insuring condos. what we’ll cover 1. how condos are different from other property 2. condo...

Insuring Condos Insuring Condos

What We’ll CoverWhat We’ll Cover

1. How condos are different from other property

2. Condo declarations

3. Obligations to replace and/or insure

4. Complications and valuation

5. Homeowners for Condos

6. Other Considerations

What Makes InsuringCondos Different?

What Makes InsuringCondos Different?

Condominiums are a different kind of real property ownership

The ownership differences create coverage problems with traditional forms

Coverage under condominium forms looks to legal documents to determine obligations to pay

Establishing adequate limits can be difficult Liability is shared with other condo owners

Condos & OwnershipCondos & Ownership

Condo Title

+

Pro-rata share of common property

Fee Simple Title

What You Will Want to Consider

What You Will Want to Consider

State Uniform Condominium Act

Condominium Declaration

Condominium Master Insurance Policy

Uniform Condominium ActHistory

Uniform Condominium ActHistory

Model Law developed by the National Association of Commissioners on Uniform State Laws in the 1970’s

Introduced in the Texas Legislature in 1981

Passed in 1993

Became Law January 1, 1994

Uniform Condominium ActKey Definitions

Uniform Condominium ActKey Definitions

Limited Common Elements – Used by one or more, but not all of the units

General Common Elements – Common Elements that are not Limited Common Elements

Condominium – Requires one or more of the common elements be owned by all unit owners

Uniform Condominium ActUnit-Owners ResponsibilityUniform Condominium ActUnit-Owners Responsibility

Maintenance and repair of any equipment servicing the unit regardless of where located

Maintenance and repair of Windows & Doors that only service the unit

Damage or willful misconduct

Unless the Declarations state Otherwise

Uniform Condominium Act Insurance Requirements


“Property insurance on the insurable common elements insuring against all risks of direct physical loss, including fire and extended coverage, in the total amount of 80% of the replacement cost or actual cash value…”

“Commercial General Liability insurance in an amount specified by the board…”

Each unit owner is an insured

No subrogation against unit owner

“No act or omission of a unit owner…will void the policy or be a condition to recovery under the policy…”



Uniform Condominium ActSummary

Uniform Condominium ActSummary

Defines what can be considered a condominium and common elements

Establishes insurance requirements elements for the Condominium Association

Imposes obligations of the Association and unit-owner for maintenance, repair or replacement of units – unless the declaration changes those obligations

Condo DeclarationCondo Declaration

Legally establishes the condo association as part of the title to the property filed with the county


Describes the extent of unit ownership and responsibility


Establishes the obligations of the Association and the unit owner (beyond statute) for:- maintenance- repair- replacement

Establishes the obligations of both parties to purchase insurance

Bare Walls Sample

Bare Walls Sample

“Each owner shall be responsible for and will obtain insurance on such Owner’s unit including all wall and floor coverings, appliances and all parts of the unit that are not common elements. Each unit owner will also be required to insure the limited common elements assigned to that unit.”

Original Specifications Sample

Original Specifications Sample

“An owner shall be responsible for insurance… covering all alterations, additions, betterments and improvements made by an Owner to his unit…”

All-InclusiveSample

All-InclusiveSample

“ The Association shall maintain insurance…on the Project including all Common Elements and Limited Common Elements”

“The Unit Owner shall notify the Board of all improvements made to the Unit that exceed $1,000.”

Obligation to InsureObligation to Insure

Original Specs

Owners may not be aware of past improvements

Easier to establish values than bare walls method

Lower premiums

All –Inclusive

One policy covers all common elements

Easier to establish accurate values

Association may not be aware of all improvements

Bare Walls

Difficult to establish values

May leave coverage gaps or shortfalls

Makes claims adjustment contentious

Best Practices Recommendation

The All-Inclusive Method


The All-Inclusive Method

All real property – no matter who owns it – should be insured on the Association master policy for the benefits of all unit-owners.

Despite the options, this complies with the original intent of the Uniform Condominium Act

Association Master PolicyAssociation Master Policy

Building(s)

Fixtures outside of units

Machinery & equipment

Personal property used to maintain or service the building

Additions or alterations under construction

Association Master PolicyAssociation Master Policy

And…

“Any of the following types of property contained within a unit, regardless of ownership, if your Condominium Association Agreement requires you to insure it.”

…fixtures, appliances, etc.

Amend the Condominium Declaration or bylaws if necessary to authorize the association to purchase insurance coverage on the units to comply with “if your Condominium Association Agreement requires you to insure it” language in the policy.


The Association Master Policy


The Association Master Policy

Complications – Repair Complications – Repair

The Condominium Act (and most declarations) makes unit owners responsible for maintenance, repair and replacement to individual units

Even if the Master Policy covers the loss, the unit owner could still be responsible

Complications – RepairThe Anderson Case

(Maryland)


(Maryland)

Anderson’s unit had extensive damage to their unit when a water heater burst. No other unit was affected

The association refused to report the claim under their policy even though it was written on an “all-inclusive” basis

Anderson’s HO carrier paid the claim and sued the Association

The declarations mirrored the law regarding maintenance and repair

Court ruled in favor of the Association


(Maryland)


(Maryland)

Complications RepairAnother Example

Complications RepairAnother Example

Wind damages the condominium roof and breaks out a window in a Unit

The roof is covered on the Association policy, but the windows are covered on the Unit Owners’ policies

Multiple deductibles will apply to the same loss

Complications - NegligenceComplications - Negligence

Negligence provisions in the declaration may hold the unit owner responsible for damage due to negligence.

