Insuring Condominium Property

There is an enduring question that has faced anyone who has owned a residential condominium, served on a condominium association board, or insured condominium property: What property is the unit-owner responsible to insure, and what property is the condominium association responsible to insure?

The answer to that question varies from time to time, and from place to place. Property/casualty insurers are studying recent developments in Maryland, Georgia, and Florida to see whether and how they will affect condominium insurance requirements in those states and elsewhere.

AAIS monitors this topic, and will update this report from time to time to address new developments.

Background

When the first condominium was built in the continental United States in 1960, it involved a novel concept: home ownership without owning land. No statutes governed the insurance-related responsibilities of condominium associations and unit-owners. The delineation of responsibilities was initially left to private contractual arrangements between associations and unit-owners. Though contracts were not uniform, they tended to incorporate one of three basic approaches regarding insurance.

"Bare Walls"
Early on, the prevailing method for insuring real property in residential condominium developments was the "bare walls" approach. Under this approach, a condominium association insures only:

• The structure of a condominium building;
• The fixtures and furnishings of the common areas; and
• The association's personal property.

Unit-owners are responsible for purchasing insurance for damage to building property beyond the unfinished bare walls. This includes paint and decorations, and fixtures they own and use exclusively, such as sinks and cabinets, as well as their own personal property.

A few states still mandate use of the bare walls approach to insuring condominium property.

Single Entity
Over time, Condominium association policies, commonly known as master policies, have generally shifted being from bare walls policies to "single entity," or "original specification," policies that cover virtually all building property, including original fixtures in individually owned units. Unit-owners, however, are responsible for the costs of betterments and additions.

Adoption of the single entity approach was spurred by its codification in the Uniform Condominium Act (UCA) of 1980 and two subsequent model acts developed by the National Conference of Commissioners on Uniform State Laws and later adopted by 18 states.1 Other states, including Illinois, have also mandated the single entity approach, although their statutes are not based on the UCA.

Use of the single-entity approach was also spurred by the secondary mortgage market agencies, "Fannie Mae" and "Freddie Mac," which required condominium associations to implement single-entity coverage to qualify their unit-owners for inclusion in loan packages. That requirement was rescinded by Fannie Mae in November 2007, and by Freddie Mac about a year later.

All Inclusive
The least common (and newest) approach is called "all inclusive," or "all in," coverage.

This approach requires a condominium association to cover all common elements and all structural items, fixtures, and equipment within the association's units, including structural improvements, betterments, and additions made by unit-owners owners.

Basically, all inclusive master policies cover all property within units except the personal property of unit-owners.

Insurance Responsibilities Under Different
Condominium Arrangements

AAIS coverage

As is standard in the industry, the unit-owners form provided in the AAIS Homeowners Program, the HO 0006, automatically covers any building property in a unit that the insured is required to insure under condominium association rules.

__________
1 Those states are Alaska, Colorado, Connecticut, Maine, Minnesota, Missouri, Nebraska, New Hampshire, New Mexico, Nevada, North Carolina, Pennsylvania, Rhode Island, Texas, Vermont, Virginia, Washington, and West Virginia.

Specifically, Coverage A, Residence covers "property that is your insurance responsibility under an agreement with an association or corporation of property owners." Coverage A specifically grants coverage for fixtures, alterations, decorations, additions, installations and appliances that are part of the building included within the described location. Coverage A also covers other structures owned solely by the insured at the site of the described location. These provisions give HO 0006 the flexibility to be used to accommodate coverage requirements for bare-walls, single-entity, and all-inclusive approaches. In HO 0006, the "described location" means the unit in which the named insured resides and which is shown on the declarations.  The basic limit for Coverage A is ten percent of the Coverage C limit and can be increased for an additional premium. When determining the Coverage A limit, it is prudent for agents to verify the insurance responsibilities between condominium associations and unit-owners. After a loss, adjusters may wish to obtain copies of contractual agreements and verify whether the contracts are compliant with state law.

Personal or commercial insurance?

For condominium unit-owners and associations, the approach used to insure condominium building property determines the extent to which exposure to loss is borne by individual unit-owners or the residents as a whole.

For property-casualty insurers, there's an added dimension to this topic.

To the extent that property is covered under a unit-owners policy, it falls under personal lines, and the premium and losses are reported as such. To the extent that property is covered under an association policy, it falls under commercial lines and, again, the premium and losses are reported accordingly.

Depending on the approach used to assign insurance responsibilities, identical losses to the same type of property (such as original fixtures) might be reported as a homeowners loss in one instance and as a commercial property loss in another. The same is true for the corresponding premium. This would ultimately have some effect on the development of loss costs under each line.

