condominium coverage concerns

Condominium Coverage Concerns

Presented by:Judy Durst, Director of Education, NHAIA


Introduction

Condominiums have unique exposures that you won’t find in your standard homeowners or commercial property risks. This course will review

condominiums in depth from a personal lines as well as commercial

lines standpoint.


Definitions


What is a condominium or “condo”?

It is a collection of individual home units or non-residential (like an office) units with common area available for the unit owners to use.


What are the advantages to owning a condo?•Affordability – normally lower price than traditional home; can build equity versus renting; limited outside maintenance•Stability – stronger sense of community; not as transient as an apartment; others are owners too & may take more responsibility


Disadvantages of condos•Ongoing costs – maintenance fees; repair costs•Restrictions – may not be able to do the things they want to do in or around their unit; renting their unit may be a problem; •Valuation – condos don’t rise in value at the same rate as a traditional home usually does.


How is a unit defined? You would look in the condo documents (by-laws and/or agreements) to find the definition. The definition will usually be one of three different types. What are the different types?


All inclusive or “all in” condos

The condo association’s master policy covers all real property in a residential condo structure, including fixtures in individual units and any structural improvements, betterments, or additions that the individual unit owner made.


“All in” condos provides coverage to replace a unit to the condition it was in at the time of the loss. The unit owner is only responsible for covering his/her personal property.


Single entity condos

Very similar to the “all in” EXCEPT it does not include any structural improvements, betterments, or additions that the individual unit owner has made.


In the single entity condo, the unit owner not only has to cover their personal property but also any improvements and betterments that they have made to the condo. The association will not include those items at the time of a loss.


Bare walls condos

With “bare walls”, the condo association insures only the bare structure of the individual condo building; the structure, fixtures, & furnishings of collectively owned areas; and collectively owned personal property of the association.


Under the “bare walls” concept, individual unit owners are responsible for insuring building property they own and use exclusively, such as sinks, cabinets, appliances, flooring along with any improvements or betterments they have made. They would include the value under their HO-6 building coverage.


So the first thing you need to do is determine the type of condominium you are working with. This is important whether you are in personal lines or commercial lines.


Check those state laws!

Depending on the state that the condo is located in there may be state laws that supersede the by-laws and agreement. This could have a big effect on the determination of values for each – condo assoc and unit owner.


Let’s begin first by concentrating on Personal Lines.


Personal Lines Exposures

•Type of condo – Is insured responsible for building items? Value?•Unit owner’s personal property. Value? Is the unit rented out?•Loss Assessment possibility?•Responsibility for Master policy deductible?


Personal lines exposures continued…

•Do they have a mortgage? What are the requirements for closing?•Perils – named versus open•What about sewer back up, earthquake, flood exposures?•Liability exposures•Limitations on the HO-6 – jewelry etc.


Coverages to consider with your client

•HO 6 with Coverage A & C•Endorsements – sewer back up, earthquake, additional loss assessment, floater, rented to others, •Flood •Floater (if not added by endorsement to HO-6


Common problems with insuring personal lines condos

The mortgagee wants to be added to the master policy of the condo association.


This is a common problem. First of all, the condo unit owner is borrowing money to buy a box of air! Unless the unit owner is responsible for some of the building items, the mortgagee has no rights to the unit owners contents or to the master policy. The association didn’t borrow the money.


The only way to fix this is to issue an evidence of property and don’t indicate that they are a mortgagee. The evidence would come from the Master policy not the HO-6. Mortgagee wants to be added as an additional insured to the Master policy? They can’t because they don’t have an insurable interest!


Let’s give you a scenario – What if the condo Master policy included 250 units and every one of the mortgagees is listed on the Master and a loss happens. The carrier would need to issue a draft with the condo association and all 250 mortgagees. YIKES!


Another problem… The mortgagee wants the binder (issue a certificate of property insurance instead) to show “walls in” coverage.


Problem is that the policy doesn’t use that language. The master policy will respond to pay losses per the by-laws. Although Fannie Mae uses that language, it would be putting the agent in an E & O situation to include it on the certificate of property insurance since the policy does not respond to that language.


If the unit owner is responsible for interior walls and such and there is Coverage A on the HO-6, you can show that on a separate certificate of insurance that you would issue as the unit owners insurance agent.


