Q&A Regarding Insurance Coverage Requirements for PHAs
The contract between HUD and public housing agencies (PHAs) is called the annual contribution contract (ACC). The ACC requires PHAs to maintain adequate loss prevention programs, which include sufficient insurance for sites owned and managed by PHAs.
In HUD’s view, insurance is necessary to ensure that PHAs remain financially viable, continue to provide safe and habitable housing to low-income residents, and minimize costs to taxpayers for keeping public housing units operational. In one audit released in December 2015, HUD’s Office of Inspector General (OIG) looked at PHAs that were affected by Hurricane Sandy and didn’t have flood insurance. OIG identified three PHAs and 72 buildings not covered by flood insurance. As a result, one PHA incurred debt to pay for Hurricane Sandy-related repairs, and another operated at a loss [HUD Audit 2015-OE-0007S, December 2015].
In another example, the OIG found that a PHA’s insurance policy didn’t cover how employees used its vehicles. The PHA owned 21 vehicles. Twelve of them (pick-up trucks, a dump truck, a van, etc.) were used by the maintenance staff and were parked on the site when they were not in use. Nine vehicles (sedans, pick-up trucks, and small SUVs) were assigned to PHA employees (directors, managers, and housing inspectors). The PHA allowed the employees to drive the vehicles to and from work and for personal use. The PHA didn’t have a policy addressing employees’ personal use of the vehicles. It didn’t maintain logs on the use of the vehicles, nor did it require the employees to record their personal use of the vehicles. The PHA’s insurance policy states that its vehicles are for business and commercial use and they should be garaged on the premises. The PHA’s ACC requires it to procure adequate insurance to protect the PHA from financial loss. Based on the use of the vehicles and the terms of the PHA’s insurance policy, the OIG found that the PHA could be exposed to financial risk if an accident were to occur with a vehicle while being used for nonbusiness purposes or while being driven by an unauthorized driver [HUD Audit 2014-PH-1003, February 2014].
Five FAQs on Insurance Requirements
HUD’s regulations at 24 CFR 965 govern public housing insurance requirements. Here are some frequently asked questions and answers regarding property and casualty insurance coverage requirements imposed by HUD.
Q Do PHAs need to purchase flood insurance?
A The ACC does not specifically state that flood insurance is a required coverage, unless the property is located in a flood plain, as determined by the federal government’s National Flood Insurance Program (NFIP). Competition in procurement isn’t required if coverage can be purchased from only a single source. Some insurance companies will include flood coverage along with their property policy, but it is usually subject to a very large deductible ($25,000 or more), and this would not be reasonable for most PHAs. Competition in procurement also is not required as long as coverage is purchased through the NFIP.
Also, PHAs should subscribe to receive FEMA notifications whenever Flood Maps are updated by visiting: https://msc.fema.gov/portal/subscription.
Q What types of insurance are required or recommended?
A PHAs are required or recommended to purchase these types of insurance if the PHA determines that exposure to the risk exists:
- Commercial Property. Mandatory. Covers losses from theft or damage to the property and its contents. Each policy must be written with a blanket limit, on a replacement cost basis, and with an agreed value clause that eliminates any coinsurance provision.
- Commercial General Liability. Mandatory. Covers claims for injuries that occur on the property and injuries that your employees cause off the property.
- Workers Compensation and Employers Liability. Mandatory. Protects employees if they’re injured on the job, offering reimbursement for lost wages and medical expenses. And protects employers from major financial loss if a worker experiences a job-related injury or illness that workers compensation doesn’t cover.
- Owned and Non-Owned Automobile Liability. Mandatory. Covers physical injuries and damage to company vehicles in the event of an accident, if you have vehicles for your business. If you don’t have corporate vehicles but employees use their own vehicles on corporate business, non-owner automobile liability coverage protects your property if someone sues you due to an accident your employee had while on company business.
- Theft, Disappearance, and Destruction. Mandatory only if the amount of cash and checks on hand at any one time exceeds the amount prescribed by HUD, which is currently $5,000.
- Employee Dishonesty. Mandatory.
- Boiler and Machinery. Mandatory only if steam boilers have been installed. However, coverage is recommended if there is extensive central air conditioning, electrical transformers, or similar equipment.
- Flood. Mandatory only for property located in a flood plain, as determined in the federal government’s National Flood Insurance Program.
- Directors and Officers or Public Officials Liability. Optional coverage, but highly recommended. Protects a business’s officers or directors from lawsuits arising from wrongful acts that could damage the company.
- Lead-Based Paint Liability. Mandatory for PHAs undergoing lead-based paint testing and abatement.
- Law Enforcement Liability. Optional, but highly recommend where the exposure exists, and the Commercial General Liability insurer has excluded coverage. It provides coverage for bodily injury, personal injury, or property damage that results from law enforcement activities or operations and is caused by a wrongful act while conducting those activities or operations.
Q Must PHAs purchase insurance on a competitive basis?
A Yes, per 24 CFR part 85. However, there is one exception: PHAs are authorized to obtain any line of insurance from a nonprofit insurance entity that is owned by PHAs without regard to competitive selection. Although a PHA may wish to obtain quotations from non-PHA-owned insurance companies, part 965 grants an exception to 24 CFR part 85, which requires full and open competition in procurement, as long as the entity has been approved by HUD.
Q Do PHAs need to purchase any kind of insurance for Housing Choice Voucher (Section 8) locations?
A A PHA that administers a Housing Choice Voucher program (Section 8) or Rental Certificate program must carry adequate fidelity bond coverage (employee dishonesty) for employees handling cash or authorized to sign checks or certify vouchers. The minimum bond limit is determined in accordance with Chapter 8 of the Property Casualty Insurance Handbook.
Except for fidelity bond coverage, the Housing Choice Voucher program (Section 8) ACC does not require any other insurance coverage for a PHA that administers a Certificate program or Voucher program. However, there have been past instances where legal action has been taken against PHAs by tenants of Housing Choice Voucher program units who incur bodily injury on the premises. Their action is based primarily on the basis that the PHA has inspected the premises and determined that they are decent, safe, and sanitary. HUD does not require that a PHA purchase liability insurance to protect against such claims. Neither is there a prohibition against purchase. It is up to the discretion of the PHA to buy this coverage if it is felt that the exposure warrants the expense.
Q How much should PHAs insure their property for?
A The ACC requires that property insurance be written on a replacement cost basis. This means that the insurance will pay the cost to replace the destroyed or damaged property on the same premises with other property of comparable material and quality, or the actual amount spent to repair or replace, whichever is less. As opposed to insuring on an “actual cash value” basis, depreciation based on the age and type of construction of the property may not be taken into consideration when adjusting a loss.
If depreciation is taken into consideration, it will produce inadequate values and the PHA will become a co-insurer on each loss. In some cases, this method has produced per dwelling unit values of under $10,000, thereby abrogating the intent of the ACC insurance provisions, which is to protect the interest of the federal government in the PHA properties.