State developments

As we've seen above, some states, though not all, have enacted statutes mandating one of the approaches to insuring condominium building property. This is usually done to clarify and standardize insurance arrangements, so that each party presumably knows what's expected. It doesn't always work out that way, however.

Maryland ruling
In April 2008, the Maryland Court of Appeals reinterpreted a state law that previously was believed to mandate single-entity association policies. The ruling in Dianne Anderson, et al. vs. Council of Unit Owners of the Gables on Tuckerman Condominium, et al. (Anderson) allows condominium associations to obtain bare-walls coverage.

Anderson involved two separate losses to individual condominium units in two different buildings; there was no damage to other units. The first loss involved water damage due to a leaking water heater. The second loss involved smoke, fire, and water damage (from a fire suppression sprinkler system) stemming from a grease fire within a unit. The losses were consolidated by the court since the insurers and the commercial property insurance forms used by the two condominium associations were the same.

At issue was the extent to which a condominium association is required to provide insurance coverage to the individual units. The contracts between the associations and unit-owners specified a bare walls approach and the Court upheld them, ruling that the legislative intent of the statute was to allow condominium associations to obtain bare walls coverage, although they are free to purchase broader coverage. In making the ruling, the court reasoned that association master policies are not necessarily meant to insure the property of unit-owners or individual units, but to protect the common interests of all owners.

The Maryland Insurance Administration (MIA) filed a motion for reconsideration and to stay the effect of the Anderson decision, and issued bulletin 08-15 urging insurers and producers to communicate with insureds regarding the potential impact of the ruling. The MIA added that condominium associations may have purchased more coverage than necessary and that many unit-owners may be underinsured.

The 2009 Maryland legislative session saw legislation that would return Maryland to single-entity condominium association coverage. Two companion bills with identical language passed - HB 287 and SB 201. Both bills were signed by the governor in May and became effective on June 1, 2009.

The law clarifies that a council of unit-owners of a condominium is responsible for the repair or replacement of the common elements and condominium units, exclusive of improvements and betterments installed in units by unit-owners other than the developer, in the event of damage or destruction of the condominium under specified circumstances. The legislation provides that the owner of the unit where damage originated is responsible for the council of unit owners' property insurance deductible not to exceed $5,000.

Georgia law
A 2008 Georgia law (HB 1121) amends Georgia statutes to clarify what property must be insured by a condominium unit-owner, and what must be insured by a condominium association.

Previously, Georgia law required that condominium association policies insure all structures within the condominium, but did not define "structure." Many had interpreted the statute to require single entity coverage, but more recently, some condominium associations took the position that their obligation extended only to the common areas or the areas for which they had maintenance responsibilities.

HB 1121 clarifies that condominium associations are responsible for obtaining insurance policies for all common elements in buildings, such as foundations, roofs, and exterior walls. Regardless of what is included in the condominium agreement entered into by the unit-owner and association, the association is additionally responsible for insuring, at full replacement cost, the following:

• The HVAC system;
• All sheetrock and plasterboard comprising the walls and ceilings of the unit; and
• Floors, subfloors, walls, ceilings, floor-coverings, plumbing and electrical lines and fixtures, built-in cabinetry and fixtures, and appliances used for refrigeration, cooking, dishwashing, and laundry.

The amended statute adds that unit-owners' policies are responsible for insuring betterments and improvements made to the interior of units.

Florida law
A 2008 Florida law specifies which permanent fixtures unit-owners are responsible to insure, and allows condominium associations to force-place coverage on behalf of unit-owners if necessary. That provision has provoked an outcry from some unit-owners and a legislative proposal to rescind it.

The 2008 Florida Condominium Act (HB 601), like previous Florida condominium law, is based on the "single entity" approach. The measure, sponsored by Rep. Matt Hudson (R-Naples), was introduced at the request of condominium associations that expressed concern that damaged condominium units were sometimes not repaired by uninsured unit-owners.

HB 601, which has since become known as the "condo glitch law," requires condominium associations to obtain an independent insurance appraisal to determine the value of buildings at least once every 36 months. The costs of the appraisal are presumably borne by the association, though that is not explicitly stated in the legislation. HB 601 allows a condominium association to establish deductibles for insurance policies. Of particular interest to insurers, the bill also provides for the following:

• Unit-owners must provide a certificate of insurance to associations upon request. If the unit-owner fails to do so within 30 days of the request, the association is authorized to force place coverage on behalf of unit-owners;
• The unit-owner's insurance policy is excess over a condominium association's policy (restatement and clarification of previous law);
• The unit-owner's policy must waive subrogation against the condominium association and name the association as a named insured and loss payee (restatement and clarification of previous law);
• A unit-owner's policy must include loss assessment or special assessment coverage in the amount of $2,000 or more;
• A unit-owner's policy must cover improvements or additions that benefit fewer than all residents; and
• Unit-owners are no longer explicitly responsible to obtain insurance for air conditioners or heaters.