Another problem… determining limits for Coverage A and for Loss Assessment.

With the Coverage A limit, you need the unit owner to determine how much it would cost to replace the unit items they are responsible for. Remember that the HO-6 only gives $1000 Coverage A without you indicating more.


Here are some of the typical items they might be responsible for:•Flooring (carpeting, hardwood floors)•Wall coverings•Lighting fixtures•Plumbing fixtures•Kitchen cabinets & built in appliances•Unit owner installed improvements


Limit for Loss Assessment is different. What if the Master policy doesn’t have an adequate amount of coverage? Would your insured even know that? What if a loss isn’t covered by the Master policy? Is $1000 enough? I would have to say NO! Think about selling at least $50,000 in loss assessment or more if you can get it.


What about the age-old problem with the Master policy deductible and the limitations under the HO-6?

The new 2011 HO form allows for more than just the $1,000 of loss assessment coverage for the association deductible.


What if your carrier isn’t using the 2011 HO forms? Check with the carrier to see if they have their own endorsement to fix this. Some carriers like Cincinnati, Chubb, Harleysville and Safeco do. Check it out!


Don’t forget to change the perils to open versus named perils.

Don’t forget to increase the liability limit as high as you can on the HO-6.

Don’t forget that very important umbrella!


Personal Lines questions?


Now let’s take a look at the condominium association and what you need to think about with regards to exposure identification and coverages.


I hate to sound like a broken record but you really need to see those by-laws.

How are you going to be able to help the insured determine the value of the buildings if you don’t know what is a building by their definition!


Setting the value of the building is only part of it. What about the following other exposures for the association?

•Perils? Building ordinances? Unit owner improvements?•Crime exposures – employee dishonesty!•Inland Marine – accounts receivable, computers, valuable papers?


•Premises liability – responsible for streets? Snow & ice removal? Parking lots? Slip & fall exposures? Swimming pools? Exercise facilities? Playgrounds?•Directors & Officers liability exposure – volunteer board may be sued because of actions they take in assessments & enforcing the by-laws.


•Any auto exposures? Non-owned? Hired?•Workers Compensation exposures? Any volunteers who receive something for their work? Reduction in fees or other?•Other things like equipment breakdown, forgery, computer fraud, cyber liability, employment related practices….


Let’s start with the commercial package…

Commercial Property – Always use the Condo Association Coverage form not the Building & Personal Property form. Why?

The definition of the building!


The definition of a building in the BPP is spelled out. Condos aren’t that simple. The building definition is found in the by-laws.

Don’t forget the personal property owned by the association like office and recreational items!


Don’t forget to review what property isn’t covered like:•Money – need crime coverage•Bridges, roads, walks, patios•Costs to excavate, grade, fill or backfill•Foundations below basement•Land, lawns•Wharves, docksAnd there are more… check the form


Don’ forget to review that vacancy condition and other conditions with the insured.

Remember coinsurance (can you say agreed value?) and that the valuation is automatically ACV unless you indicate you want RC on the dec.!


Vacancy for the association applies to each entire building. A building is vacant unless at least 31% of the total square fee area is:•Rented to conduct customary operations•Used by the building owner to conduct customary operations


Vacant is a definite YIKES! Here are the penalties (these could apply to one building and not another):If building vacant for more than 60 consecutive days before the loss, there is no coverage for vandalism, glass breakage, water damage, theft or attempted theft and sprinkler leakage (if not protected from freezing)


Vacancy penalties continued:

Any other loss will be reduced by 15% if caused by any other covered cause of loss.


With any commercial risk, you should be looking at the debris removal coverage. Is it enough… usually $25,000 over limit of liability…. Have you tried to get rid of construction or loss debris lately? Very expensive. Talk to the insured about additional Debris removal coverage – can be done by endorsement.


Please don’t forget Earthquake (can be added by endorsement to the Commercial Property) and Flood!

Remember that if it is a residential condo association you should use the RCBAP product not the General Property form.


