Don’t Put Your HOA at Risk by Not Tendering Claims to Insurance Carriers

Homeowner association management personnel are frequently confronted with situations that involve actual or potential claims being made by a third-party such as a homeowner or an injured worker. The association typically first learns of such claims through verbal or written communications that are received from the potential claimant or a legal representative of that person. How the association deals with the information received concerning an actual or potential claim can make the difference between being covered, and not being covered, by insurance if the claim progresses to a lawsuit or a judgment imposing liability on the association. It can also make the difference in whether or not the association’s insurance carrier provides costly legal counsel to defend against the potential liability on the claim.

Association boards should always be made aware of all actual or potential claims that have been made or have been threatened against the association. Property managers that have been retained by the association should never be vested with the responsibility of making the decision on whether or not a claim, or potential claim, justifies being reported to the appropriate insurance carriers for the association. The property manager may be the first to lean about the claim, but he or she should always immediately pass that knowledge on to the association’s officers and directors for action by the association’s board of directors. When the board becomes aware of a claim, or a potential claim, it should direct that the facts be immediately reported to all insurance carriers that might provide coverage for the potential liability. The timely reporting of claims, or potential claims, will preserve the association’s rights to coverage.

The standard language in association liability policies typically requires that the insured report claims as soon as “reasonably practicable.” The facts of the particular case will determine what a “reasonably practicable” time frame is but it is a good practice to play it safe and report the claim sooner (within days of learning about it), rather than later (months after first learning about it). Even if a policy provides coverage for a particular claim, a late notification to the insurance carrier can result in a denial of the claim because the carrier could take the position that a late notification of a claim has prejudiced the carrier’s ability to properly investigate the claim.

If a carrier decides to deny a claim that it believes was reported late, the association then has to incur the expenses of retaining legal counsel to defend against the claim and the ultimate liability that may be imposed from a settlement or loss of the case. In some instances, a carrier may defend a claim that it believes was tendered late under a “reservation of rights” which means that it may (and often does) file a separate legal action against the association for “declaratory relief” seeking a determination from a court that the carrier does not have to provide the coverage under the policy due to the late reporting. The association then has to deal with hiring separate legal counsel to defend the insurance company’s declaratory relief action. An association that believes the insurance company has wrongfully denied its defense of a claim, or coverage, can file a lawsuit against the insurance carrier, but it still has to deal with the original claim that led to the insurance company’s denial.

Considering the possible ramifications of not timely reporting an actual or potential claim, associations should error on the conservative side and immediately report all facts it becomes aware of concerning a potential or actual claim to the appropriate insurance carrier(s). The actual policy will contain language on the procedure to follow in submitting a claim. Regardless of the policy provisions, it is good practice to also provide written notification to the association’s insurance agent / broker. The initial reporting of a claim is frequently done telephonically, but telephonic notification should be followed up with a written notification by email or letter to establish a paper trial in the event subsequent issues develop over the timeliness of the first notification of the claim. It is understandable that association boards may want to avoid reporting a potential or actual claim out of concerns about the impact on their insurance premiums (rate increases), but those concerns should be outweighed by the impact of their carrier denying coverage because a claim was not timely reported.