CMCA Risk Management and Insurance 2 — Questions and Answers
Question 1: A community association's property insurance policy contains a coinsurance clause requiring 80% coverage. If the building is valued at $1,000,000 but insured for only $600,000, how does this affect a $200,000 loss?
- The full $200,000 is paid minus the deductible
- The insurer pays $150,000 (75% of the loss) (Correct answer)
- The insurer pays $200,000 with a coinsurance penalty waived
- The policy is void due to underinsurance
Correct answer: The insurer pays $150,000 (75% of the loss)
With a coinsurance penalty, the insurer pays (amount carried / amount required) × loss = ($600K / $800K) × $200K = $150,000.
Question 2: Which type of liability coverage protects a community association board member sued for making an honest mistake in their governance decisions?
- Commercial general liability (CGL)
- Directors and Officers (D&O) liability (Correct answer)
- Umbrella liability
- Employment practices liability (EPLI)
Correct answer: Directors and Officers (D&O) liability
D&O liability insurance specifically protects board members and officers from claims arising out of their management decisions and actions.
Question 3: An association's governing documents require earthquake insurance, but the board cannot find affordable coverage. What is the most appropriate course of action?
- Self-insure by setting aside reserve funds for earthquake losses
- Amend the governing documents via member vote to remove the requirement (Correct answer)
- Purchase the coverage regardless of cost to comply with the documents
- Ignore the requirement since it is impractical
Correct answer: Amend the governing documents via member vote to remove the requirement
The proper legal mechanism to change an insurance requirement in governing documents is a formal amendment approved by members as required by those documents.
Question 4: What does 'subrogation' mean in the context of community association insurance?
- The insurer's right to pursue a third party responsible for a loss after paying the claim (Correct answer)
- The association's right to increase coverage mid-policy term
- A provision allowing the insurer to cancel coverage without notice
- The process of splitting a claim between two insurers
Correct answer: The insurer's right to pursue a third party responsible for a loss after paying the claim
Subrogation allows the insurer, after paying a claim, to step into the insured's shoes and sue the negligent third party to recover the paid amount.
Question 5: A condominium association receives a claim from a unit owner whose personal property was damaged by a pipe burst in the common area. Which policy should respond first?
- The unit owner's HO-6 policy
- The association's master property policy (Correct answer)
- The association's general liability policy
- The unit owner's umbrella policy
Correct answer: The association's master property policy
Damage originating from a common area pipe is typically the association's responsibility, so the master property policy responds first for structural and common-area damage.
Question 6: Which risk management technique is employed when a community association requires vendors to carry their own liability insurance and name the association as an additional insured?
- Risk retention
- Risk avoidance
- Risk transfer (Correct answer)
- Risk reduction
Correct answer: Risk transfer
Requiring vendors to carry insurance and naming the association as an additional insured transfers the financial risk of vendor-caused losses to the vendor's insurer.
Question 7: What is the primary purpose of an association obtaining a fidelity bond (also called employee dishonesty coverage)?
- To protect against injuries to employees on the job
- To cover theft or fraudulent acts by employees or board members handling association funds (Correct answer)
- To insure association vehicles used for official business
- To cover legal fees in contract disputes with contractors
Correct answer: To cover theft or fraudulent acts by employees or board members handling association funds
A fidelity bond protects the association's finances against dishonest acts such as embezzlement or theft by those who handle its money.
CMCA Risk Management and Insurance 2
A community association's property insurance policy contains a coinsurance clause requiring 80% coverage.
If the building is valued at $1,000,000 but insured for only $600,000, how does this affect a $200,000 loss?