INSURANCE

1. THE INSURANCE INDUSTRY

Insurance evolved from meeting the marine risks associated with global exploration and shipping that began in the late 1600s.
Fire, life, and accident insurance took longer to develop, but by the mid-19th century, their value was widely recognized. The
20th century was a time of substantial economic expansion, and the insurance industry both supported and grew as part of
that progress.

In the United States, insurance is divided into two broad categories: the first is accident, life, and health insurance. The second
is property and liability insurance. More than 6,000 insurers operate in the United States. Of these, approximately 4,000 offer
property and liability insurance; however, the majority of this coverage is underwritten by around 900 companies licensed in
multiple states. Property and liability insurance can be further categorized into commercial and personal insurance. A
community association purchases commercial insurance, while a unit owner or homeowner in an association purchases
personal insurance. In such cases, the community association is the insured, and the insurer is the company issuing the
coverage.

Insurance contracts are designed to provide financial protection based on exposure to loss. The concept of exposure units is
fundamental to how insurers set rates and predict losses. For instance, an insurer underwriting condominium units must
ensure that a sufficiently large number of units are insured so that projected losses are accurate and premiums remain
reasonable.

1.1. Types of Insurers

Insurance contracts or policies are provided by both the private and public sectors. Most private insurance is voluntary,
although some coverages are mandated by law. For example, many states require employers to carry workers
compensation insurance and vehicle owners to maintain automobile liability coverage. These policies can often be
purchased from either the private or public insurance markets. Most governmental insurance, however, is involuntary.
Some insurers write only one line of insurance; others are authorized to write many different types. An insurer that
provides both property and liability insurance is known as a multiple-lines company. Multiple-lines insurers are generally
restricted from offering health, life, and accident insurance.
1.1.1. Private Insurers
Private insurers are generally classified based on ownership structure. The four most common types of private
insurers are stock companies, mutual companies, reciprocals, and Lloyd’s-type organizations. Two additional
types relevant to community associations are risk retention groups and purchasing groups.
[Link]. Stock companies
A stock insurance company is a private, for-profit entity established to sell insurance. Stock companies are
required to maintain specific capital and surplus levels set by the states in which they operate. They are also
required to participate in state guaranty funds. Like any other stock corporation, shareholders bear the
financial risk and benefit from company profits through dividends.
Stock insurers often market their policies through the American Agency System or Independent Agency
System. These systems rely on private insurance organizations to establish rating structures and policy forms,
which must then be filed with or approved by the state insurance commissioner in order to do business in
that state.
[Link]. Mutual companies
Mutual insurance companies are nonprofit organizations governed by state insurance codes and owned by
the policyholders. Rather than generating profits for shareholders, any excess income earned by the mutual
company is typically returned to the policyholders through premium reductions, dividends, or retained
earnings for future operations. In some cases, mutual companies may issue stock if the organization requires
additional capital and the policyholders vote to allow it.
Mutual insurers also work with private rating organizations to develop rates and policy forms. They may
market coverage through in-house agents or company employees, rather than relying on independent
brokers.
 [Link]. Reciprocal insurance exchanges
Reciprocals—also known as inter-insurance exchanges—are designed to provide at-cost insurance. Unlike
stock or mutual companies, a reciprocal is an unincorporated association owned by its subscribers. While they
often insure niche markets and only a small share of total insurance business, some community associations
have partnered with reciprocals for liability and property insurance.
[Link]. Lloyd’s types of associations
Lloyd’s of London is a consortium of individuals and groups that insure risk collectively on a cooperative basis.
These groups are known as syndicates. Lloyd’s operates in the U.S. market through the excess and surplus
lines sector, insuring high-risk exposures that standard markets avoid. Each member (or name) of Lloyd’s is
personally liable for their share of any claims made against the policies they underwrite.
American Lloyd’s and similar exchanges follow a similar structure but do not participate in state guaranty
funds. While not typical in community association insurance, Lloyd’s syndicates may be used for properties
with unique exposures such as ski slopes or equestrian facilities.
[Link]. Risk retention groups and purchasing groups
Risk retention groups (RRGs), owned by their policyholders, offer hard-to-place liability insurance to groups
with similar risk exposures. Although RRGs have not been widely adopted for community associations, they
are commonly used in other specialized markets.
Purchasing groups, by contrast, do not assume risk but collectively buy insurance from traditional insurers.
Community associations have used purchasing groups to access coverage such as directors and officers (D&O)
liability and fidelity insurance.
1.1.2. Government Insurers
Federal and state governments have developed insurance programs to cover risks that private insurers may avoid, such
as flooding or workers compensation claims.
[Link]. Federal insurance programs
The federal government offers several insurance programs, but two are most relevant to community
associations. The National Flood Insurance Program (NFIP) provides flood insurance through FEMA and allows
associations to purchase flood coverage. The program is administered by the Federal Insurance
Administration. Another program, Social Security, offers financial protection against disability and old age but
is not directly applicable to community associations.
[Link]. State insurance programs
States have developed insurance systems to address high-risk areas such as workers compensation, auto
liability, and windstorm insurance. Most states also have established assigned risk pools or monopolistic funds
to serve employers who cannot obtain coverage from private carriers.
These residual market programs are designed to ensure that all mandated insurance coverages are accessible,
even if private insurers decline the risk. Associations may encounter these state-run entities when seeking
workers compensation coverage for staff or vendors.

1.2. Financial Performance of Insurers

The Audit Guide for Common Interest Realty Associations, published by the American Institute of Certified Public
Accountants, provides a framework for evaluating the financial health of community associations. These same financial
principles, grounded in generally accepted accounting practices, are also used to assess whether insurance companies
are financially viable and capable of meeting their future obligations.

The financial performance of insurers is evaluated not only by these standard principles, but also by statutory accounting
rules mandated by individual state insurance departments. These statutory accounting systems place special emphasis
on liquidation values—what assets can realistically be used to pay claims in the event the company ceases operations.
An insurer that goes out of business must still pay its policyholders’ claims, return any unearned premiums, and fulfill
obligations to third-party beneficiaries. Therefore, financial performance directly affects the insurer’s ability to meet
these responsibilities.
1.2.1. Profitability
Property and liability insurance companies primarily generate income from premiums paid by policyholders. In
addition to this core income source, insurers also earn investment income from interest and returns on unearned
 premium reserves and other capital holdings. Because statutory accounting practices tend to be conservative,
insurers often understate their asset values.
[Link]. Assets
Although an insurer collects the full annual premium at the start of a policy term, it earns that income over
time. That means the insurer may owe a refund of unused premium if the policy is canceled early. To address
this, the insurer maintains unearned premium reserves and carefully matches assets against its anticipated
liabilities. To discourage policy cancellations, insurers often impose short-rate penalties—typically 10 percent
of the unearned premium amount. In some cases, the penalty may be even higher.
[Link]. Liabilities
An insurer’s liabilities include operating expenses such as commissions to agents and internal overhead, along
with funds held in reserve for unpaid claims. These claims may be either already reported or expected to arise
but not yet filed. This reserve structure ensures that funds are available to cover both known and future
obligations.
[Link]. Loss Reserves
Loss reserves are financial amounts set aside to pay for claims and related expenses. These reserves are based
on estimates of the amounts required to settle claims once all expenses and obligations are accounted for.
Property losses are usually resolved fairly quickly, and the associated reserves tend to be smaller. However,
liability claims—especially those involving litigation—often take longer to resolve and require significantly
larger reserves. Insurers maintain loss run reports that document past claims activity and show how much
has been paid on each claim and how much is still expected to be paid. Associations should request a copy of
this loss run annually to better understand their own claims history and its potential effect on future
premiums.
[Link]. Policyholders’ Surplus
Once an insurer’s liabilities are subtracted from its total assets, the remaining value is known as policyholders’
surplus. This surplus is the insurer’s financial safety net—similar to an individual’s savings account—and is
used to pay for unexpected or catastrophic claims. The surplus also supports the insurer’s ability to remain
solvent and meet long-term obligations to policyholders.
[Link]. Capacity
Capacity refers to the insurer’s ability to take on new business, based on the size of its policyholders’ surplus.
Regulators watch the ratio of premiums written to surplus as a key indicator of financial health. A ratio greater
than 3:1 may suggest the insurer is overextended and could be vulnerable to financial instability.
[Link]. Combined Ratio
The combined ratio is the most common measure of an insurer’s profitability from underwriting. It is the sum
of two key figures:
• The loss ratio, which reflects the proportion of premium income spent on claims, and
• The expense ratio, which includes all administrative and operational costs.
If an insurer collects $1.00 in premiums and spends $1.10 on claims and expenses, its combined ratio is 110.
This means it is operating at an underwriting loss and must rely on investment income to remain profitable.
The industry’s long-term average combined ratio has exceeded 110, but when this figure reaches 115–117,
insurers typically begin to increase rates to restore profitability.

1.3. Insurance Regulation

Insurers are regulated to ensure they fulfill their obligations to policyholders and other third-party claimants. In the
United States, this responsibility lies with the states—not the federal government. Each state has a commissioner of
insurance who regulates insurance companies within that jurisdiction. State insurance departments often play a critical
role in protecting community associations by enforcing insurance laws and intervening in cases of insurer misconduct.
The National Association of Insurance Commissioners (NAIC) serves as a coordinating body among state regulators. NAIC
promotes consistent regulatory standards and provides community associations with access to important financial and
operational data about insurers.
1.3.1. Rate Regulation
States regulate insurance rates to ensure they are reasonable, adequate, and fair. Each state determines how
actively it participates in regulating property and liability rates, and these approaches vary.
1.3.2. Solvency Regulation
In addition to overseeing policy rates, states monitor the financial solvency of insurers.
[Link]. State Surveillance
State regulators evaluate the financial health of property and liability insurers by reviewing their annual
financial statements. Many also use the Insurance Regulatory Information System (IRIS), developed by the
NAIC, which provides a set of financial ratios used to assess solvency risk. Associations may request IRIS data
from their agent or from the state’s department of insurance.
[Link]. State Guarantee Funds
Most states maintain guarantee funds to protect policyholders in the event an insurer becomes insolvent.
These funds are typically supported by assessments on other licensed insurers and are used to pay
outstanding claims and unearned premium refunds. However, these funds generally have statutory limits per
claim and may not cover all losses. In recent years, associations have increasingly relied on state guarantee
funds as a form of last-resort protection.
[Link]. Private monitoring organizations
Several well-known private entities independently assess the financial condition of property and liability
insurers. These include A.M. Best, Standard & Poor’s, Moody’s Investors Service, and Duff and Phelps. These
organizations use various rating systems to evaluate insurer strength and stability. A.M. Best, for example,
issues ratings using letter grades such as A++, A, B+, and so forth. Other systems use numbers or combinations
of letters and numbers.
Some monitoring agencies also assign a financial size category, which indicates the insurer’s available surplus
and capacity to write new business. Every association should verify whether its insurer appears on the NAIC’s
IRIS list and understand what that rating means. An association’s insurance agent can help interpret these
evaluations.
1.3.3. Consumer Protection
State insurance regulators also protect consumers through various rules that govern the business practices of
insurance companies and agents.
[Link]. Licensing
Before conducting business in a state, an insurer must be licensed (or “admitted”) to sell specific types of
insurance there. To obtain a license, the insurer must prove it meets financial strength requirements, file
policy forms and rates, and agree to participate in the state’s guaranty fund. Once licensed, the insurer is
subject to ongoing oversight.
Insurers that are not licensed in a given state may still write insurance there under special provisions, typically
through excess-and-surplus-lines brokers. These brokers work with non-admitted carriers when licensed
insurers are unwilling to write a policy. However, non-admitted insurers do not participate in the state
guaranty fund, and their rates and policy forms are not subject to prior approval. For this reason, surplus lines
policies are often used for hard-to-place risks or complex exposures.
[Link]. Policy forms
Most states require that licensed insurers file their policy forms with the state insurance commissioner for
approval. These forms may be standard or nonstandard. Standard forms are often issued by private
organizations such as the Insurance Services Office (ISO), which is widely recognized in the property and
liability industry. These forms are commonly known as bureau forms, and ISO retains copyright over their
content.
Some insurers develop their own policy forms rather than relying on ISO materials. These proprietary forms
must still comply with applicable insurance regulations, and the forms must be filed and, in some cases,
approved by the state before use.
Other organizations also provide specialized forms used in the community association insurance field, such
as the Surety Association of America (for crime and fidelity bonds), the National Flood Insurance Program,
and the National Council on Compensation Insurance (for workers compensation and employers liability).
ISO policy forms and rates are sometimes referred to interchangeably as bureau forms and bureau rates,
although many insurers now rely on proprietary forms instead.
 To streamline communication and data sharing, insurers and agents use standardized application formats
such as ACORD forms. These forms vary depending on the type of coverage requested and facilitate clear,
consistent information exchange among all parties.
[Link]. Market conduct
Insurance regulators also monitor the conduct of agents and insurers in the marketplace. This includes
oversight of sales practices, underwriting standards, and claims handling procedures. States may prohibit
unfair practices under unfair trade practices laws, which can include misrepresentation of coverage, improper
claim denial, or failure to disclose policy terms. Violations may result in fines, suspension of licenses, or other
disciplinary actions.
States also maintain consumer complaint departments, which policyholders can contact if they experience
problems with an insurer or insurance agent. These departments serve as an important enforcement tool and
allow regulators to identify systemic issues in insurer performance.

