As repair work was underway on a leaking roof, water damage spread through a shared hallway in a community association building. The association filed a claim, and so did the firm’s own insurer, because the association’s attorney had named the management company alongside the Board members.

The general liability policy was never intended to cover a claim like this. By the time everyone realized it, the policy limits weren’t enough to cover the liability and the resulting loss.

The Real Scope of a Property Management Company’s Exposure

Property management firms are typically treated as small businesses and receive a standard business owner’s policy. The risks that affect a property management firm, though, are much greater than those facing a typical small business, and a strong program for insurance for community associations accounts for that difference from the start.

These companies sit in the middle of many relationships, and each one carries its own liability. A typical business owner’s policy usually covers only one dimension of that exposure.

Most property management firms purchase a Business Owner’s Policy that includes general liability coverage. This type of policy provides protection for bodily injury and property damage to others arising from the management company’s premises and operations.

HUB International has pointed out that professional liability claims against property managers are on the rise, and in most cases they’re excluded under general liability insurance. These claims are typically covered under errors and omissions coverage instead, which generally doesn’t extend to situations where a loss results from a firm’s judgment error rather than a physical one.

Where the Real Risk Actually Comes From

Each type of risk a property management company encounters requires the right type and extent of insurance. Matching coverage to the exposure is what prevents an unexpected insurance problem from turning into a serious financial consequence for the firm.

Vendor and Contractor Oversight

Most associations managed by property management companies rely on vendors, contractors, and subcontractors for repairs and maintenance throughout the year, and many of these are hired directly by the management company. A significant number of claims filed by community association clients against property management firms arise from faulty work performed by these contracted vendors or subcontractors.

Errors in judgment or a failure to supervise properly can damage the association’s property, and sometimes that damage results in legal action.

Handling Client Funds

Accounting errors, compromised bank accounts, and embezzlement by current or former employees of a community association management company are becoming more frequent sources of claims. These types of claims are typically covered under a firm’s fidelity and crime insurance policy, and that coverage frequently does not extend to cover errors on the part of the association’s own employees.

Advisory Exposure to the Board

Boards of directors often rely on the advice of their management company, whether that means selecting a contractor for repairs, setting a budget for an upcoming project, or interpreting the documents that govern the association. If advice from the management company leads to a Board decision that someone later challenges, the management company can be held liable for its role, often alongside the volunteer Board members it advised.

This type of exposure falls under errors and omissions coverage, not general liability coverage.

Matching Coverage to the Actual Exposure

For property management firms and their brokers, this means treating coverage as a set of layers that need to work together rather than a single policy. The errors and omissions coverage offered to a management company extends to the company’s own actions and the work of its employees, but the directors and officers coverage in the same package would not extend to cover those employees’ actions.

As noted above, crime and fidelity coverage needs to extend to the management company’s handling of association funds, not be limited to the association’s own employees.

A management company overseeing multiple associations also needs to look at umbrella limits differently than a typical small business would, since one severe claim could potentially affect every association it manages. This is why a management company should look to its broker for a program that accounts for the full scope of coverage a management company actually needs, including package, umbrella, D&O, crime, and cyber.

What Happens When Coverage Falls Short

When insurance doesn’t cover the firm’s actual exposure, the consequences of a loss usually extend far beyond the limits of the policy that would have covered it had the association been responsible instead.

Legal defense costs alone can exceed the value of the claim, even when the management company is ultimately found not responsible for the damages. Many management companies don’t survive a claim like this, because a Board can be easily convinced the management company was at fault in some way and choose not to renew the contract.

The Firms That Keep Growing Treat Risk as Structural

The example above reflects what happens to management firms with strong coverage and a solid reputation that were still exposed to significant risk they never saw coming until a claim forced it into the open.

Risk in the property management business is inherent, built into the structure of managing other people’s property, funds, and governance decisions. Growing as a property management firm means having a program in place that addresses the risk of managing community associations, with each policy set up to match its specific exposure. Only then do client relationships survive, and business keeps growing.