One issue that regularly arises regarding homeowner’s associations involves the insurance coverage they are required to maintain and how to deal with the variety of claims that may arise. This is mostly governed by the Colorado Common Interest Ownership Act, generally known as CCIOA. This act applies to all common interest communities, i.e. condominiums, townhomes and linear subdivisions but different sections apply depending on when the community was created. In any case the actual requirements are below with some commentary added by me.
(1) Commencing not later than the time of the first conveyance of a unit to a person other than a declarant, the association shall maintain, to the extent reasonably available: [Comment: Mandatory.]
(a) Property insurance on the common elements and, in a planned community, also on property that must become common elements, for broad form covered causes of loss; except that the total amount of insurance must be not less than the full insurable replacement cost of the insured property less applicable deductibles at the time the insurance is purchased and at each renewal date, exclusive of land, excavations, foundations, and other items normally excluded from property policies; and
(b) Commercial general liability insurance against claims and liabilities arising in connection with the ownership, existence, use, or management of the common elements, and, in cooperatives, also of all units, in an amount, if any, specified by the common interest community instruments or otherwise deemed sufficient in the judgment of the executive board but not less than any amount specified in the association documents, insuring the executive board, the unit owners’ association, the management agent, and their respective employees, agents, and all persons acting as agents. The declarant shall be included as an additional insured in such declarant’s capacity as a unit owner and board member. The unit owners shall be included as additional insureds but only for claims and liabilities arising in connection with the ownership, existence, use, or management of the common elements and, in cooperatives, also of all units. The insurance shall cover claims of one or more insured parties against other insured parties.
[Comment: All of section (1) above relates to common element insurance.]
(2) In the case of a building . . . that contains units having horizontal boundaries [Comment: “horizontal boundaries” means condominiums] described in the declaration, the insurance maintained under paragraph (a) of subsection (1) of this section must include the units but not the finished interior surfaces of the walls, floors, and ceilings of the units. The insurance need not include improvements and betterments installed by unit owners, but if they are covered, any increased charge shall be assessed by the association to those owners. [Comment: If an association obtains such insurance the increased cost MUST be assessed to the individual owners. As I read it, what is being required by this section is for the association to insure the structure of all the units so the shell could be rebuilt or repaired if damaged.]
(3) If the insurance described in subsections (1) and (2) of this section is not reasonably available, or if any policy of such insurance is cancelled or not renewed without a replacement policy therefore having been obtained, the association promptly shall cause notice of that fact to be hand delivered or sent prepaid by United States mail to all unit owners. The declaration may require the association to carry any other insurance, and the association in any event may carry any other insurance it considers appropriate, including insurance on units it is not obligated to insure, to protect the association or the unit owners.
(4) Insurance policies carried pursuant to subsections (1) and (2) of this section must provide that:
(a) Each unit owner is an insured person under the policy with respect to liability arising out of such unit owner’s interest in the common elements or membership in the association; [Comment: This relates only to liability insurance so that each owner is covered IF there is liability based ONLY on the owner’s interest in the common elements or association membership. It does NOT cover an owner’s liability for something the owner did in his or her own unit. As an example, if an owner allows water to overflow and that damages another unit then association coverage will usually not apply and the owner causing the damage will be personally responsible. If that owner had his or her own liability policy in effect then that should cover the damage; if not the owner should pay.]
(b) The insurer waives its rights to subrogation under the policy against any unit owner or member of his household;
(c) No act or omission by any unit owner, unless acting within the scope of such unit owner’s authority on behalf of the association, will void the policy or be a condition to recovery under the policy; and
(d) If, at the time of a loss under the policy, there is other insurance in the name of a unit owner covering the same risk covered by the policy, the association’s policy provides primary insurance. [Comment: Very limited applicability. If an owner has his or her own coverage that would protect against liability based on the owner’s interest in the common elements or association membership then, in that case, the association’s insurance provides primary coverage.]
(5) Any loss covered by the property insurance policy described in paragraph (a) of subsection (1) and subsection (2) of this section must be adjusted with the association, but the insurance proceeds for that loss shall be payable to any insurance trustee designated for that purpose, or otherwise to the association, and not to any holder of a security interest. The insurance trustee or the association shall hold any insurance proceeds in trust for the association unit owners and lienholders as their interests may appear. Subject to the provisions of subsection (9) of this section, the proceeds must be disbursed first for the repair or restoration of the damaged property, and the association, unit owners, and lienholders are not entitled to receive payment of any portion of the proceeds unless there is a surplus of proceeds after the property has been completely repaired or restored or the common interest community is terminated.