1.4. Insurer Operations

Three core aspects of insurer operations directly impact a community association’s insurance program: establishing
rates, underwriting, and marketing. A fourth area—reinsurance—is less visible to the policyholder but still plays a vital
role.
1.4.1. Establishing Rates
To determine insurance rates, insurers must assess the loss potential of the insured and apply a rate that will
allow them to pay claims, cover operating expenses, and earn a profit. An exposure unit is the base measurement
used to estimate loss potential. Figure 1 identifies common exposure units in community association insurance.
Figure 2 provides sample calculations for premium determination using those units.
[Link]. Manual rating
Manual rating—sometimes referred to as class rating—is based on rates listed in formal rating manuals. These
rates may be applied broadly across a class of similar risks or may be further refined using specific
characteristics of the insured.
[Link]. Bureau rating
Bureau rating relies on rates created by private rating organizations, such as the Insurance Services Office
(ISO), which insurers may subscribe to. These organizations collect data from member insurers to establish
rates based on loss trends and exposure data. Insurers using bureau rates apply them either directly or in
modified forms.
[Link]. Merit rating
Merit rating adjusts the manual rate based on characteristics unique to the insured. For example, a
community association with modern fire protection systems or security features may qualify for discounts
under a merit rating plan. Some insurers allow for narrowly focused manual rates tied to a specific class of
business—such as homeowners associations or multi-family dwellings.
[Link]. Experience rating
Experience rating reflects the insured’s loss history. A better claims history—meaning fewer or less severe
claims—leads to more favorable premiums. Experience rating is most commonly used in workers
compensation and employers’ liability policies, which are highly sensitive to claim frequency and severity.
[Link]. Debits and credits
Each of these rating systems may include adjustments (debits and credits) based on a variety of factors. These
include loss experience, the size of deductibles, the presence of safety or mitigation features, and other risk-
relevant details.
1.4.2. Underwriting
The term underwriting, referring to the evaluation and pricing of insurance risk, dates back to Lloyd’s of London
in the 17th century. Shipowners would seek financial protection for their cargo, and underwriters would literally
sign beneath the contract, indicating the share of risk they agreed to take. Their signatures represented their
personal financial exposure, so they were highly selective about the risks they accepted.
 [Link]. Selecting risk
Modern underwriters perform a similar function. They analyze insurance applications to determine whether
to accept the risk, how to price it, and which terms and conditions should apply. Underwriters are responsible
for evaluating prior loss history, the condition and characteristics of the insured property, and the financial
standing of the applicant. The underwriter may require additional information from the community
association, such as maintenance reports or reserve studies, to assess risk.
[Link]. Capacity
Capacity refers to the ratio of premiums written to the insurer’s policyholders’ surplus. This ratio directly
impacts how much new business the insurer can underwrite. A ratio above 3:1 may indicate that the insurer
is approaching financial limits and should slow its rate of growth. Community associations should be
especially mindful of capacity in geographic areas prone to catastrophic loss, such as wildfires or hurricanes.
[Link]. Delegating underwriting
While underwriters handle the primary risk assessment, insurers may delegate some tasks to field
representatives or to licensed insurance agents. These individuals often submit the completed application to
the underwriter on the insurer’s behalf. Some insurers allow agents to make underwriting decisions within
preapproved guidelines; this is known as delegated underwriting authority.
1.4.3. Marketing
The primary function of marketing within the insurance industry is to sell coverage. Insurers accomplish this
through a network of agents and brokers who are typically compensated through commissions. Their behavior
is regulated by state law and is subject to insurer rules and codes of conduct.
[Link]. Agents and brokers
Insurance professionals may be referred to as agents, brokers, producers, or sales representatives. The term
agent—when paired with broker—has specific historical significance. Traditionally, the agent represented the
insurer and the broker represented the insured. However, these distinctions have blurred over time.
Community associations should ask whether the person they are working with has the authority to bind
coverage on behalf of the insurer.
[Link]. Marketing systems
Property and liability insurance is generally distributed through one of four systems:
Independent agents
These agents are affiliated with the American Agency System and may represent multiple insurers.
They typically offer clients a range of coverage options and pricing structures.
Exclusive agency system
These agents represent a single insurer or a small group of insurers. They are specialists in their
insurer’s products and rely on the insurer’s brand and resources.
Direct writing system
In this model, the agent is a direct employee of the insurer or a contractor who only offers policies
from that insurer.
Direct-response or direct-mail solicitation
In this system, the insurer markets directly to the consumer without using an agent or broker.
The most common distribution channels for community association insurance are independent agents, direct
writers, and exclusive agents. When selecting an agent, the association should consider the quality of service,
depth of expertise, and cost-effectiveness.

[Link]. Agent compensation.

Agents are typically paid through commissions based on a percentage of the premium. Most states prohibit
agents from rebating—that is, sharing the commission with the insured—as it is considered an unfair practice.
In some cases, agents may also charge a fee for placing coverage, especially if the process involves unusual
complexity. Some states regulate or restrict such fees.
[Link]. Agent regulation
State governments license insurance agents and monitor their compliance with performance and conduct
standards. The insurer that employs or appoints the agent is ultimately responsible for their behavior. If issues
 arise, a community association can report the agent to both the insurer and the state department of
insurance.
Many insurance professionals specialize in community association coverage and may participate in CAI’s
educational or certification programs. These agents can provide an added layer of guidance and expertise.
1.4.4. Reinsurance
Reinsurance is the process by which insurers transfer portions of their risk portfolios to other insurance
companies. This practice increases the insurer’s capacity, spreads risk, and provides stability. Reinsurance is
especially important when dealing with catastrophic losses or when an insurer writes a high concentration of
similar risks.
Reinsurers are not typically regulated by the states, so their financial strength should be carefully considered. A
community association may indirectly rely on reinsurance, especially when insured through a company writing
high-value or geographically concentrated risks.
In most cases, the insured does not interact directly with the reinsurer. However, some insurers provide pass-
through endorsements that allow the association to contact the reinsurer if the primary insurer becomes
insolvent. This structure, known as cut-through reinsurance, is typically used in high-value accounts—those
exceeding $100 million. An agent can help determine whether this endorsement would benefit the association.

2. INSURANCE CONTRACTS AND POLICIES

Insurance policies are special contracts between the insurer and the insured, and they are an integral part of a community
association’s risk management program. Contracts are legally enforceable promises. Every contract must have certain
features to be valid and enforceable, including: an agreement, competent parties, consideration, form required by law, legal
purpose, and no defense to formation or enforcement. If an element is missing, the contract may be voidable. Insurance
contracts comprise six special features.

2.1. Features of an Insurance Contract

2.1.1. Conditional
Whether the insurer has to pay a claim depends on whether a loss occurs and whether other conditions are met.
For instance, if the community association fails to notify the insurer of a claim within the required time period,
the association may lose its right to enforce the claim.
Coinsurance is also a condition of the contract that the insurer uses to obtain insurance-to-value. If the
association fails to carry a requisite amount of property insurance, it must pay a portion of the loss beyond the
deductible. It will become a “coinsurer” with the insurance company. These and various other conditions affect
the contract’s enforceability.
2.1.2. Aleatory
The premium amount will probably only be a fraction of a possible claim. It is this exchange of unequal amounts
of money that makes the conditional nature of the insurance contract a fair trade.
2.1.3. Utmost good faith
As an aleatory contract based on a promise to pay, insurance requires the utmost good faith of both the insurer
and the insured. Good faith can be violated by concealment, misrepresentation, or breach of warranty by the
association. The existence of any of these could void the contract. Concealment is the failure to disclose material
facts. Misrepresentation is the false statement of a material fact. A breach of warranty occurs when a statement
that is deemed to be true is violated. These three actions are most likely committed by the insured during the
application process. The insurer can violate its good faith agreement by unfair claims settlement practices. This
is called bad faith.
2.1.4. Adhesion
The insurance company writes the contract and uses preprinted forms for most insureds. The insurer presents
the contract on a take-it-or-leave-it basis. Because the insured must adhere to the contract, the courts interpret
any ambiguity in favor of the insured; therefore, insurers benefit from clear policy language.
2.1.5. Indemnity
The amount paid by the insurer depends on the amount lost by the insured. This is why most property policies
are written on an actual cash value (ACV) basis and not a replacement cost basis (RCV). (See Figure 3.) If the
insured suffers a loss of an old item, then the insured should be indemnified on a depreciated basis. A community
 association is much better off with replacement cost protection. This usually needs to be endorsed or specifically
provided because of the indemnity concept.
2.1.6. Insurable Interest
In property insurance, an insured party must be in a position to suffer a financial loss at the time of the insured
claim. Absent an insurable interest, recovery may be voided or voidable. For a community association, insurable
interest problems develop in at least two ways.
[Link]. Blanket Basis
First, a planned community that insures itself on a blanket basis (as though it is a condominium or
cooperative), must have an insurable interest in the individual homes. This can usually be accomplished by
covenants that allow the board to purchase blanket coverage or require the association to maintain private
home insurance.
[Link]. Group/Master insurance Programs
Second, some community associations participate in master or group insurance programs that are written in
the name of a community association management company or other entity. There may be no insurable
interest, however, between the community association and the entity itself. This is often referred to as a
fictitious fleet in state insurance statutes.
[Link].1. Consequences of Master Insurance Programs
• There may be no insurable interest, which may void the coverages.
• The first-named insured is not the community association. Therefore, important policyholder rights
are lost and regulatory oversights are compromised.
• Because the association is not the first-named insured, the coverages probably do not conform to
governing document requirements.
• Because the association is not the first-named insured, any insurance certificate might be rejected
by a lender because its borrower is not completely protected.
• The adverse experience of one community within the group program could affect all of the
associations’ loss experience.
• The closer associations are located to each other in a group program, the more a catastrophic event
could affect the policyholder’s surplus.
• The property insurance component of these groups is usually layered, which makes policy
administration and claims management more difficult.
• The property policy limits are usually based on the concept of probable maximum loss for each
association in the group program. These limits may cause an association to be underinsured if a
catastrophic loss occurs or if the association is not insured for full replacement costs.
• The liability insurance component usually does not have limits dedicated to each individual
association so that low premiums mask shared limits.
o Associations should carefully evaluate master or group programs. Most policies follow a
certain common format:
• Name of the insurer and insured
This is usually presented on the first page or the declaration page.
• Policy period
This also is on the declaration page.
• Consideration
This premium may appear at different locations.
• Definitions
Contemporary property and liability policies usually have glossaries that define words printed in
bold. It is necessary to understand these definitions to understand the insurance. Sometimes they
are different from common usage. For instance, in everyday usage, the term personal injury usually
includes the idea of bodily injury, whereas a liability insurance contract makes a clear distinction
between the two.
• Insuring agreement(s) and exclusions
While there are sections with these exact titles, insurance coverages, limitations,
extensions of coverages, and exclusions are typically found throughout the policy. The
entire contract must be read.
 • Limits and valuation provisions
These provisions define how much will be paid and how that amount is determined.
• Duties of the insurer and insured
These provisions relate to the conditional nature of an insurance contract, especially
regarding claims.
• Dispute resolution
These provisions detail how disputes over claims and coverages will be resolved.
Most property and liability policies follow a standardized policy structure. Non-standardized
forms contain special coverage features or manuscript endorsements. Endorsements expand,
contract, or clarify coverage. Manuscript endorsements are specifically designed for a particular
policyholder. Community associations cannot rely on these features. Each contract of insurance
must be read and understood on its own.

