Insurance Coverage Can Turn on Full Disclosure

Many associations are taking a second look at their insurance coverage these days. That makes this a prime time to remind them that omitting potential legal claims or other so-called “material” information can come back to bite them. A California HOA learned this lesson the hard way association when a court found it concealed important facts.

The trouble arose when the HOA and its new management company was sued after terminating its contract with its former management company (which allegedly ran through 2050!). The HOA turned its defense over to its liability insurance company.

The insurer provided a defense but also filed a lawsuit against the association and its new manager, seeking to be released from any duty to defend or indemnify in the case with the former manager. The trial court ruled in the insurer’s favor before trial, allowing the company to rescind the HOA’s policy. The HOA appealed to the Ninth Circuit Court of Appeals.

The appellate court explained that, under California law, a material misrepresentation or concealment in an insurance application entitles the insurer to rescind the policy. Most, if not all, states take this approach.

“Ultimately, associations have an obligation to disclose material factual information or facts known to them when applying for insurance,” says Aaron Goodlock, a partner with the full-service community association law firm Orten Cavanagh Holmes & Hunt, LLC, in Denver, Colo.

But, the court concluded, the association concealed material facts. Specifically, the application asked applicants to disclose “any fact, circumstance or situation which may result in a claim against the Organization or any of its Directors … [or] Officers.” The HOA didn’t disclose anything in response.

Read the full story now: Why Your Clients Need to Take Insurance Applications Seriously

Best regards,
Matt Humphrey
President