CMCA Risk Management and Insurance 5 — Questions and Answers
Question 1: A condominium association experiences a data breach exposing owners' financial information stored in its management software. Which coverage would respond to notification costs and regulatory fines?
- Commercial general liability (CGL) with a personal injury endorsement
- Cyber liability insurance (Correct answer)
- Directors and Officers (D&O) liability
- Employee dishonesty bond
Correct answer: Cyber liability insurance
Cyber liability insurance specifically covers data breach response costs, regulatory fines, notification expenses, and related losses that standard CGL policies exclude.
Question 2: What is the primary purpose of requiring a vendor to provide a 'hold harmless agreement' in addition to evidence of insurance?
- To limit the vendor's right to collect payment for completed work
- To contractually shift liability for the vendor's negligence away from the association (Correct answer)
- To give the association access to the vendor's insurance policy documents
- To extend the vendor's warranty obligations beyond the statutory period
Correct answer: To contractually shift liability for the vendor's negligence away from the association
A hold harmless (indemnification) agreement is a contractual risk transfer tool that obligates the vendor to defend and indemnify the association for claims arising from the vendor's work.
Question 3: Under workers' compensation law, if an association's landscaping contractor is found to be an uninsured subcontractor, what risk does the association face?
- No risk, because independent contractors are never the association's responsibility
- The association may be liable as the statutory employer for the worker's injury claims (Correct answer)
- The contractor's workers are covered automatically under the association's CGL policy
- The association faces only a fine, not actual injury claim liability
Correct answer: The association may be liable as the statutory employer for the worker's injury claims
Many states make a hiring entity the 'statutory employer' of uninsured subcontractors' workers, exposing the association to full workers' compensation liability.
Question 4: An association's property is insured on an 'actual cash value' (ACV) basis. After a hail storm destroys the roof, the insurer pays $40,000 instead of the $60,000 replacement cost. The $20,000 difference most likely represents:
- The policy deductible applied to the claim
- Depreciation subtracted from the replacement cost to arrive at ACV (Correct answer)
- A coinsurance penalty for underinsurance
- The insurer's profit margin on the claim
Correct answer: Depreciation subtracted from the replacement cost to arrive at ACV
ACV equals replacement cost minus depreciation; the $20,000 gap reflects the age and wear-related depreciation the insurer deducted from the replacement cost.
Question 5: Which of the following scenarios would most likely trigger coverage under an association's 'environmental liability' or 'pollution liability' policy?
- A slip-and-fall in the clubhouse caused by a wet floor
- Mold discovered in a common-area HVAC system contaminating multiple units (Correct answer)
- A board member's error in approving a flawed maintenance contract
- Theft of pool chemicals by a vendor employee
Correct answer: Mold discovered in a common-area HVAC system contaminating multiple units
Pollution liability policies cover bodily injury and property damage from pollutants such as mold, asbestos, or chemical releases, which standard CGL policies often exclude.
Question 6: When is a community association most likely to need 'loss of assessment' income coverage?
- When a unit owner refuses to pay monthly assessments
- When a covered disaster renders common areas unusable and owners refuse to pay assessments during repairs (Correct answer)
- When the association loses a lawsuit and must refund past assessments
- When market conditions force the association to lower assessment rates
Correct answer: When a covered disaster renders common areas unusable and owners refuse to pay assessments during repairs
Loss of assessment income coverage protects the association's cash flow when a covered disaster makes common facilities unavailable and assessment income drops as a result.
Question 7: Which best practice should a community association follow when its master property policy is up for renewal to ensure adequate replacement cost coverage?
- Use the prior year's insured value adjusted for CPI inflation only
- Obtain an independent appraisal or professional property valuation before the renewal (Correct answer)
- Rely on the insurer's estimate from the previous policy term
- Set coverage equal to the original construction cost from property records
Correct answer: Obtain an independent appraisal or professional property valuation before the renewal
An independent appraisal provides an objective current replacement cost figure, preventing underinsurance that triggers costly coinsurance penalties after a loss.
CMCA Risk Management and Insurance 5
A condominium association experiences a data breach exposing owners' financial information stored in its management software.
Which coverage would respond to notification costs and regulatory fines?