues are disseminated within the community without being accused of being secretive.
The association should work closely with an experienced insurance agent who understands the unique risks faced by HOAs. Potentially, obtaining renewal bids early in the process can help brokers develop a better picture of the condition of the association generally and specific features (such as roofs, plumbing, heating and cooling, etc.) which will allow brokers to obtain a more accurate and appropriate quote for insurance.
This includes evaluating policy terms, understanding deductibles, and knowing the type of coverage provided (e.g., all-risk, named perils, etc.). Using a checklist can be useful in reviewing key elements and ensuring all necessary insurance is included.
The right insurance broker can also be invaluable in helping small to medium HOAs make significant strides over time with greater broker representations and also possibly savings on premiums.
Maintaining transparency with members is key in keeping them informed of the coverage types, limits, and exclusions. Regularly repeat the basics of insurance coverage to prevent misunderstandings down the line.

Common pitfalls to avoid

The most common mistake homeowners associations (HOAs) make is not obtaining an adequate amount of insurance. With the average cost of a policy now in the tens of thousands of dollars, the temptation to go short is great. Some Association managers and boards confuse "self insured retentions" (aka SIRs) with deductibles. A SIR is essentially a sinkhole where the HOA rather than the insurance company pays the first portion of any given claim. That amount can run the HOA well into the tens of thousands of dollars . Or, the board may be persuaded to only insure to actual cash value rather than replacement cost. If something happens, the HOA makes a claim for a portion of the actual cash value it is on the hook for the difference. None of the foregoing scenarios are salvageable by having the insurer defend and indemnify the HOA, nor are the amounts noted above were factored into initial settlement negotiations. Ultimately, the boards’ decision not to spend adequately will almost undoubtedly reflect negatively on the HOA’s budget and potentially drive up assessments.