2.2. Community Association Insurance Policies

Community association insurance contracts usually are written on standard forms. Some insurers and their agents,
however, have developed special nonstandard forms and endorsements.
Even insurers using standard forms, however, have developed specialized conditions for condominium policies. No
similar standard policy conditions, however, exist for cooperatives and planned communities.
2.2.1. Standard Policies
These policies follow the forms and endorsements developed by the Insurance Services Office.
[Link]. Commercial package policy
The commercial package policy (CPP) is written in a modular format and usually is referred to as a package
policy. This policy contains property and liability coverages and it may contain other coverages, including
boiler and machinery insurance, blanket employee dishonesty (fidelity), and directors and officers liability
insurance. Modifications to these package policies are accomplished by adding either standard or manuscript
endorsements.
The package policies usually have more favorable ratings than a stand-alone or monoline policies. For
example, commercial property insurance written by itself (stand-alone) would have a higher premium rate
than if it was combined with commercial general liability and both were written in a commercial package
policy. This favorable rating is generated by administrative and actuarial savings.
In addition to rate advantages, package policies usually contain numerous coverages extensions for valuable
papers and records, property of others, and similar exposures.
A planned community with nominal property exposures should keep rate advantage and coverage extensions
in mind when evaluating a package policy.
Even the most basic planned community will have some type of common area property. Trees, shrubs,
entrance signs, fencing, and light poles can be used to justify the property insurance component of a
commercial package policy.
[Link]. Business owners’ policy
The business owners’ policy is a special type of package policy that has been developed by the ISO and
combines certain coverages with corresponding coverage and rating benefits. If a business owners’ policy is
used, however, special endorsements must be added to the contract. Only condominium associations are
eligible for this package program.
[Link]. Special or nonstandard policy
Certain insurers, usually with the assistance of an exclusive agent or an agent specializing in association
insurance, have developed unique policy forms to insure community associations. These nonstandard policies
vary greatly, but their coverage benefits can be substantial. The association should carefully explore the
coverage differences between nonstandard and standard forms.
2.2.2. Special Policy Conditions
Among condominiums, certain special policy conditions have become standard. These unique conditions were
developed in response to governing document requirements to more equitably meet association, unit owner,
and developer insurance needs.
 These special conditions usually are contained in the condominium endorsement. There are no corresponding
standard endorsements for cooperatives and planned communities, so these two types of associations must
request special conditions.
Most condominium association commercial package policies include the following special conditions:
1. Although the association is the named insured on the declaration page, unit owners also are defined
as insureds except for the portion of the property that they own or control.
2. The insurer waives its right to require the association to transfer recovery rights to the insurer
regarding unit owners. This was formerly termed a waiver of subrogation. In other words, if a unit
owner, as an insured, accidentally causes insurable damage to the common areas, the insurance
company waives its right to sue the unit owner for recovery of claim proceeds that were paid to the
association.
3. The developer, if a unit owner, is recognized as an insured under the policy.
4. The insurer will recognize the appointment of an insurance trustee to receive the payment of claim
proceeds if required in the governing documents.
5. A severability-of-interest clause protects innocent insureds if any given insured jeopardizes coverage.
6. A no-control clause preserves coverage for loss caused by an insured acting outside of the control of
the association.
7. Cross liability is included that permits one insured to bring a claim against another insured.
8. The association’s commercial package policy is treated as primary when the unit owner and the
association carry insurance over the same property. This helps speed claims adjustment when both
the unit and the adjacent common elements are damaged by the same covered cause of loss.
9. A unit owner mortgagee is protected by a mortgagee interest certificate and governing document
requirements that the association use insurance proceeds to reconstruct the property. Only the
association, as the first-named insured, is entitled to receive payment of claims.
In a cooperative with an underlying blanket mortgage, however, the standard mortgage clause would be used.
The same also would be true for a condominium or planned community if the association owned real property
encumbered by a mortgage.
Remember that condominiums using a business owners’ policy form and cooperatives and planned communities
using a standard commercial package policy form should work with their agent to obtain these special conditions.

2.3. BIDDING AND EVALUATING CONTRACTS

In addition to understanding the nature of insurance contracts as discussed above, boards and managers need to
understand how to go about bidding, evaluating, and maintaining those contracts as part of their risk management
responsibilities.
Agents (and insurers) who demonstrate a commitment to community associations and to a given association account—
absent a legal requirement—should not be subjected to annual bidding.
Associations need to balance detailed bidding specifications with bare outline specifications. That balance centers on
the degree of responsibility or liability that the person who prepared the bid specifications is willing to incur.
2.3.1. Insurance RFPs: Best Practices
The following items should be in a bid packet that can be used to solicit bids:
▸ The specifications dealing with the four loss exposure areas: property, liability, net income, and personnel.
▸ Three years of loss runs.
▸ Governing documents and pertinent resolutions.
▸ Insurable replacement cost appraisal.
▸ Annual financial reports or audit.
▸ Site plan, map, or other graphic property description.
▸ Annual report or annual meeting minutes.
2.3.2. Bid Calendar
Typically, associations renew their insurance policies on an annual basis. Different policies, however, have
different annual policy periods. Therefore, it is important to maintain a chronological schedule of coverage
inception dates. Allow at least 90 days lead time for the bidding and evaluating process and provide bidders with
a complete bid packet.
 2.3.3. Market Allocation
If more than one agent wants to use the same insurer, that insurer will only provide a premium quote to one of
the agents. The assignment of the insurance market to a single insurance agent is known as market allocation. It
is accomplished by having the association send an Agent of Record letter to the insurer appointing a specific
agent to receive the quote.
2.3.4. Evaluating Insurers
Associations can evaluate insurers by using Best’s ratings or ratings of comparable organizations. Associations
should base their evaluation on the insurer’s commitment to community associations. The National Association
of Insurance Commissioners and state insurance commissioners also can provide useful information.
2.3.5. Evaluating Agents
Agents or brokers should be evaluated according to their experience, expertise in association insurance,
participation with CAI, and professional standing. Three important designations in the insurance field are:
▸ CPCU—Chartered Property and Casualty Underwriter.
▸ ARM—Associate in Risk Management.
▸ CIC—Certified Insurance Counselor.

Agents may also demonstrate commitment to their field by participation in insurance organizations. All of this
information should be revealed in their biographical material. Associations that rely purely on an insurer’s
reputation miss a fundamental part of the risk management assessment—the agent’s degree of expertise.
The agent or broker and other industry professionals should demonstrate an understanding of the six-tiered
analytical format. The agent also must review the association’s governing documents. It is virtually impossible to
prepare an effective insurance program without reviewing those documents.
The agent can also demonstrate commitment to community associations through CAI membership. CAI offers
comprehensive publications and programs that deal with community association insurance and risk
management.
2.3.6. Evaluating Insurance Programs
Spread sheet comparisons of limits and premiums fail to consider the quality of the coverages, much less agent
and insurer qualifications. They are of dubious value in the risk management decision process when used as the
primary basis for making the selection of the insurance program. In a very direct sense, the association is
purchasing coverages, expertise, service, and premium—in that order.
An individual, committee, employee, or consultant must bid and review the insurance program. Encourage long-
term involvement in this function. Insurance issues are usually examined once a year. Short-term employees and
volunteers examine insurance issues too infrequently to retain a command of the basic concepts.
3. ANALYZING INSURANCE REQUIREMENTS
3.1. Types of Community Associations
Condominiums, cooperatives, and planned communities.
In a condominium, an individual owns a unit and holds an undivided interest in the common elements.
In a cooperative, a corporation owns the units and common areas, while residents hold exclusive occupancy rights to a
specific unit under a special lease.
In a planned community, a person owns both the unit and the land it sits on, while the common areas are owned
collectively by a corporate entity.
These three types of community associations may also exist within larger developments—such as master-planned or
mixed-use communities.

3.2. Associations’ Core Activities

All community associations conduct three essential types of activities—business, government, and community—each
of which underscores the importance of a comprehensive commercial insurance program as part of an effective risk
management strategy.
3.2.1. Business Activities
A community association’s core business function is the protection of assets, both tangible and intangible.
Tangible assets include physical structures, equipment, and property improvements, all of which require
insurance coverage for repair, maintenance, or replacement. For example, these may include clubhouses, entry
monuments, or shared utility infrastructure.
 Intangible assets in nonprofit associations can be more abstract—such as the combined resale value of member-
owned units or other reputational assets.
Even when a condominium association does not directly own the units or common elements, its governing
documents often require the association to insure and maintain them. The same applies in planned communities,
where governing documents typically place responsibility for maintaining structural exteriors on the association.
3.2.2. Government Activities
A community association’s governmental role includes interpreting and enforcing the association’s governing
documents—such as the declaration, bylaws, rules, regulations, and resolutions.
These governing instruments, though they may differ in title depending on the type of association, generally
serve equivalent purposes and can impose liability for breach under contract, tort, or corporate law. (See Tabel
“Quick Guide 3.2.2: Community Association Documents”)

Quick Guide 3.2.2: Community Association Documents

Other Important
Type of Association Name of Governing Documents
Documents
Declaration of covenants, conditions & Rules,
Planned Community restrictions (CC&Rs), bylaws, and articles of regulations,
incorporation resolutions
Rules,
Declaration, master deed, bylaws, and articles
Condominium regulations,
of incorporation
resolutions
Rules,
Proprietary lease or occupancy agreement or
Cooperative regulations,
membership agreement
resolutions

3.3. Community Activities

A community association’s core community function is to preserve and enhance social harmony. It does this by
facilitating dispute resolution, fostering communication with residents, and educating members on the responsibilities
of communal living.
Harmony among members is key to effective governance. Poor governance, unprofessional conduct, and unresolved
disputes can lead to internal unrest and, potentially, litigation. If a board's failure to maintain this harmony is interpreted
as a breach of fiduciary duty, liability may result. These risks are often best mitigated through liability insurance coverage.

3.4. Analyzing Legal Requirements

Because each of an association’s core activities introduces potential legal exposure, the process of purchasing insurance
must be treated as a risk management priority. To properly analyze its legal obligations regarding insurance, an
association should follow these steps:
3.4.1. Step 1. Carefully examine association governing documents.
These documents often authorize or require the board to purchase insurance.
• For instance, in a planned community, governing documents may mandate the association to
insure both the common areas and individual homes on a blanket basis, whereas condominium
documents may limit required insurance to shared elements only.
These documents are recorded in the county land records and are legally binding.
Even resolutions—while often unrecorded—can have binding legal force and must be included in the review.
3.4.2. Step 2. Examine the enabling statute that created the association.
Condominiums are authorized under specific statutes in each state. Cooperatives and planned communities,
however, are usually created through conventional real estate transactions.
3.4.3. Step 3. Determine if related statutes at the local, state, and federal levels have direct or indirect implications.
[Link]. Local Laws
At the local level, relevant statutes often address building codes and zoning. These laws can significantly affect
insurance requirements. For instance, if zoning prohibits rebuilding in a damaged area, a cash value
 settlement might be triggered instead of full replacement—potentially limiting available insurance proceeds.
Other local mandates, such as setback or landscaping ordinances, can also influence coverage.
[Link]. State Statute/Case Law
At the state level, the most common insurance-related statutes pertain to unemployment and workers’
compensation. In some states, nonprofit corporations—including associations—may purchase insurance for
directors and officers or gain statutory immunity for volunteers. However, tort immunity laws vary and often
depend on the association’s tax or corporate status.
[Link]. Federal Law/Case Law
At the federal level, two major programs are particularly relevant:
1. The National Flood Insurance Program (NFIP), which is required for associations in federally designated
flood zones.
2. The Federal Deposit Insurance Corporation (FDIC), which indirectly affects associations by regulating
deposit insurance on association-held bank accounts.
3.4.4. Step 4. Carefully review the requirements of lenders, agencies, and professional organizations.
Lenders—especially the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage
Corporation (FHLMC)—often require that associations meet insurance standards before backing a mortgage.
Similarly, the Federal Housing Administration (FHA) and Veterans Administration (VA) may impose insurance
stipulations for associations whose members use FHA/VA financing. Through regulatory agreements, these
agencies can directly influence the structure and adequacy of a cooperative’s insurance plan.
Professional standards also come into play. The accounting profession, through the American Institute of
Certified Public Accountants (AICPA) and the Financial Accounting Standards Board (FASB), monitors insurance
adequacy during audits.
3.4.5. Step 5. Review all vendor, contractor, and service provider agreements.
These contracts may require the association to provide indemnity or obtain insurance for third-party claims. For
example, a landscaping contract may require the association to carry liability coverage for injuries to the
contractor while on site.
3.4.6. Step 6. Use prudent business judgment.
Boards must carefully review all insurance contracts and, ideally, design the association’s insurance and risk
management program in partnership with qualified professionals.

Quick Guide 3.4: How to Analyze Community Association Insurance Requirements

Step Action

1 Examine the governing documents and related rules, regulations, and resolutions.

2 Examine the state enabling statute, if any, that created the association.

3 Determine if any local, state, or federal laws apply.

4 Determine if the association needs to comply with FNMA, FHLMC, FHA, or VA requirements.

Determine if the association has assumed any insurance or indemnity obligations under a
5
contract with a vendor, contractor, or other service provider.

6 Use good business judgment and read the insurance contracts.

4. PROPERTY ISSUES AND PROPERTY INSURANCE

Before a board can establish the association’s property insurance program, it must first evaluate several related
considerations. Chief among these is the determination of property values and the delineation of responsibilities between
individually owned units and the association’s common elements.
Assigning a monetary value to the association’s real and personal property is essential for measuring potential loss exposures,
ensuring proper insurance-to-value coverage, and avoiding coinsurance penalties. The American Institute of Real Estate
Appraisers outlines various valuation methodologies, including: market value, use value, investment value, going-concern
value, insurable value, and assessed value.

4.1. Insurable Value

The Association’s focus is on insurable value, which the Appraisal Institute defines as “that portion of the value of an
asset or asset group that is acknowledged or recognized under the provisions of an applicable loss insurance policy.” In
the context of commercial property insurance, insurable value excludes certain items such as land and paved surfaces,
and limits coverage for others such as trees and glass.
4.1.1. Forms of Insurable Value
From the insurer’s perspective, insurable value takes one of two main forms:
[Link]. Actual cash value
The replacement cost of an asset, minus depreciation.
[Link]. Replacement cost value
The cost to replace an asset using current prices, building standards, and materials. This value is determined
at the time of loss, without a depreciation deduction, but is subject to policy limits.
Most governing documents for community associations require replacement cost coverage. Replacement cost, unless
qualified as uninsurable, typically excludes items like land, portions of foundations, paving, curbing, bulkheads, piers,
dams, and other similar features.
4.1.2. Insurable Replacement Cost of Real Property
The insurable replacement cost of real property also includes the value of heating, ventilating, air conditioning,
and other related equipment. The inclusion of equipment and machinery values in total property values does
not mean that these items are insured for all causes of loss.
[Link]. Actual cash value
Most widely used valuation concept in commercial property insurance because of the principle of indemnity.
In other words, most property insurance contracts need to be endorsed to obtain insurable replacement cost
coverage.
[Link]. Guaranteed replacement
Available option with respect to commercial property valuation. This concept, borrowed from personal lines,
insures the property without any limit. The property limit of insurance purchased is only for determining
premiums and does not act as a limitation of any loss payments.
[Link]. Appraisals
The most effective way to determine insurable replacement cost is to purchase an insurable replacement cost
appraisal. The insured is responsible for determining value in a property contract of insurance—the insurer
will only perform a replacement cost estimate. At times, the insurer may require the association to stipulate
the property values being insured by signing a statement of values. The board should not sign such a
statement without an insurable replacement cost appraisal.
Planned communities should consider obtaining a package rather than a stand-alone (or monoline)
commercial general liability policy. In a very simple planned community, however, with virtually no common
property, two problems may arise: appraisals are impractical, and the type of property included in the
commercial property part of the package may be uninsurable.
4.2. Owner Insurance & It’s Interface Between Units/Lots and Common Elements
Condominiums, cooperatives, and planned communities that insure on a blanket basis (as though they were a
condominium or cooperative) are usually required to insure the common elements and the units. Driven by interest
allocation, this requirement produces an overlap or interface problem. Where do the common elements and the units
begin and end?
In cooperatives, this interface has largely been resolved through leasehold interest solutions that were developed for
rental and commercial properties where the legal structures were similar: a single title holder with a real property
interest and a user’s (renter’s) personal property interest.
In condominiums, however, this problem became more convoluted because of the owner’s real property interest in the
unit and the association’s interest in the common elements.
Most of the debate centers around improvements and betterments and who is responsible for insuring them—the
association or the unit owner. Historically, improvements and betterments were additions made to the premises by a
tenant that became part of the realty and reverted to the owner at the termination of the lease. With the exception of
certain types of housing cooperatives, this is not the case for most associations.
There is no single correct way to handle this interface problem except by using the six-step analytical framework outlined
earlier. Once insurance responsibility has been determined and allocated, it needs to be firmly spelled out in the package
policy by endorsement (preprinted or manuscript) and communicated to all owners by means of newsletters, mailings,
or meetings. It is important to remember that though the owner may have maintenance responsibilities, the association
may have insurance responsibilities. (See Figure 6.)
Adjusting too many losses within the boundaries of a unit may lead to endless problems for the association. If the single
entity or all-in approach is used, the package policy deductible can be used to help reduce claim frequency. Once again,
the solution must become part of the formal association governance and must be communicated to the owners.
Cooperatives may be required to insure all improvements and betterments and appliances whether they are built in or
not.

Quick Guide: The Interface Between Common Elements and Unit/Lots

Treats the unit and common elements as entirely separate. Therefore, the owner would have to
Bare Walls
insure not only personal property, but also partitions, paint, cabinets, etc.
Treats the unit and common elements as one. The package policy insures paint, partitions, cabinets,
Single Entity
fixtures and similar real property that was part of the original unit. Personal property is excluded.
Extends the single-entity concept to insure a variety of improvements and betterments within the unit
All-In
at the time of a loss.

4.2.1. Owner Insurance

The individual owner’s personal insurance program is important not only for the individual, but also for the
association. At one level, both are interconnected because of the interface between common elements and
individual units. At another level, they are interconnected because the board may be charged in the governing
documents with monitoring the existence and quality of the individual’s policies.

Insurance programs for community associations and the owners come into close contact in several areas,
although the consequences often vary. If the master commercial package policy is primary and the common
area/unit interface is carefully evaluated and communicated, it should make little difference if the association is
insured through one company and the unit owner through another.

In a planned community, the association must worry about whether the individual owner is adequately insured.
Unless the planned community insures on a blanket basis, it has no way to control the effects of an owner’s
underinsurance or lack of insurance.

Relying on the mortgagee to require the owner to carry adequate insurance begs two questions. First, the owner
may own the home free of debt. Second, the mortgage limit may be very low compared to insurable replacement
cost. The mortgage company will usually only require insurance for the debt limit. The association can try to be
named as an additional insured on the owner’s policy, but some insurers balk at this.

Also, planned communities that do not insure on a blanket basis are more susceptible to insurance pricing cycles
because insurers traditionally prefer predictable property exposures. When the insurance market hardens and
rates increase, liability-driven insurance programs usually feel the price increases first. If the market significantly
hardens, then coverage availability becomes a problem.

There are no easy answers to these problems. Experienced association insurance professionals can provide useful
advice. The most effective answer, however, is for the planned community to insure itself as though it was a
condominium or cooperative.
4.2.2. Insurance Services Office Homeowners & Unit Owners Program
All of the coverages listed below are referred to as the “homeowners’ insurance program” by the Insurance
Services Office. Forms HO-1, 2, 3, and 8 apply to homes, form HO-4 is for renters, and form HO-6 is for a
condominium or cooperative unit owner. The numbering system of the homeowners’ insurance program has 10
 digits with the last four referring to the edition date: HO 00 01 2013. Insurance Services Office provides six main
coverages:
[Link]. Coverage A (dwelling)
Insures the housing unit and construction supplies. In an HO 00 06, it means:
• Additions, alterations to the “residence premises.”
• Items of real property that pertain exclusively to the residence premises.
• Property that is the individual’s insurance responsibility under the governing documents
• Structures owned solely by the owner located at the residence premises.
[Link]. Coverage B (other structures)
Insures other structures located on the premises, but not connected to the dwelling. In an HO 00 06, there is
no Coverage B. It is included in Coverage A.
[Link]. Coverage C (personal property)
provides contents coverage and applies to property owned or used by the individual owner (insured).
[Link]. Coverage D (loss of use)
Involves additional living expenses, fair rental value, and prohibited use.
[Link]. Coverage E (personal liability)
Covers legal liability arising from bodily injury and property damage claims. It does not include personal injury—
libel, slander, defamation, etc.
[Link]. Coverage F (medical payments to others)
Provides accident coverage for third parties injured on the premises.
4.2.3. Association Loss Assessment Coverage
All of the homeowner forms, except the HO 00 04, contain within Coverages A and E an additional coverage
entitled loss assessment. In both cases, the limit of liability is $1,000 although this limit can be increased by
endorsement to as much as $50,000. In some cases, the coverage is only triggered if the assessment is made
against all unit owners.
• Coverage A pays that part of a loss assessment charged to the owner by the association because of a
peril. The assessment must occur during the policy period, but the cause of loss may occur earlier. The
commercial package policy deductible for the common area policy, if it is charged back to the
individual, can be paid for out of this coverage. It is subject to the homeowner policy deductible and a
possible sub-limit that is usually $2,500.
• Coverage E pays that part of a loss assessment charged to the owner by the association because of
property damage or bodily injury or because the liability for the act of a director or officer is charged to
the owner. The assessment must occur during the policy period, even though the event that caused it
may have occurred earlier.
Owners in a community association can add certain endorsements to their homeowner’s policy that will
provide broader protection.
4.2.4. Communicating the Insurance Program
In any type of community association, it is vital that the association’s insurance agent communicate to the
owners the type of coverage in place for the association, how that coverage may or may not benefit them, and
what they should consider insuring. This can be done through meetings, newsletters, or direct mailings.
4.3. Other Property Issues and Interests
Personal property is usually defined as everything that is not real property. Personal property is not typically appraised
unless it has unique value. The valuation of personal property can usually be obtained by reviewing acquisition records
and inventories.
4.3.1. Unique property
Large-scale master planned communities often have unique and special property issues. For example, they may
have ski hills, dams, retaining walls, docks, piers, stables, and golf courses. Associations must correctly value
these exposures and read the policy to determine if unique property exposures fall within the definition of
insured property. If they do not, the board should develop endorsements.
 Association property involves many legal interests, including present-ownership interests, future-ownership interests,
present-use interests, and future-use interests.
[Link]. Frequently Encountered Interests
Besides the association (present-ownership interests), the most frequently encountered interests are:
• Secured creditors
Secured creditors include mortgages, loss payees, those secured with UCC filings.
• Sellers and Buyers
The terms of sale usually stipulate when title passes and when insurance obligations shift.
• Bailee Interests
Bailments are created when the bailee (i.e., the association) receives the property of another—the
bailor—in a condition of trust for a specific purpose. For example, a bailment is created when a valet
parks a car in the association garage or when an on-site management office receives resident packages.
• Tenant interest
Any tenant has a property interest, known as a leasehold interest, in the rented property. This interest
may involve improvements and betterments.
4.4. Causes of Association Property Loss
The causes of property loss fall into three broad categories: natural perils (fire, windstorm, flood, disease), human perils
(thefts, homicides, negligence, pollution), and economic perils (strikes, new technology, stock market fluctuations).
Typically, insurance contracts deal only with natural and human perils. In insurance contract language, certain perils may
become covered causes of loss.

4.4.1. Covered Causes of Loss

In commercial property insurance, causes of loss are insured in the following forms or insuring agreements: basic
form (fire, lightning, windstorm, etc.), broad form (everything in basic form, plus breaking glass, falling objects,
weight of snow, ice, or sleet, water damage), and the special form (covers direct physical loss, except the
exclusions).
4.4.2. Standard Policy Exclusions
The board will gain a better appreciation of its property insurance needs if it understands what is not insured.
Everything but exclusions are insured. All three of the forms listed above, including the special form, have several
important exclusions:
[Link]. Building ordinance or law
This relates to a building code (or ordinance) that may require the association to tear down an
undamaged portion of a building because a certain percentage of the total structure has been destroyed.
Exclusions
There are three aspects to this exclusion.
EXCL 1. Contingent liability
This is the value of the undamaged portion of the buildings.
EXCL 2. Demolition
The commercial property policy contains demolition coverage for the part of the building
that has been damaged by a covered cause of loss. Demolition in building ordinance
coverage, however, is for the undamaged portion of the building.
EXCL 3. Increased cost of construction
Once the undamaged part has been demolished and reconstruction begins, the cost of this
new construction may be increased because of changes in building code requirements.
[Link]. Earth Movement
Any earth movement (other than sinkhole collapse), such as earthquake, erosion, and mud slide.
 [Link]. Governmental action
Seizure or destruction of property by order of governmental authority is excluded unless the destruction
helps prevent the spread of a fire.
[Link]. Power failure
This excludes damage caused by off-premises power or utility services failure. Coverage can be obtained
for this exposure.
[Link]. War and Military Action
Losses caused by such perils are usually so catastrophic that they are not insurable.
[Link]. Nuclear Hazard
The potential losses are too catastrophic for conventional commercial insurance. Coverage can be
purchased, if necessary.
[Link]. Water damage
The water damage that is insured pertains to damage caused by leaking roofs, plumbing, and similar
causes.
Exclusions
Water damage caused by the following, however, is usually excluded:
EXCL 1. Leakage and seepage, whether continuous or not
EXCL 2. Back-up of sewers and drains
EXCL 3. Surface and subsurface water
EXCL 4. Flood
EXCL 5. Wind-driven rain without prior damage to the building.
In other words, if the wind blows a window open and water enters and causes damage,
the ensuing water damage is insured.
[Link]. Glass damage
Coverage is often provided on a limited basis, such as $100 per pane and $500 per occurrence for specific
causes of loss, such as vandalism.
[Link]. Maintenance exclusions
Damage caused by wear and tear, rust, corrosion, etc. is excluded unless loss or damage is caused by a
specified cause of loss.
[Link]. Mechanical breakdown and electric arcing
If mechanical equipment, such as pumps, fans, and electric switch gear accidentally breaks down,
damage is excluded.
[Link]. Pollutant cleanup
By the mid-1980s, insurers were refusing to grant any liability protection for pollution. Insureds then
began to make pollution claims under the debris removal section of their property insurance. In turn,
insurers eliminated virtually all direct damage property coverage for pollution cleanup, except for
$10,000 as an aggregate limit.
4.5. Standard Conditions & Limitations
4.5.1. Coinsurance
This is a condition of a commercial property policy that the insurer uses to obtain insurance-to-value. Broadly
speaking, coinsurance allows an insurer to value the property twice: once at the inception of coverage and again
at the time of a loss. If the property insurance limits are insufficient at the time of loss, the insurer can
contractually demand the insured to share in the loss. Most commercial package policies have several examples
of the application of coinsurance.
4.5.2. Special Policy Conditions
Condominiums are usually granted special policy conditions. However, cooperatives and planned communities
need to ask for them.
 4.5.3. Property Limitations
All property policies have techniques for modifying their coverage:
[Link]. Curtailed limits
Trees and landscaping, glass, valuable papers and records, accounts receivable, property of others, and
other coverage extensions have defined limits that may be insufficient to meet the association’s loss
exposures.
[Link]. Actual cash value
Despite granting replacement cost coverage for the buildings, certain items, such as common element
carpeting and appliances may still only be insured at actual cash value.
[Link]. Types of property
Fences, antennas, swimming pools, docks, architectural glass, retaining walls, etc. may be excluded. They
may not be defined as a building.

4.6. Property Insurance Coverages

The policies and coverages listed below are available in the community association marketplace.
Commercial Package Policy
The commercial property part of the commercial package policy provides coverage for most of the association’s property
exposures to loss. Four areas of concern involve valuation, deductibles, covered causes of loss, and contents.
4.6.1. Valuation of real and personal property
It is important to obtain insurance-to-value by means of an insurable replacement cost valuation (for real
property) and to obtain replacement cost endorsement because most commercial property insurance is written
on an actual cash value basis.
4.6.2. Property policy deductibles
These should apply on a blanket basis to all buildings. The deductible should not apply per location. If it does,
multiple deductibles could apply for any given occurrence.
• Property policy deductibles should be as high as possible to ensure adequate premium savings and to deter
the use of the insurance contract as a maintenance policy.
• Deductibles can be split in dollar amount between real and personal property. They can also be allocated in
differing amounts among the various covered causes of loss.
• The allocation of part or all of the package policy property deductible back to the unit owner depends on
several factors that can be evaluated and analyzed according to the framework presented earlier. This
allocation should be clarified before any loss occurs.
• In property insurance, the deductible will apply for each occurrence of a covered cause of loss. What
constitutes an occurrence, however, may be open to question. Some occurrences are clearly defined—an
earthquake and subsequent tremors that occur within 72 hours are viewed as a single event. On the other
hand, a pipe that leaks over several months and causes damage with each leak presents a problem. How
many occurrences took place? The association’s agent should clarify how such an occurrence would be
treated.
4.6.3. Causes of loss and other endorsements
Of the three forms of property insurance discussed earlier, the most comprehensive coverage is the special
form covered cause of loss. The special form, however, may need to be supplemented by other insurance
coverages and endorsements.
• Replacement cost and/or guaranteed endorsement.
• Agreed amount endorsement that deletes coinsurance.
• Inflation guard endorsement that adjusts the amount of property insurance by a certain percentage on a
periodic basis during the policy year.
• Other covered cause of loss endorsements depend on the type of cause of loss (such as sewer backup) for
which the association seeks coverage.
• Some or all of the special association policy conditions mentioned earlier.
 4.6.4. Contents coverage
Most contents exposures can be insured through the commercial package policy. The agreed amount
endorsement should apply to both the building and the contents. Certain items that appear to be contents,
such as building maintenance equipment, are usually included in the definition of a building. Read the property
insurance contract.
4.7.

DRAFTING RULES
1. THE ROLE OF RULES IN COMMUNITY GOVERNANCE
1.1. The Legal Necessity and Philosophical Foundation of Rulemaking
Community Associations are governed by a fundamental principle: residents agree to abide by a common set of
standards in exchange for the benefits of shared ownership and collective decision-making. This social contract is only
effective when backed by a structure that can be predictably and fairly enforced—namely, rules.
Rules are not an accessory to governance; they are essential. They operationalize the community’s values and clarify
expectations, transforming broad principles from the declaration (CC&Rs) into practical standards for day-to-day living.
Without rules, enforcement becomes inconsistent, governance becomes subjective, and the Association’s credibility
deteriorates.
Legally, the authority to make rules must be grounded in either state statute or the Association’s Governing Documents.
This authority is not implied—it must be explicitly granted. Typically, the Governing Documents (particularly the Bylaws
or CC&Rs) contain language empowering the Board of Directors to adopt rules related to the use of common areas or
the conduct of residents.
From a philosophical standpoint, rulemaking is a deliberate delegation of authority from homeowners to their elected
representatives. When the Board of Directors adopts rules, it is exercising its role as a fiduciary body entrusted with
protecting the Association’s interests. Rules, therefore, are not instruments of control but of governance. They help
maintain property values, reduce conflict, and promote consistency across the community.
Good rules do more than prohibit—they clarify. They should be transparent in purpose, logically structured, and
enforceable as written. Poorly drafted rules can breed resentment, invite legal challenges, and undermine the Board of
Directors' legitimacy. The Board’s role is to adopt rules that support—not frustrate—the spirit and intent of the
Governing Documents.

