Fear and Loathing in Association Insurance Coverage Disputes

Published on: October 4, 2001

Although insurance policies are arguably the most important contract entered into by community associations, there appears to be no great desire of community associations to actually read the insurance policy. Since the contract is generally not understandable, good reasons exist for community associations and their professionals to avoid the task of actually reading the coverage to determine what is covered and what is excluded. In legal parlance, such contracts are known as “contracts of adhesion”. Since the forms are not comprehensible, they are typically not negotiable and one has little choice but to have an insurance policy. However, most states have statutes for unfair and deceptive insurance practices in order to give the consumer some ability to ensure that the insurance carrier acts in a reasonable manner. The typical insurance protection statute provides for the possibility of recovering double and treble damages plus insurance fees in the event the insurance carrier overreaches in responding to a coverage claim. Unfortunately, one has to first understand that an insurance carrier may have engaged in unfair and deceptive practices and one must be willing to litigate the issue or any protections offered by the State are lost.

Recently, it has become apparent that some insurance carriers and their adjusters are running rough-shod over community associations presumably with full knowledge that the insured has little knowledge about what the insurance contract says or what obligations the insurance carrier has under State Consumer Protection laws.

A typical State Consumer Protection Act would include the following as among the unfair and deceptive practices of an insurance carrier:

Unreasonable Delay In Approving Or Denying A Claim Unreasonable Denial Of A Claim Failure To Properly Investigate The Claim Denying The Claim When Coverage Exists Attempting To Settle The Claim Substantially Less Than The Amount Of The Claim

While traditionally community associations have often purchased insurance coverage based upon which carrier could provide the best premium, not all policies are alike and different coverages and exclusions exist. Therefore, since the insurance agent is actually the agent of the insurance carrier and not of the community association, it would appear that community associations should strongly consider retaining the services of a corporate risk advisor to review the various policies and to make recommendations not only based upon the premium but also on the scope of coverage and the insurance carrier’s rating and the insurance carrier’s representation for fairly and equitably settling claims. It would appear obvious that an insurance carrier could offer a very low premium if the carrier rarely approves a claim. An insurance advisor provides many benefits to community association in terms of putting the parties on somewhat equal bargaining levels. Once the policy has been approved, based upon the advice of the insurance advisor, the community association still needs expert outside help when claims arise especially if the claims are of any magnitude. Unfortunately, many community associations, believing that all insurance carriers act in good faith, have developed a bad habit of receiving a letter of denial of a claim, throwing it in the trash and paying for the claim out of its own funds. Unfortunately, although most carriers have good representations, it is also apparent that a notable few do not and therefore, community associations are advised to not simply accept a denial letter from the insurance carrier, but rather to have denials of substantial claims reviewed by an insurance advisor or adjuster and/or legal counsel with specific expertise in the area of dealing with unfair and deceptive insurance practices. While it is truly unfortunate that not all insurance carriers are as reputable as others, perhaps it is simply a sign of the times and community associations are urged to be cautious in dealing with this most important area and responsibility.

We are in the process of dealing with an insurance carrier’s intent to name names in a future column, once the disputes have been resolved. I would suggest that it would make sense for community associations to share their bad experiences, as well as their good experiences, with each other in terms of insurance carriers and their willingness to act in good faith.