(6) The association may adopt and establish written nondiscriminatory policies and procedures relating to the submittal of claims, responsibility for deductibles, and any other matters of claims adjustment. To the extent the association settles claims for damages to real property, it shall have the authority to assess negligent unit owners causing such loss or benefiting from such repair or restoration all deductibles paid by the association. In the event that more than one unit is damaged by a loss, the association in its reasonable discretion may assess each unit owner a pro rata share of any deductible paid by the association.
(7) An insurance policy issued to the association does not obviate the need for unit owners to obtain insurance for their own benefit. [Comment: Owners should not form the opinion that they have no need for their own insurance. Typically an association will not insure contents, which includes all furnishings, clothing, electronics and anything not attached to the structure of the unit. An owner MUST purchase such coverage on his own.]
(8) An insurer that has issued an insurance policy for the insurance described in subsections (1) and (2) of this section shall issue certificates or memoranda of insurance to the association and, upon request, to any unit owner or holder of a security interest. Unless otherwise provided by statute, the insurer issuing the policy may not cancel or refuse to renew it until thirty days after notice of the proposed cancellation or nonrenewal has been mailed to the association, and each unit owner and holder of a security interest to whom a certificate or memorandum of insurance has been issued, at their respective last-known addresses.
(9) (a) Any portion of the common interest community for which insurance is required under this section which is damaged or destroyed must be repaired or replaced promptly by the association unless:
(I) The common interest community is terminated, in which case section 38-33.3-218 applies;
(II) Repair or replacement would be illegal under any state or local statute or ordinance governing health or safety;
(III) Sixty-seven percent of the unit owners, including every owner of a unit or assigned limited common element that will not be rebuilt, vote not to rebuild; or
(IV) Prior to the conveyance of any unit to a person other than the declarant, the holder of a deed of trust or mortgage on the damaged portion of the common interest community rightfully demands all or a substantial part of the insurance proceeds.
(b) The cost of repair or replacement in excess of insurance proceeds and reserves is a common expense. If the entire common interest community is not repaired or replaced, the insurance proceeds attributable to the damaged common elements must be used to restore the damaged area to a condition compatible with the remainder of the common interest community, and, except to the extent that other persons will be distributees, the insurance proceeds attributable to units and limited common elements that are not rebuilt must be distributed to the owners of those units and the owners of the units to which those limited common elements were allocated, or to lienholders, as their interests may appear, and the remainder of the proceeds must be distributed to all the unit owners or lienholders, as their interests may appear, as follows:
(I) In a condominium, in proportion to the common element interests of all the units; and
(II) In a cooperative or planned community, in proportion to the common expense liabilities of all the units; except that, in a fixed or limited equity cooperative, the unit owner may not receive more of the proceeds than would satisfy the unit owner’s entitlements under the declaration if the unit owner leaves the cooperative. In such a cooperative, the proceeds that remain after satisfying the unit owner’s obligations continue to be held in trust by the association for the benefit of the cooperative. If the unit owners vote not to rebuild any unit, that unit’s allocated interests are automatically reallocated upon the vote as if the unit had been condemned under section 38-33.3-107, and the association promptly shall prepare, execute, and record an amendment to the declaration reflecting the reallocations.
(10) If any unit owner or employee of an association with thirty or more units controls or disburses funds of the common interest community, the association must obtain and maintain, to the extent reasonably available, fidelity insurance. Coverage shall not be less in aggregate than two months’ current assessments plus reserves, as calculated from the current budget of the association.
(11) Any person employed as an independent contractor by an association with thirty or more units for the purposes of managing a common interest community must obtain and maintain fidelity insurance in an amount not less than the amount specified in subsection (10) of this section, unless the association names such person as an insured employee in a contract of fidelity insurance, pursuant to subsection (10) of this section.
(12) The association may carry fidelity insurance in amounts greater than required in subsection (10) of this section and may require any independent contractor employed for the purposes of managing a common interest community to carry more fidelity insurance coverage than required in subsection (10) of this section.
(13) Premiums for insurance that the association acquires and other expenses connected with acquiring such insurance are common expenses.