CMCA CMCA - Certified Manager of Community Associations Risk Management and Insurance Questions and Answers 2 — Questions and Answers
Question 1: Which type of insurance covers the association for claims arising from bodily injury or property damage occurring in common areas?
- Directors and officers liability
- Commercial general liability (Correct answer)
- Fidelity or crime insurance
- Workers' compensation
Correct answer: Commercial general liability
Commercial general liability or CGL insurance is the primary coverage for third-party claims of bodily injury or property damage that occur on association-maintained property.
CGL is foundational insurance for community associations. It covers claims arising from accidents in common areas such as slip-and-falls, pool accidents, and playground injuries, and pays for defense costs and damages.
Question 2: Directors and officers liability insurance protects:
- Homeowners from assessment increases
- Board members from personal liability for wrongful acts in their governance capacity (Correct answer)
- The association's physical property
- Employees injured during the course of employment
Correct answer: Board members from personal liability for wrongful acts in their governance capacity
D&O insurance covers board members for claims alleging they made wrongful decisions, breached their fiduciary duty, or violated governing documents in their governance role.
Without D&O coverage, board members face personal financial exposure for governance decisions that harm members or the association. D&O insurance encourages qualified individuals to serve on boards and covers defense costs and settlements for covered wrongful act claims.
Question 3: A community association's fidelity or crime insurance policy is specifically designed to cover:
- Physical damage to common area buildings
- Employee theft or dishonest acts that result in financial loss to the association (Correct answer)
- Homeowner slip-and-fall accidents
- Legal costs for covenant enforcement lawsuits
Correct answer: Employee theft or dishonest acts that result in financial loss to the association
Fidelity or crime insurance protects the association against financial losses caused by dishonest acts of employees, board members, or management company staff such as embezzlement or fraud.
Because association funds are managed by a small number of people, embezzlement risk is real. Fidelity insurance provides a financial safety net if a person with access to association funds steals money. Many lenders and state laws require fidelity coverage in amounts tied to the association's total annual assessments.
Question 4: An umbrella or excess liability policy for a community association primarily provides:
- Coverage for the first dollar of any claim
- Additional liability coverage above the limits of the underlying policies (Correct answer)
- Coverage for events specifically excluded from the general liability policy
- Workers' compensation for uninsured contractors
Correct answer: Additional liability coverage above the limits of the underlying policies
An umbrella policy extends the association's liability coverage beyond the limits of its primary policies, providing additional protection for large catastrophic claims.
A single major accident in a community such as a drowning in the pool could result in a multi-million-dollar judgment. An umbrella policy provides cost-effective additional coverage above the primary policy limits. It does not fill coverage gaps but raises the total available coverage for covered claims.
Question 5: Before purchasing property insurance, the association should determine the replacement cost value of insured structures. This value represents:
- The market value of the property including land
- The cost to rebuild the structures at current construction prices without depreciation (Correct answer)
- The original construction cost when the community was built
- The assessed value used for property tax purposes
Correct answer: The cost to rebuild the structures at current construction prices without depreciation
Replacement cost value is the amount needed to rebuild the insured structure from scratch using current labor and materials, without any deduction for depreciation or market fluctuations.
Insuring to replacement cost rather than actual cash value ensures the association can fully rebuild after a loss. Over time if the insured value is not updated, inflation can leave the association significantly underinsured. Annual review of insurance limits relative to current construction costs is a best practice.
Question 6: An additional insured endorsement on a vendor's liability policy means:
- The vendor's employees are covered under the association's policy
- The association is added to the vendor's policy, allowing the association to make claims directly under that policy (Correct answer)
- The vendor can submit claims to the association's insurer
- The association's coverage limits are transferred to the vendor
Correct answer: The association is added to the vendor's policy, allowing the association to make claims directly under that policy
An additional insured endorsement extends the vendor's liability coverage to the association for claims arising out of the vendor's work, providing direct protection and a right to defense under the vendor's policy.
Requiring vendors to name the association as an additional insured is a critical contract management step. If a vendor's employee causes property damage or injury, the association may be named in the resulting lawsuit. As an additional insured, the association has a right to defense under the vendor's policy.
CMCA CMCA - Certified Manager of Community Associations Risk Management and Insurance Questions and Answers 2
Which type of insurance covers the association for claims arising from bodily injury or property damage occurring in common areas?