CMCA Risk Management and Insurance 4 — Questions and Answers
Question 1: A community association decides to self-insure its $5,000 deductible by not purchasing a separate deductible buy-down endorsement. This strategy is best described as:
- Risk transfer
- Risk avoidance
- Risk reduction
- Risk retention (Correct answer)
Correct answer: Risk retention
Retaining the financial impact of the deductible internally rather than shifting it to an insurer is a classic example of risk retention.
Question 2: Which of the following is typically covered under a community association's commercial general liability (CGL) policy?
- Damage to the association's own buildings caused by fire
- A visitor's bodily injury sustained in a common-area slip-and-fall (Correct answer)
- Theft of association funds by a board treasurer
- A board member's error in approving an inadequate budget
Correct answer: A visitor's bodily injury sustained in a common-area slip-and-fall
CGL policies cover third-party bodily injury and property damage claims that occur on association-controlled premises, such as common-area slip-and-falls.
Question 3: What key factor determines whether a loss to a unit owner's improvements should be covered by the master policy or the owner's HO-6 policy in a 'bare walls-in' master policy structure?
- The date the improvement was installed
- Whether the improvement is structural or cosmetic
- Whether the improvement is original construction or an owner-added upgrade (Correct answer)
- The dollar value of the improvement
Correct answer: Whether the improvement is original construction or an owner-added upgrade
Under bare walls-in coverage, the master policy covers only original construction; owner-installed upgrades and betterments must be insured by the owner's HO-6 policy.
Question 4: An association's governing documents require that reserve funds be used only for capital expenditures. After a major uninsured hurricane loss, the board wants to use reserves for repairs. What should the board do first?
- Use the reserves immediately since an emergency supersedes governing documents
- Levy a special assessment to fund the repairs without touching reserves
- Obtain member approval via a special meeting to authorize using reserves for the loss (Correct answer)
- File a lawsuit against the insurer for denial of coverage before acting
Correct answer: Obtain member approval via a special meeting to authorize using reserves for the loss
Reserves restricted by governing documents generally require member approval to be used for purposes outside their defined scope; a properly called meeting ensures legal compliance.
Question 5: When reviewing certificates of insurance from a vendor, which element is most critical for an association manager to verify?
- The name and address of the insurance agent who issued the certificate
- That the association is listed as an additional insured and coverage limits meet contractual requirements (Correct answer)
- The insurer's A.M. Best rating only
- The vendor's years in business as stated on the certificate
Correct answer: That the association is listed as an additional insured and coverage limits meet contractual requirements
Confirming additional insured status and adequate limits ensures the association has direct coverage rights under the vendor's policy if a claim arises.
Question 6: What does 'agreed value' coverage mean on a community association property policy?
- The insurer agrees to pay market value regardless of policy limits
- The coinsurance requirement is suspended and the insurer pays the full agreed limit in a total loss (Correct answer)
- Coverage is limited to the lesser of actual cash value or the agreed amount
- The association and insurer agree to split all losses 50/50
Correct answer: The coinsurance requirement is suspended and the insurer pays the full agreed limit in a total loss
Agreed value coverage eliminates the coinsurance penalty; in a covered total loss the insurer pays the full stated limit without applying a coinsurance formula.
Question 7: Which coverage gap does a 'law and ordinance' endorsement address for community associations?
- Losses caused by government seizure of association property
- The increased cost to rebuild damaged property to current building codes after a covered loss (Correct answer)
- Fines levied by local governments for code violations unrelated to a loss
- Legal fees to challenge municipal zoning decisions
Correct answer: The increased cost to rebuild damaged property to current building codes after a covered loss
Law and ordinance coverage pays the extra costs of complying with current building codes when repairing or rebuilding after a covered loss, costs standard property policies exclude.
CMCA Risk Management and Insurance 4
A community association decides to self-insure its $5,000 deductible by not purchasing a separate deductible buy-down endorsement.
This strategy is best described as: