Broker’s insurance chicanery could land board in hot water

Question: Years ago, our homeowners board hired a management company that terminated our longtime insurance and turned us over to its broker. In switching brokers and insurance carriers, our rates skyrocketed. Our board accepted the increased premiums without question. The management company would hold off policy renewals, then attach a note to the board stating “urgent, sign here -- just two days to renew.”

I’ve acquired copies of the contracts and agreements between the broker and the carriers he does business with. To get the lowest rates, the broker falsified information to the carriers’ insurance managing agents and then, shortly after policy purchase, the broker would file an amendment providing “corrected” information which, predictably, resulted in a higher adjusted premium rate. New premium invoices are generated directly from the insurance carrier so those rate hikes look legitimate and the board pays it. What now?

Answer: Boards are required to act in good faith and perform due diligence before acting. That means investigating vendors and their practices, and uncovering conflicts of interest between the management company and insurance broker, although each should voluntarily disclose any conflicts. Due diligence in contractual arrangements, including agreements to provide insurance, requires that each party protect its own interests. This involves asking a vendor such as the management company or insurance broker for additional information to verify both what is being purchased and how much is being paid. This entails disclosure of the wholesaler’s broker fees in addition to the insurance agent-broker’s fees. Agent-broker fees are negotiable and not all brokers charge fees.

Holding off policy renewals until there’s a risk of cancellation forces the board to keep the present broker and policies in place. This prevents the board from obtaining, reading and reviewing insurance policies in advance of renewal. It also has the residual effect of making the board, not the management company or the broker, look as if it was derelict in its duties.

Nothing is preventing the board from obtaining its own bids in addition to bids submitted by management. However, to compare coverage and pricing, the present board must have complete copies of its insurance policies in hand.

Ultimately, the board is responsible for reading and reviewing all its insurance policies and documents before signing them.

A fraudulent application could be reason for an insurance company to avoid paying a legitimate claim. If the information provided on the contract, application or agreement to purchase any insurance is false, the entire policy may be voided, leaving the association exposed to liability.

The insurance agent-broker and the managing general agent should be reported to the California Department of Insurance investigations division at (800) 927-HELP. Association boards of directors should know that decisions to delegate responsibilities to a managing agent or management company will not absolve them of liability if and when something goes wrong. The board cannot ignore requirements for exercising due care merely by saying that’s the manager’s job. It is not.

*

These rules aren’t just for condos

Question: Do deed restrictions apply only to condos?

Answer: No. Deed restrictions apply to any property located in a “common interest development.” Under Civil Code Section 1351(c), this includes a community apartment project, condominium project, planned development or stock cooperative. Most such developments have a homeowners association and a board of directors, though some don’t.

The only way to know for sure is to obtain a copy of your title report directly from the local county recorder’s office in your area. It is recommended that all buyers obtain such title reports before deciding to make an offer on a property.

*

Send questions to P.O. Box 11843, Marina del Rey, CA 90295 or noexit@mindspring.com.