1.2. Distinguishing Rules, Restrictions, and Regulations

The Board of Directors must clearly understand the distinction between rules, restrictions, and regulations—terms that
are often used interchangeably but have important legal and practical differences.
Restrictions are permanent, property-based limitations found in the recorded declaration (CC&Rs). These restrictions
are binding on all owners, current and future, and typically address fundamental issues such as lot usage, architectural
standards, and prohibited activities. Because they are part of the recorded declaration, they can usually only be
amended by a vote of the membership.
Rules are policies adopted by the Board of Directors to interpret and implement the Governing Documents. They often
relate to common area use (such as pool hours), procedural expectations (such as parking or trash removal), or the
submission of architectural applications. Rules must be consistent with and subordinate to the CC&Rs and cannot
materially alter the rights of owners.
Regulations is a broader, informal term that may encompass both rules and restrictions. It is often used in the context
of administrative procedures or operational guidelines adopted by the Board of Directors or its committees.
 The guiding principle is foreseeability. Could a reasonable homeowner, reading the CC&Rs, expect that the Board of
Directors might adopt a rule on the subject in question? If the answer is no, the rule may not be appropriate.
This does not mean the Board of Directors lacks flexibility—but it means that any rule must flow logically from the
Governing Documents and remain within the bounds of the authority granted.

1.3. Fiduciary Duty and the Obligation to Enforce Consistently

Serving on the Board of Directors is not simply about volunteering time—it is about accepting a legal and ethical duty
to act in the best interests of the entire Association. One of the clearest expressions of this fiduciary role is the obligation
to enforce rules fairly, consistently, and transparently.
Boards of Directors that enforce some violations but overlook others—or that apply rules selectively—risk more than
community unrest. They may face legal challenges for breach of fiduciary duty, discrimination, or denial of due process.
Courts have consistently ruled that selective enforcement may invalidate an otherwise lawful rule if it undermines
fairness or appears retaliatory. To fulfill their obligation, the Board of Directors must:
• Apply rules uniformly to all Members, regardless of social relationships, status, or intent.
• Follow proper enforcement procedures, including giving notice of violations, allowing owners an opportunity to
be heard, and documenting all actions taken.
• Maintain records of all communications, hearings, and outcomes.
• Use discretion judiciously—not every infraction requires a fine or formal penalty, but discretion must be guided
by reason, not preference.

The Board of Directors should also avoid creating or enforcing rules that invite ambiguity or controversy. If a rule is
difficult to understand, difficult to enforce, or inconsistently applied, it becomes a liability. Rules that are clear, justifiable,
and transparently enforced are far more likely to achieve voluntary compliance and avoid conflict.
Lastly, consistent enforcement not only satisfies statutory requirements—it reinforces the Board of Directors' integrity.
When residents trust that rules are applied fairly and for the Association’s benefit, it becomes easier to govern, and the
community becomes a stronger, more harmonious place to live.

2. SOURCES OF AUTHORITY AND LIMITS OF BOARD POWER

2.1. The Hierarchy of Governing Documents
The power of the Board of Directors to govern and adopt rules does not exist in a vacuum. It is rooted in a layered legal
framework, where each document builds upon and must conform to those above it. Rules occupy the lowest tier of this
hierarchy, meaning they must never conflict with or attempt to override documents or statutes that carry greater
authority.
2.1.1. Federal and State Law
• Examples: to be listed in final draft
2.1.2. Recorded Plat or Map
• Examples: to be listed in final draft
2.1.3. Declaration (CC&Rs)
• Examples: to be listed in final draft
2.1.4. Articles of Incorporation
• Examples: to be listed in final draft
2.1.5. Bylaws
• Examples: to be listed in final draft
2.1.6. Rules and Regulations / Board Resolutions
• Examples: to be listed in final draft
Each layer must align with those above it. If a rule contradicts the CC&Rs or state law, it is unenforceable, even if it was
adopted unanimously.

2.2. The Scope of Board Authority to Adopt Rules

The Board of Directors may only adopt rules when it has been given the power to do so by the Governing Documents.
That power may be specific or general, but it must be stated.
 2.2.1. Frequent Rule Topics:
• Use and hours of operation for common areas
• Safety and conduct in shared amenities
• Parking protocols and pet guidelines
• Procedures for architectural submittals and compliance
• Enforcement practices, including warnings and fines
2.2.2. Rule Making Authority
Rulemaking authority is often granted through language in the Association’s CCRs such as:
"The Board shall have the power to adopt and publish rules and regulations governing the use of the common
properties and facilities and the personal conduct of the Members and their guests thereon."

Even with such language, rules must be reasonable, enforceable, and cannot contradict restrictions already
established in the CC&Rs or Bylaws. They also cannot extend into areas that the declaration reserves to the
membership for approval.
Boards must clearly identify the section of the Governing Documents or statute that gives them the right to
regulate a particular subject. If no such authority exists, the Board should not proceed with the rule.

2.3. Recognizing the Limits of Rulemaking

Boards sometimes overstep when they use rules to create new restrictions that were not contemplated in the Governing
Documents. Rules are meant to provide detail, guidance, and implementation of existing restrictions—not to invent new
prohibitions or expand the scope of the declaration.
2.3.1. Examples of overreach
• Attempting to ban certain architectural features when the CC&Rs do not empower the Board to regulate
them;
• Imposing rules that limit leasing or occupancy in ways not authorized by the Governing Documents;
• Establishing fines or enforcement processes not permitted by the Bylaws.
While the reasonableness of a rule is important and should be considered, the true test is whether the rule is
foreseeable from the CC&Rs. Could a homeowner reading the CC&Rs reasonably anticipate that the Board might adopt
such a rule? If not, the rule may be vulnerable to challenge.

2.4. Rulemaking Requires Thoughtful Restraint

Just because the Board can make a rule does not mean it should. Boards should be judicious in choosing what to
regulate.
2.4.1. Rule Adoption “Rules”
Rules should be adopted only when they are:
• Clearly needed to address a recurring problem or issue of community concern;
• Based on input from residents or committees;
• Necessary to support the operation, safety, or welfare of the Association;
• Consistent with existing policies and legal standards;
• Enforceable in a fair and consistent manner.
2.4.2. Motto: Educate before you regulate
Overregulation breeds resentment, undermines goodwill, and creates unnecessary tension. The most successful
Boards adopt a minimalist approach to rulemaking—focusing on essential standards, using clear and positive
language, and avoiding intrusion into matters better left to individual discretion. Boards are encouraged to
educate before they regulate. Open dialogue, newsletters, and reminders can often achieve better compliance
than immediate rule adoption.

2.5. Best Practices for Boards in Rule Development

To fulfill their fiduciary duty and maintain harmony within the community, there are a few key things Board Members
should keep in mind:
2.5.1. Habits every Board Member should practice:
• Familiarize yourself with the hierarchy of documents and understand its legal constraints
 • Confirm that any proposed rule falls within an area of authorized regulation
• Avoid rules that conflict with, duplicate, or extend beyond the CC&Rs
• Prioritize clear, enforceable language that reflects community standards
• Consider the long-term impact on Member relationships, staff enforcement, and administrative overhead
• Solicit community feedback when possible before adopting new rules
• Document the source of authority and the rationale for adoption
• When in doubt: Get and heed legal advice
Rulemaking is a serious responsibility. When done well, rules support order, clarity, and fairness. When done poorly, they
alienate residents and expose the Association to legal risk. The Board’s role is to adopt rules only where necessary, ensure
their legal foundation, and apply them in a manner that builds trust and community cohesion.

3. HOW RULES ARE DEVELOPED

3.1. Rule Development Begins with a Problem
For the Board of Directors, the starting point for any rule should be the recognition of a specific problem or a pattern of
undesirable behavior that cannot be addressed adequately through existing restrictions or informal means. A rule should
never be created simply because a few residents made complaints, or because a Board Member believes it's a good
idea. Rulemaking must be grounded in an identified need that affects the community’s well-being, operations, or shared
resources.
3.1.1. Examples of common problem areas include:
• Use of parking spaces by oversized vehicles
• Noise disturbances in common areas
• Inappropriate use of shared amenities (pools, playgrounds, etc.)
• Safety concerns such as speeding or unaccompanied children in pools
To determine whether a rule is appropriate, the Board should ask: Is this issue ongoing? Does it affect a significant portion
of the community? Can it be addressed through communication or education first?

Effective rules are those that resolve issues, not create new ones. A poorly conceived rule might worsen resident
dissatisfaction, encourage complaints, or expose the Association to legal scrutiny.

3.2. Evaluating Alternatives and Understanding the Cause

Before drafting a rule, the Board of Directors must clearly define the problem, its root causes, and the outcomes they
seek. This requires observation, dialogue, and sometimes professional guidance.
3.2.1. Evaluating Necessity
• What exactly is the behavior or condition that needs regulation?
• How frequent is the issue, and who is affected?
• Are there liability, safety, or fairness concerns?
• Are there existing rules or restrictions that already apply?
Sometimes, the right solution is not a new rule but an operational change, a policy clarification, or better signage. Other
times, adjusting enforcement of an existing rule is more effective than creating a new one. Rulemaking should be a last
resort, not a first reaction.

3.3. Researching Existing Authority and Precedent

Once the need for a rule is clear, the Board must determine whether it has the authority to adopt it. This requires
referencing the declaration, bylaws, and applicable statutes. If the rule involves new restrictions or obligations, the Board
must ensure those are within its scope of authority.
3.3.1. Steps to Ensure Validity
• Review relevant provisions in the Governing Documents
• Identify whether the Board is permitted to regulate the topic
• Examine prior resolutions to ensure consistency and avoid duplication
• If necessary, consult legal counsel to verify enforceability
Inconsistencies with past resolutions, CC&R limitations, or statutory boundaries can render a rule invalid or
challengeable.
3.4. Drafting the Rule with Clarity and Precision
With the authority confirmed and the issue clearly defined, the Board should prepare the rule in writing. A well-drafted
rule includes several key elements.
3.4.1. Key Elements of a Well Drafted Rule
[Link]. Clear Statement Permitted or Prohibited Practices
Avoid vague terms like "excessive noise" without defining what constitutes a violation.
[Link]. Defined Terms and Scope
Clarify whether the rule applies to owners, tenants, guests, or vendors.
[Link]. Rationale for the Rule
This can be included in the resolution or attached communication.
[Link]. Method of Enforcement
Include how the Association will issue notices, allow for hearings, and impose penalties, consistent with
Governing Documents.
[Link]. Effective Date
Allow reasonable time between adoption and enforcement.
[Link]. Positive (when possible) & Clear Language
When writing the rule, use positive language when possible. Members should know what they are to do, not
what not to do. Rules should not target groups of people unfairly. For example: Instead of: "Do not allow
children to run in the clubhouse," a rule should read: "Children X age and under must be supervised inside of
the clubhouse.” “Members and visitors must walk while inside the clubhouse."
It is fair to consider safety as it relates to capacity, but it is not fair to assume only certain classes of people
will be unsafe.
Rules should be written so that the average Member can understand and comply without legal interpretation.

3.5. The Importance of Transparency and Member Input

While most rulemaking authority rests with the Board, the process benefits greatly from community input. Open
communication builds trust, educates residents, and increases voluntary compliance.
3.5.1. Steps to incorporate transparency could include:
• Circulate a draft of the proposed rule with a summary of its purpose.
• Solicit feedback through meetings, email, or designated comment periods.
• Discuss the rule at an open meeting before adopting it formally.
This process does not mean every comment must be accepted, but it ensures Members feel heard. It also protects the
Board from claims of secrecy or bias.

3.6. Formal Adoption and Publication

Once the rule has been reviewed and finalized, the Board must adopt it by formal resolution at a properly noticed open
meeting.
3.6.1. Elements To Include in the Resolution
• The text of the rule
• A statement of authority
• An effective date
• Notes on any sunset clause, review date, or related policies
After adoption, the rule must be communicated to the community. T
3.6.2. Methods to Notify the Membership
• Email or mailed newsletters
• Bulletin boards or signage in common areas
• The Association website
• Inclusion in an updated rulebook or handbook
 Residents must have access to all current rules at all times. A good practice is to maintain a consolidated rules
document that is updated after every Board action.

3.7. Reviewing and Updating Rules Over Time

The Board’s responsibility does not end with adoption. Rules must be revisited, aka Audited, regularly to ensure they
remain UpToDate
3.7.1. Elements of Effective Audit
[Link]. Enforceable
[Link]. Aligned with Governing Documents
[Link]. Responsive to changes in community needs
[Link]. At least annually, the Board should review all standing rules and:
[Link]. Repeal rules that are obsolete or ineffective
[Link]. Consolidate overlapping rules
[Link]. Revision of unclear language
Rules are not and should not be set in stone. Circumstances evolve, and so should governance practices. However,
change must always be done through proper process—never arbitrarily.

3.8. Summary
Rule development is a formal expression of the Board’s governance power. When approached with deliberation,
transparency, and legal grounding, rules become effective tools for protecting the Association, maintaining peace, and
supporting property values. When handled carelessly, rules can invite backlash, noncompliance, or legal exposure.
The Board must:
1. Start with a clearly defined and justifiable problem
2. Research authority and review precedent
3. Draft rules that are clear, necessary, and enforceable
4. Solicit and incorporate Member input when possible
5. Adopt rules formally and communicate them widely
6. Review and revise as necessary to reflect community needs.
A rule that is created carefully, adopted transparently, and enforced consistently reflects strong leadership and sound
governance.

4. ENFORCEMENT PROCEDURES AND DUE PROCESS

Enforcement is where a rule ceases to be theoretical and begins to impact real people. For this reason, enforcement must be
carried out with the utmost care, fairness, and adherence to both the Association’s Governing Documents and fundamental
principles of due process. While enforcement is necessary to preserve community standards and protect property values,
how the Board of Directors chooses to enforce rules will define its reputation—either as a fair and principled body or as an
inconsistent or overreaching authority. This section explains how enforcement should be structured, how hearings are
conducted, what due process means in a community association context, and how to ensure the Association’s actions remain
both lawful and respected.

4.1. Fairness and Notice: What Due Process Looks Like in an HOA
Due process refers to the legal and ethical obligation to treat all Members fairly before depriving them of any right,
privilege, or imposing any consequence.
4.1.1. Context: Community Associations
In the context of Community Associations, due process ensures that no Member is penalized without:
• Notice: Being notified of the alleged violation
• Hearing: Being given an opportunity to be heard before a decision is made.
4.1.2. Required Elements of Notice
Notice of a violation of a rule must be given to a violating member and it must be timely, specific, and informative.
Notice must include:
• A clear citation and description of the rule or restriction allegedly violated
• The factual basis of the violation (e.g., date, time, location, and nature of the incident)
 • The possible consequences (fines, suspension of privileges, etc.) in accordance with the documents
• Information on how the Member may respond or contest the charge (typically through a hearing)
4.1.3. Opportunity to be Heard
The opportunity to be heard must be meaningful, not perfunctory. The Member should be offered a reasonable
time and place to explain their side of the story. They must be allowed to present evidence, respond to
allegations, and even bring witnesses if desired.
Even if the Governing Documents do not spell out detailed procedures, the Board has a fiduciary duty to provide a
process that is transparent and fair.

4.2. Violations: Documentation, Communication, and Consistency

Before any enforcement action can occur, the Board must establish that a violation occurred—and that requires
evidence. Documentation is the bedrock of successful enforcement.
4.2.1. Key Relevant Documentation
• Photographs (or videos when appropriate)
• Written descriptions of the issue by management or observers
• Copies of relevant communications (e.g., warning letters, complaints)
• Prior notices or warnings related to the same issue
4.2.2. Effective Communication
Once a violation is documented, steps to notify the homeowner should be taken. This is where an effective
enforcement and notification policy coming into play. At a minimum, the Board (or Management, if delegated)
should send a written notice of violation to the Member. This communication should not be aggressive or
accusatory, but factual and professional. More details regarding Notice and Enforcement can be found in the
Enforcement section of this manual.
4.2.3. Consistency
For any rule to be found as valid or even enforceable, consistency and fairness are essential. If one violation is
penalized while others are ignored, the Board risks accusations of selective enforcement, which can make even
valid actions legally vulnerable. Consistency does not mean rigidity. Boards may take circumstances into account
(e.g., first-time violation, mitigating factors), but the underlying rules and process must apply equally to all
Members.

4.3. Hearing Procedures

Hearings are the formal mechanism for providing due process. The hearing is not a trial, but it must offer basic fairness
and structure.
4.3.1. Elements of a Fair Hearing
• The Member received proper notice (date, time, location, and subject of hearing).
• The hearing is held before an impartial panel—typically the full Board of Directors.
• The Member is allowed to present their side, submit evidence, and answer questions.
• The Board listens objectively and does not make a decision until after the Member has spoken.
4.3.2. During the Hearing: Best Practices
• Assign a time limit for each party to present.
• Ensure all parties behave respectfully.
• Keep the focus on the issue, not personalities.
In the end, the Board’s decision must be based on facts in relation to the documents as they are written. After the hearing,
the Board may meet in closed session to deliberate, if allowed by state statute (in AZ, if the homeowner requests an open
meeting, the Board must deliberate openly.)
No matter the outcome, or the style of final deliberation, the decision and any penalty imposed should be
communicated in writing and include the rationale for the outcome. If no violation is found, the Member should be
notified accordingly. If a violation is confirmed, the Notice/communication should specify:
• What rule was violated
• What fine or consequence has been imposed
• Whether the violation needs to be corrected, and by when
4.4. Fines, Suspensions, and Penalties: Limits and Best Practices
While the Board has a duty to enforce rules, its power to impose penalties is limited by the Association’s Governing
Documents and, where applicable, by law.
4.4.1. Fines
Fines must be authorized by the Governing Documents or an adopted schedule of monetary penalties
(Enforcement and/or Fine Policy.) The amount must be considered reasonable and proportional to the violation,
and align with State Statute. Repeating fines for ongoing violations may be appropriate, but excessive or
punitive fines may be considered unenforceable.
4.4.2. Suspensions
The suspension of privileges (such as pool use or voting rights) must also be explicitly authorized by the
documents. These must be used sparingly and only after due process.
4.4.3. Best practices for imposing penalties
• Always confirm legal authority before issuing a fine or suspension.
• Provide written notice of the penalty with the reasoning and rule cited.
• Allow for correction where appropriate—especially with first-time violations.
• Consider grace periods or compliance deadlines.
4.4.4. Penalties Practices to Avoid
• Target specific individuals unfairly
• Lack clear connection to a violation
• Feel retaliatory or overreaching
Always remember: the goal of enforcement is compliance, not punishment.

4.5. What to Do When Enforcement Fails

Even with clear rules, consistent processes, and communication, some violations persist. When this occurs, the Board
must decide how far to escalate enforcement efforts.
4.5.1. Enforcement Options: Persistent Violators
• Repeating the notice and hearing process
• Increasing fines, if authorized
• Suspending privileges (if allowed)
• Seeking mediation or arbitration, where applicable
4.5.2. Referring the matter to legal counsel
Legal action should always be a last resort, and used when:
• Other efforts have failed
• The violation is serious and ongoing
• The community’s interests are materially affected
4.5.3. Before pursuing legal action
• Consider whether the matter involves safety, liability, or high-impact harm
• There may be other remedies, such as city/state law enforcement
• The Board should weigh the costs (legal fees, potential backlash)
• Talk openly with the Association’s counsel prior to formal request

4.6. Transparency and Recordkeeping

Boards must ensure that every step of the enforcement process is documented and available for future reference. This
is essential for defending actions, maintaining fairness, and preventing liability.
4.6.1. Record Retention
The Association should retain record of:
• All violation notices sent and their delivery method
• Documentation submitted (photos, written reports)
• All correspondence with the Member
• Hearing dates, attendees, and summaries
• Decisions made and penalties imposed
 • Records of compliance or follow-up
4.6.2. Transparency
TRANSPARENCY DOES NOT MEAN VIOLATING PRIVACY.
The details of individual violations should not be disclosed to other Members. The Board can—and should—
report in general terms on enforcement activity (e.g., “Three noise violations were addressed this month”)
without naming individuals.

4.7. Summary
Effective enforcement is not about control. It is about upholding community standards with integrity, respect, and legal
grounding. A responsible Board will:
• Ensure all rules are fair, necessary, and clearly written.
• Notify Members of alleged violations with specificity and clarity.
• Provide a fair hearing process.
• Impose only those penalties authorized by the documents.
• Apply enforcement consistently to all Members.
• Document all actions and decisions.
• Reserve legal escalation for serious, unresolved cases.
When enforcement is carried out with professionalism and due process, it strengthens—not weakens—community trust
and cohesion. The role of the Board of Directors is not to dominate but to lead through fairness, restraint, and
accountability.

5. SPECIAL CONSIDERATIONS IN RULEMAKING

5.1. Rules That Affect Owners’ Rights
Some rules go beyond managing behavior—they affect an owner's rights related to property use, access, leasing, or
voting. These kinds of rules are not procedural; they touch on ownership itself and, therefore, must be handled with
extraordinary care. Boards must first ask:
1. Does this rule alter, limit, or expand a right conveyed by deed, contract, or statute?
2. Is this the kind of rule that the average homeowner would reasonably expect to vote on?
If the answer to either is yes, the rule may not be within the Board’s unilateral authority to adopt. Even if the governing
documents appear to grant broad rulemaking authority, courts are wary of Boards using that power to materially change
the bargain homeowners accepted when purchasing.
5.1.1. High-Risk Rules
• Limiting the number of rentals without a membership vote, when the CC&Rs are silent.
• Creating guest policies that effectively restrict family visitation.
• Changing the way votes are allocated or counted.
RULES ARE MEANT TO CLARIFY RIGHTS AND OBLIGATIONS—NOT REDEFINE THEM.

