To learn more about cyber insurance, we spoke with Gregg V. Gerelli, graduate of the College of Insurance and President of Gerelli Insurance Agency, Inc. in Cold Spring, New York.
Cyber security is an often overlooked but increasingly essential part of community associations. Every association should develop their own strategy for minimizing the threat of a cyber attack, including keeping their security software up-to-date, keeping sensitive information secure and educating employees and board members on safe cyber practices.
Even if cyber security is being addressed by an association, Gerelli explained that, “Most commercial insurance policies do not cover cyber, and if they do, it’s usually on a very limited basis.” If those preventative measures aren’t enough, and a cyber attack proves successful, that’s where cyber insurance comes in. “When a cyber attack occurs, community association operations may be interrupted. Cyber insurance helps to recover losses due to downtime,” Gerelli said. Cyber insurance also covers the association’s liability in the event of a data breach, such as theft of residents’ personal identifiable information. Thus, it is important for community associations to purchase a cyber liability policy, to ensure they are fully protected in that regard.
What is a waiver of subrogation? Most states have this written into their statutes or their condominium acts. In the world of community associations, the waiver of subrogation basically means that the association waives its right to subrogate — that is, specifically to go after a unit owner when the unit owner causes a loss or claim for the community association.
Gerelli gave the following example: “I live in an eight-unit con- dominium and I’m in my unit and I fall asleep while smoking a cigarette, and that cigarette then falls and sets my mattress on fire. I get out alive and I get everyone else out alive, but all eight units burn down to the ground. What the waiver of subrogation is going to stipulate is that the community association is not going to be able to come after me to rebuild all eight of those units.” This also means that the association’s insurer cannot go after the person in this ex- ample. The association and its property insurance need to pay this on their own, and they cannot subrogate against the unit owner.
Gerelli explained that the reason why the waiver of subrogation was written into the early condominium statues was to take certain decisions out of the board’s hands. Take an example of two unit owners having the same type of loss. Each of their water heaters bursts and the result is $10,000 worth of damage to each of their buildings. Let’s say one of the unit owners is well liked by the board. He volunteers on committees, he is a good neighbor and always participates positively in association meetings. The other unit owner, however, is the bane of the board’s existence. He causes disturbances at meetings and frequently calls the board president to harass him. In this example you can see where this law protects the board from inadvertently making an arbitrary decision to sue one of the owners and possibly not the other due to their personal feelings about either individual. Because of the waiver of subrogation, one does not need to decide if an owner should be sued in these cases, as the association’s master policy pays the claim. Gerelli explained that while insurance companies have lost large amounts of money due to paying claims, in cases where waiver of subrogation applies, it would have been much worse if they didn’t have the law because they would be paying even more in D&O liability claims.
The indemnification clause is typically found in the association’s bylaws, and it states that if a board member is sued through their actions functioning as such, the community association shall indemnify the board member and reimburse them for any financial loss. Gerelli said that the purpose of the indemnification clause is basically to address the fears many people have about stepping up to serve on the board of their association. Many individuals are afraid to volunteer as board members for fear of the potential liability. “The indemnification clause is going to try and encourage people to take association leadership positions by telling them, ‘hey, if you make a decision out here and you get personally named in a lawsuit, have expenses with the lawsuit and you lose the lawsuit, the association will indemnify you,’” he said.
When the association buys D&O liability insurance, it should be a policy that will be able to back up that promise. Gerelli warned if the proper policy isn’t written, then the association would need to write a check out of its own pocket to back this indemnification promise up.
Community associations can get themselves into trouble if they decide to charge for liquor at such an event. In that case, an association may need to obtain a liquor license and then can’t be covered by the Host Liquor Liability coverage. In that case, an association would need Dram Shop Liquor Liability — that is, true Liquor Liability insurance.