RCBAP

Flood Form

General Property

Flood Form

Replacement cost ACV

$250,000 per unit in a building

$500,000 maximum per building

80% coinsurance No coinsurance


Crime coverages you should recommend (at a minimum):•Employee theft•Forgery and alteration•Money & securities – inside & out•Computer fraud


Inland Marine coverages to recommend:•Valuable papers•Any contractors equipment •Coverage for any bridges•TV or cell towersRemember that inland marine is used for exposures that move or have something to do with transportation or communications


General liability coverage should be at least the ISO CGL or better and at the maximum limit available under that program. Once again, you need to review the by-laws to see who will be responsible for snow removal. This could pose a very big exposure to your insured if the unit owner is responsible and doesn’t take care of it.


Directors and Officers coverage is a very misunderstood coverage because it really doesn’t cover the association but the directors or officers of the association. If you are volunteering you’ll want to make sure this is provided by the association to protect yourself! Once again… buy and offer the maximum that you can!


Automobile coverageIf the condo associations owns a vehicle, make sure you ask for Symbol 1 on the auto liability and Symbol 2, 8 on the physical damage. If the association doesn’t own a vehicle that doesn’t mean they have no auto exposure. Does anyone ever use their vehicle on association business?


At a minimum, you should be including hired & non-owned auto coverage or Symbols 8, 9. Does the association ask everyone who could be driving for them to give them a certificate of insurance proving they have auto insurance? Probably not!


Workers’ CompensationEven if the association doesn’t have any employees, I would recommend an “if any” policy in the event someone is designated by the labor department as an employee and the association is responsible to pay for WC benefits.


Okay, when can something like that happen?•Volunteer that is “paid” with something of value beyond just gas money.•When you use a contractor to do work and they have employees and no WC coverage on them.•Association hires someone and doesn’t tell you they now have this exposure.


Umbrellas – Can’t stress that you need to recommend an umbrella to the association. At what limit? As much as you can get from your markets. What is their exposure? The sky is the limit! Wow!


What about Cyber Liability? Does the association have personally identifiable information in their computer about unit owners? Probably. Could someone hack into it and leave the association with the responsibility to tell the affected individuals and pay for credit monitoring?Yes!


Equipment breakdown – heating system, electrical equipment? How do you value? Value of the building and personal property within.


Unit owners will purchase HO-6 if it is a residential condo or a BOP/CPP if a commercial condo. Most office condos will include coverage under a BOP. Just don’t forget about building items the insured unit owner may be responsible for!


Commercial Lines questions?


E & O Exposures from Condos

There are several areas that could cause an increased E&O exposure to your agency. Let’s review a couple.


Don’t act like your insured’s lawyer. You are not reviewing the condo documents as an attorney would. You are looking at possible insurance exposures to your insured. Remember to tell your insured to have their lawyer review anything that they plan to sign before they sign it.


Valuation problems can cause you heartburn. Remember, it is up to the insured to ultimately determine the amount of coverage they need. They need to contact a contractor to determine what the replacement value is for the building items they are responsible for.


Issuing binders with the mortgagee listed. Just issue a certificate of property insurance and list the mortgagee as the certificate holder only. Remember, you can’t add the mortgagee to the association policy and don’t make it look like you can!


Not recommending flood can be a big exposure to you. Will they buy it? You don’t know until you offer it. Remember that everyone has an exposure to flood. The only question you need to ask to determine that is “Does it rain where you are located?”. Don’t forget the unit owner too! Most flood losses involve more personal property damages.


Not using a checklist… Remember that you can’t remember everything. Using a good checklist when reviewing the needs of every insured will be a terrific defense in the event you are sued. Documentation and invariable procedures/practices is the best defense!


Making coverage choices for your insured. Just don’t do it! Recommend everything that you can and let the insured decide what they want to purchase. Then document to them what they chose to buy and what they declined… in writing!


Forgetting about the limitations on the policy for building code updates, debris removal and others. Remember that most condos were built a while ago (Condos started in the 1980s) and even if they weren’t, building codes change constantly!


Not using disclaimers.Make sure that your proposal includes disclaimers so the prospective insured doesn’t make assumptions about coverage or if coverage is being provided.


The moral of the story… •Use checklists•Don’t make choices for the insured•Recommend everything at the highest limit you have available for them•Use disclaimers•Don’t practice law without a license!


Any more questions?


Thank you for using NHAIA for your insurance education needs. This class has been approved for three continuing education credit hours. Please make sure that you have signed the roster so I can add those credits to your transcript.

condominium coverage concerns

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