5.2. Rules that Affect Protected Classes

Federal law—especially the Fair Housing Act (FHA)—places strict boundaries on rulemaking that could affect individuals
based on characteristics like:
• Race
• Color
• Religion
• Sex
• Familial status
• National Origin
• Disability
When drafting rules related to parking, noise, amenity access, or occupancy, Boards must consider whether those rules
could disproportionately impact or target one of these protected groups.
5.2.1. Examples of Problematic Rules
• A rule that says “Children under 16 may not be in the pool without an adult” might seem neutral but could
be interpreted as familial status discrimination under FHA.
 • A rule banning medical equipment on balconies could violate the rights of a person with a disability who
needs that equipment.
• A requirement that residents speak English in common areas could run afoul of national origin protections.
5.2.2. Best Practices
• Avoid writing rules that apply to specific classes of people.
• Always tie rules to a legitimate safety or operational concern, and document that rationale.
• When in doubt, consult legal counsel before adopting the rule.

5.3. Reasonable Accommodations and Modifications

Boards must also be prepared to make exceptions to rules when federal law requires it. Under the FHA and Americans
with Disabilities Act (ADA), residents with disabilities may request:
• A reasonable accommodation: a change in rules or policies to give a person with a disability equal
opportunity to use and enjoy their home or common areas.
• A reasonable modification: a physical change to a home or common area that allows equal access or usability.
5.3.1. Required Approval
Requests made in accordance with FHA must be granted if:
• The person has a qualifying disability.
• The request is necessary to afford equal use or enjoyment.
• The request is reasonable (i.e., does not pose undue financial or administrative burden on the Association).
5.3.2. Allowable Requests from the Boards
Boards may:
• Ask for confirmation of the disability (usually in the form of a professional letter).
• Ask how accommodation is related to the disability (physical therapy, dog provides a service)
Boards may not:
• Demand diagnosis or treatment details
• Decide what type of treatment is “best”
• Deny accommodation just because others may not receive the same
Rules that appear neutral but fail to make room for reasonable accommodations can be considered discriminatory—
even if unintentional.

5.4. Rules About Use of Technology

As technology becomes more integrated into daily life, Boards are increasingly asked to regulate:
• Surveillance cameras and doorbell cameras
• Drones
• Electric vehicle (EV) charging
• Solar panels and satellite dishes
When addressing these issues, Boards should:
• Understand what state or federal law may already protect, such as:
• FCC regulations protecting satellite dish placement
• Statutes preventing unreasonable restrictions on solar energy systems
• Focus on reasonable placement, safety, and aesthetic standards, not outright bans.
• Include technical definitions and clear criteria in rules involving newer tech.
Tip: Boards may wish to defer to architectural review processes rather than writing standalone rules on emerging
technologies, unless specific needs have been identified.

5.5. Service Animals and Emotional Support Animals (ESAs)

Rules about pets require extra caution when applied to service animals or emotional support animals, which may not
be treated as ordinary pets under federal law.
5.5.1. Dos & Don’ts
• Boards may not:
• Charge pet deposits or fees for service animals.
• Ban ESAs outright if the resident has documentation supporting the need.
 • Boards may:
• Request basic documentation of need.
• Require that animals behave appropriately and not threaten others' safety or property.
Rules that attempt to classify all animals under a general “pet policy” may conflict with the Fair Housing Act if they do
not account for these protected categories.

5.6. Other Protected Rights to Watch For

In addition to fair housing rights, Boards should be alert to areas where rules may bump up against other federal
protections:
5.6.1. Freedom of speech and assembly
While Associations are not government bodies, courts have sometimes extended basic rights—like political signs
or peaceful assembly—into the HOA space, particularly in common areas or during elections.
5.6.2. Privacy rights
Rules that allow Board members or managers to enter private units or homes without cause may violate
constitutional or contractual privacy rights.
5.6.3. Religious displays
Rules banning religious displays on doors or windows may violate federal or state religious freedom protections
unless narrowly tailored.

5.7. Summary: Caution, Clarity, and Counsel

Special considerations in rulemaking are not reasons to avoid rules altogether—they are reminders that rules affect real
people with legally protected rights. Boards that draft rules with caution, clarity, and compassion are less likely to face
legal consequences and more likely to earn community support.
5.7.1. Checklist for Board Review:
☐ Does the rule alter a fundamental right?
☐ Could it disproportionately impact a protected group?
☐ Would it require reasonable accommodation exceptions?
☐ Is there a documented rationale?
☐ Have you consulted legal counsel, if there is any doubt?
Rulemaking is a powerful tool—and with it comes legal and ethical responsibility. Boards that understand these
responsibilities and follow best practices are better stewards of their communities and their Members’ trust.

6. CREATING A CULTURE OF COMPLIANCE

6.1. Educating the Membership: Before and After Rule Adoption
Education is the cornerstone of effective compliance. When residents understand the reasons behind a rule and how it
benefits the community, they are more likely to follow it voluntarily. Education should not be an afterthought, nor should
it be limited to a rule's rollout. It must be ongoing, embedded into the Association’s communications strategy, and
included in new resident orientation.
6.1.1. Before Adoption
• Explain the purpose of proposed rules and the problems they are designed to solve.
• Use meetings, emails, and FAQs to invite questions and feedback.
• Clarify the Board’s authority to enact the rule under the governing documents.
6.1.2. After Adoption
• Provide clear, written summaries in plain language (include the rule text, start date, and what compliance
looks like).
• Offer examples and visual aids (e.g., parking diagrams, landscaping illustrations).
• Follow up with reminders at regular intervals.
Effective education transforms rules from abstract mandates into shared standards, fostering community buy-in and
reducing resistance.
6.2. Tone, Language, and Communication Tactics
The tone of communication matters as much as the content. Rules enforced with a punitive or authoritarian tone often
invite resentment, while those conveyed with respect, clarity, and purpose are more likely to inspire cooperation.
6.2.1. Best Practices
• Use positive, not punitive language: "Please park within marked spaces" is more effective than "Do not park
outside the lines."
• Avoid legalese: Plain English promotes understanding.
• Use the active voice: "Residents must store trash bins out of view" is better than "Trash bins should not be
visible."
• Be respectful: Avoid condescension or overly rigid phrasing.
6.2.2. Communication formats to consider:
• Infographics or step-by-step visuals
• Short explainer videos or email clips
• Reminder signage in shared spaces
The goal is not to "scold" residents into compliance but to invite them into a shared effort to uphold community
standards.

6.3. Empowering the Management Team: Role of Community Managers in Enforcement

Community managers are the operational bridge between Board policy and resident behavior. To fulfill their role
effectively, managers need clear guidance and support from the Board.
6.3.1. Management’s Role
• Monitoring common areas and reporting potential violations
• Sending courtesy notices or violation letters in accordance with Association policy
• Tracking compliance timelines and escalating as necessary
• Educating residents informally during interactions
6.3.2. Board’s Role
• Provide managers with updated rules, templates, and protocols
• Ensure enforcement expectations are clearly defined in the management contract
• Protect managers from being placed in adversarial positions or receiving inconsistent instructions
Boards and managers must function as a team. Managers are not enforcers of opinion but implementers of Board-
approved policy.

6.4. Using Newsletters, Welcome Packets, and Events to Reinforce Rules

Repetition builds retention. Regular Association communications offer an opportunity to normalize rule compliance and
keep residents informed.
6.4.1. Newsletters
Newsletters can include:
• Monthly "Rule of the Month" spotlights
• Clarifications on frequently misunderstood rules
• Seasonal reminders (e.g., firework bans, pool rules)
6.4.2. Welcome Packets
Welcome Packets should include:
• Include a full copy of the current rulebook
• Highlight the top 5-10 "must-know" rules
• Explain who to contact with compliance questions
6.4.3. Events
• Feature short presentations or handouts
• Offer Q&A sessions with Board Members or the manager
• Use games or raffles to encourage learning (e.g., rule trivia)
Embedding rule education into daily operations helps create a culture where compliance is the norm, not the exception.
 6.5. Encouraging Voluntary Compliance over Punitive Enforcement
Compliance by cooperation is more sustainable than compliance by coercion. Boards that lead with empathy and
transparency often find that punitive measures are rarely needed.
6.5.1. Steps to Support Voluntary Compliance
• Use courtesy notices or door hangers before issuing formal violations
• Personalize communication when possible
• Offer residents a way to explain or cure violations before penalties apply
• Provide education when violations suggest confusion, not defiance
Avoidance of early escalation preserves goodwill and fosters a sense of partnership. Enforcement tools should be reserved
for repeat, dangerous, or willfully negligent behavior. Most residents want to do the right thing; Boards should give them the
opportunity to do so without fear or friction.

7. AUDITING, SUNSET CLAUSES, AND POLICY REVIEW

7.1. Annual Rule Audits and Policy Hygiene
Just like financial audits, rule audits help ensure governance is current, relevant, and legally compliant. A rule that was
appropriate five years ago may now be outdated or superseded by statute.
7.1.1. Key Elements
• Confirm every rule still aligns with state and federal law
• Verify the rule is consistent with the CC&Rs and Bylaws
• Evaluate whether the rule is still needed or effective
• Check that enforcement protocols are being followed
• Solicit input from committees or staff regarding problem areas
Boards should assign responsibility for the audit to a committee, manager, or legal counsel, depending on complexity.
At minimum, each document should be professionally reviewed every 2-3 years.

7.2. How to Sunset a Rule

Sunsetting refers to automatically retiring a rule after a certain time unless renewed. This approach prevents stale
policies from lingering indefinitely.
7.2.1. When to consider a sunset clause:
• The rule is experimental or designed to address a temporary issue
• The rule regulates new technology or trends (e.g., short-term rentals)
• The Board is uncertain about long-term effectiveness
• Sample language: "This rule shall expire on December 31, 2026, unless reauthorized by the Board."
Boards should calendar all sunset dates and conduct a review at least 60 days prior to expiration.

7.3. Merging, Repealing, or Updating Rules

Over time, rules may become duplicative, inconsistent, or no longer useful. Periodic review should identify opportunities
to streamline.
7.3.1. Updating & Repealing Rules
• Identify the rule’s original purpose and whether that need still exists
• Draft revised language, if merging or amending
• Present changes at an open Board meeting for transparency
• Formally vote and document the action in Board minutes
• Update all versions of the rulebook and inform the membership
Tip: Don’t delete old rules without confirming whether other rules or policies rely on them. Cross-reference before vacating
matters.

7.4. Keeping the Rulebook Accessible and Current

Accessibility is a legal and practical necessity. Residents must be able to find and understand the current rules at any time.
7.4.1. Best practices:
• Maintain a digital, searchable rulebook on the Association’s website
 • Provide printed copies upon request or at annual meetings
• Use version control: date each rule and maintain an archive
• Notify the membership of any additions, changes, or deletions
A rule that is hard to find is hard to follow. Clarity, consistency, and access are the final steps in building a strong and
sustainable rulemaking framework.