This provision may tempt the Association to refuse to turn in claims covered by the Master policy when confined to a single unit



Amend the “Repair & Replacement” section of the Declarations to provide an exception when the repair is needed due to a covered loss on the Association policy

Amend the “Negligence” section to provide the same exception

Complications - ValuationComplications - Valuation

Based upon the declaration’s statement of responsibility

100% of the cost to rebuild

Other issues:- Debris removal- Design expenses- Inflation (major catastrophes)- Building ordinances

Discussions Regarding Values

Discussions Regarding Values

1. Market values are irrelevant

2. The decision is the customer’s, but remind them off the law

3. Use available resources- Professional appraisers- Local builders- Architects


Amount of Insurance


Amount of Insurance

Obtain an appraisal at least every three years and include construction cost information

Insure the property on a replacement cost basis

Use the Agreed Value Option to suspend the coinsurance condition

Complications - Mortgagees


An on-going headache for agents

Uniform Condominium Act

A claim for any loss covered by the policy under Subsection (a)(1) must be submitted by and adjusted with the association…unit owners and lienholders are not entitled to receive payment of any portion of the proceeds unless there is a surplus



ISO’s Condominium Association Coverage Form CP 00 17 with Texas Changes CP 01 47 Mortgageholders Additional Condition

“If the condominium is terminated...In all other respects, we will pay for loss…to you or your insurance trustee…”

DeductiblesDeductibles

Unit Owners ultimately pay the deductibles through assessments

Individual policies may limit the amount of loss assessment coverage or deductible payments ($1,000)

Pre funding the Association deductible is ideal

RecommendationRecommendation

The Association declaration should clearly state that a deductible expense is a common expense for all unit owners, even if the loss only affects one or two units

The Uniform Condominium Act is silent on this issue

Other Insurance to Consider


For the Association: CGL coverage Auto liability Workers’ compensation Umbrella Employee dishonesty D&O liability Flood Insurance

ISO HO-6(05/11)

ISO HO-6(05/11)

Coverage A – Dwelling limit

Coverage C – Personal property limit

Causes of Loss – named peril

HO 17 90 – “All risk” for personal property

HO 17 91 – “All risk” for the unit

Insurance for Unit OwnersInsurance for Unit Owners

Limit of Insurance – the Dwelling

What does the declaration say regarding the obligations of the Association and the owner?

Safest course – protect the interest of the unit owner’s interest in the property

Options: replacement cost per square foot, or an appraised value of the real property inside of the unit and consistent with ownership

ISO HO-6Insuring Agreement

ISO HO-6Insuring Agreement

Alterations, appliances fixtures & improvements

Real property that pertains exclusively to the unit

Property which is your responsibility to insure under the Association agreement

Structures used solely by insured at location of residence premises

Unit Owner – Loss Settlement

Unit Owner – Loss Settlement

Excess over the amount due from the Association policy

Primary as respects amount covered by this policy and not due under the Association policy because of the application of a deductible


Amount of Insurance


Amount of Insurance

Determined by Unit Owner

Default: The full replacement value of the real property in the unit

Alternative: 25% of the replacement value or the amount of the Association deductible, whichever is more

Insurance for Unit OwnersInsurance for Unit Owners

Limit of Insurance – Personal Property

Let the customer make the decision

Conduct an inventory (www.iii.org)

Use their previous personal property limit or a percentage of the condominium purchase price

http://www.iii.org/

ISO – HO-6(05/11)

ISO – HO-6(05/11)

Exclusions to note:

Ordinance or law

Water exclusions and limitations- Flood (NFIP)- Wind-driven rain (HO 17 90 & 91)- Repeated seepage (HO 04 83)- Sewer backup (HO 04 69)

Rental to others (HO 17 33)

ISO HO-6(05/11)

ISO HO-6(05/11)

Other Endorsements

Loss Assessment – HO 04 35

RC for personal property – HO 23 04



For the Unit Owner

Flood insurance

Umbrella Coverage

SummarySummary

Review the Uniform Condominium Act

Definitions

Association’s obligations

Unit-Owners obligations

Best Practices SummaryBest Practices Summary

Use the All-inclusive method for the Association and amend the declaration/by-laws if necessary

Amend the “repair and replacement” and “negligence” provisions in the declarations to avoid complications

SummarySummary

Recommend an appraisal every three years

Insure property on a replacement cost basis

Insure to 100% of value and use Agreed Value Option

Fight the good fight when it comes to values

Insuring Condos

Thank you!

Insuring Condos

Thank you!

insuring condos. what we’ll cover 1. how condos are different from other property 2. condo...

Documents

insurance slide

condominium association

owners unit

responsibility slide

county slide

board slide

condominium forms

unit damage