CMCA - Certified Manager of Community Associations Risk Management and Insurance Questions and Answers — Questions and Answers
Question 1: A visitor slips and falls on a wet common area sidewalk, breaking their leg. They sue the association for medical expenses. Which insurance policy is designed to respond to this type of claim?
- Directors & Officers (D&O) Liability
- Commercial General Liability (CGL) (Correct answer)
- Fidelity Insurance
- Workers' Compensation
Correct answer: Commercial General Liability (CGL)
Commercial General Liability (CGL) insurance is specifically designed to protect the association against claims of bodily injury or property damage sustained by third parties (like visitors, guests, or vendors) on its common areas. D&O covers claims against the board for wrongful acts, Fidelity covers theft, and Workers' Compensation covers injuries to employees.
Question 2: A homeowner sues the Board of Directors, alleging they acted negligently by failing to properly maintain the common area drainage system, which led to water damage in the homeowner's unit. Defense against this type of lawsuit would primarily be covered by which policy?
- Property Insurance
- Commercial Umbrella Insurance
- Directors & Officers (D&O) Liability Insurance (Correct answer)
- Fidelity Bond
Correct answer: Directors & Officers (D&O) Liability Insurance
Directors & Officers (D&O) liability insurance protects board members and the association from claims arising from their decisions and actions (or inactions) taken while managing the community. This includes allegations of negligence, errors, and omissions in their performance of fiduciary duties. Property insurance covers direct damage to property, a Fidelity Bond covers theft, and an Umbrella policy provides excess liability coverage over other policies.
Question 3: In the context of community association risk management, purchasing an insurance policy is the most common example of which risk management strategy?
- Risk Avoidance
- Risk Reduction
- Risk Retention
- Risk Transfer (Correct answer)
Correct answer: Risk Transfer
The four primary risk management strategies are avoidance (eliminating the risk), reduction (mitigating the risk), retention (accepting the risk, e.g., through a deductible), and transfer (shifting the financial burden of the risk to another party). Purchasing insurance is the classic example of risk transfer, where the financial consequences of a potential loss are moved from the association to an insurance company in exchange for a premium.
Question 4: During an annual audit, it is discovered that the association's bookkeeper, who is a volunteer homeowner, has been writing fraudulent checks to themselves from the association's operating account. Which type of insurance policy is specifically designed to cover this loss?
- Commercial General Liability
- Fidelity Bond/Crime Insurance (Correct answer)
- Errors & Omissions
- Property Insurance
Correct answer: Fidelity Bond/Crime Insurance
Fidelity insurance, also known as a fidelity bond or crime insurance, is specifically designed to protect the association from financial losses resulting from dishonest or fraudulent acts like theft and embezzlement committed by people entrusted with the association's finances, such as board members, employees, or volunteers.
Question 5: An association's property insurance policy includes a "waiver of subrogation" clause. What is the primary function of this clause?
- It prevents the insurance company from suing a negligent homeowner to recover funds paid for a claim. (Correct answer)
- It waives the association's responsibility to pay the policy deductible.
- It prevents the insurance company from increasing premiums after a claim is filed.
- It requires disputes between the association and the insurer to be settled by arbitration instead of in court.
Correct answer: It prevents the insurance company from suing a negligent homeowner to recover funds paid for a claim.
Subrogation is a legal right that allows an insurance company, after paying a claim, to "step into the shoes" of the insured (the association) and sue the party responsible for the loss to recover the payment. A waiver of subrogation clause prevents the insurer from exercising this right against the association's members, protecting homeowners from being sued by their own association's insurance carrier.
Question 6: A fire in the community clubhouse causes $75,000 in damages. The association's property insurance policy has a replacement cost provision and a $5,000 deductible. Assuming the loss is fully covered, how much will the insurance company pay for the claim?
- $70,000 (Correct answer)
- $75,000
- $5,000
- $80,000
Correct answer: $70,000
The deductible is the portion of a covered loss that the association is responsible for paying out-of-pocket before insurance coverage begins. The insurance company's payment is calculated by taking the total amount of the covered loss and subtracting the deductible amount ($75,000 - $5,000 = $70,000). The association pays the first $5,000.
CMCA - Certified Manager of Community Associations Risk Management and Insurance Questions and Answers
A visitor slips and falls on a wet common area sidewalk, breaking their leg.
They sue the association for medical expenses.
Which insurance policy is designed to respond to this type of claim?