Most community association board members are aware that if a person sustains an injury in the association’s common elements, such as a typical “slip and fall,” and makes a claim against the association for the injuries, the association should be covered by insurance. That is, the association’s insurance carrier should adjust the claim and, if necessary, hire a lawyer at the insurance company’s expense to defend the association in any lawsuit arising out of the injuries. The insurance coverage would be provided under the so-called “liability” portion of the association’s insurance, and is typically a matter of routine.
In other instances where associations are sued, an insurance company’s response may not be so routine. Increasingly, an insurance carrier will issue a “reservation of rights” letter where it conditionally agrees to provide a defense (hire an attorney) but will not agree at the outset to indemnify or pay for any damages that may be awarded against the association. In other words, it “reserves its rights” not to pay. These reservation of rights letters are often written by insurance company lawyers and contain multiple pages of legalese and insurance contract provisions that allege insurance coverage may not be available. In some instances, the letters reject any coverage at all. Whether the insurance policies are casualty policies, liability policies, or directors and officers (errors and omissions) policies, the reservation of rights letter will refer to definitions such as “an occurrence,” or “property damage” or “sudden and accidental” to deny or limit coverage.
In many instances, these letters are appropriate and accurate but some are not. In general, if an insurance company issues a reservation of rights letter but still agrees to defend the association and pay for its attorney, the association merely needs to work with the insurance company’s attorney and its own counsel to assure that its interests are being adequately protected and the insurance policy is being followed. In most cases, the case will be resolved through settlement or trial with no additional financial exposure to the association.
In cases where the insurance company denies all coverage, the association should not assume it has no recourse. Most insurance rejection letters invite the association to submit additional facts or circumstances that may change the insurance company’s position. Kaman & Cusimano has been very successful in convincing some insurance companies to change their positions after examining the pertinent policy provisions and providing additional information to them. The bottom line: whenever an insurance company says it is reserving its rights, a community association should make sure it does likewise.