Florida law previously specified that unit-owners were responsible to insure "air conditioner or heating equipment" and "all air conditioning compressors that service only an individual unit, whether or not located within the unit boundaries."

HB 601 amends the law so that it makes no explicit mention in regard to the responsibility for insuring such features. Some groups have interpreted this as meaning that the responsibility for such items has shifted to associations. The Florida Office of Insurance Regulation (FOIR) has made no clarification as to whether the deletion suggests or signifies a change in the responsibility for the items.

AAIS has made filings to comply with the new Florida law.

In an attempt to once again change the Florida condominium law, the 2009 legislative session saw the introduction SB 714, which was intended to correct the "glitches" of the legislation passed the previous year. The legislature passed the bill and sent it to the Gov. Charlie Crist for his signature. To the surprise of many, the governor vetoed the bill, citing fire safety concerns regarding the legislation's sprinkler provisions. The issue is likely to be resurrected again in 2010.

The AAIS Homeowners Program and
the 2008 Florida Condominium Act

Commercial Properties endorsement, Residential Condominium Building Amendments, has been revised and filed with the FOIR to include as covered building property all portions of the condominium property as originally installed or replaced in accordance with the original plans; include HVAC equipment as covered building property; and exclude certain items within an individual unit or limited common element.

Media reports indicate some condominium associations are unhappy with the new duties they have under the new law, even though the bill was introduced at the request of other associations. Some associations feel this will increase the likelihood of litigation with unit-owners and lead to increases in the cost of master policies. HB 419 was introduced during the current legislative session and would once again amend the Florida statute. The bill has passed out of committee, but still needs to be approved by both houses and be signed by the governor before it becomes law.

Loss Assessment and Association Deductible Coverage

The 2008 Florida Condominium Act addressed unit-owners' responsibilities for loss assessment coverage, but made no explicit mention of coverage for insurance deductibles. AAIS countrywide homeowners forms include incidental property coverages for both Loss Assessment and Association Deductible. Though the coverages may seem similar, they serve different purposes.

The forms providing Association Deductible Coverage are not yet on file in Florida as well as a few other states.

Loss Assessment Coverage in HO 0006 covers a unit-owner's share of an assessment levied by a condominium association if the assessment is made as a result of a direct loss to common property caused by a peril insured against other than earthquake, land shock waves, or tremors, but an endorsement can be added for Loss Assessment for loss caused by earthquake.

Loss assessment coverage applies when the assessment arises out of loss to property that would be covered under the policy if it were owned by insured. Coverage may be provided when damage occurs to common areas of condominium buildings and the loss is not fully covered by the association's master policy. The basic limit is $1,500 per occurrence, but can be increased for an additional premium.

Association Deductible Coverage applies toward a unit-owner's obligation to pay for an insurance deductible under a master policy covering a condominium association. The coverage applies when responsibility for the deductible is imposed upon an insured by by-laws or other instruments, association practices, or law.

The basic limit for Association Deductible is $1,500 per occurrence, but can be increased for an additional premium. The loss for which a covered association deductible is imposed must be caused by a peril covered by the unit-owner’s policy, other than earthquake, land shock waves, or tremors, but an endorsement can be added for Association Deductible for loss caused by earthquake. The coverage can be extended to additional locations, such as a location that is owned by the insured and rented to others.

Association Deductible coverage was introduced by AAIS in 2004 as a countrywide sample endorsement, then added as a built-in incidental property coverage in the 2006 and 2008 editions of its Homeowners booklet forms. The coverage applies to any type of homeowner in a community governed by a homeowners association.

As condominium associations choose higher deductibles on their master policies, there is a trend of associations shifting the exposure for such deductibles to unit-owners. Occasionally the deductibles charged to unit-owners by associations are substantial and can create a heavy financial burden on unit-owners who do not have adequate coverage. The amount of an association deductible is a function of the tug-of-war between the condominium association and the unit-owner, and between personal and commercial insurance coverage.

TOP

American Association of Insurance Services
1745 S. Naperville Road | Wheaton, IL 60189-5898
630-681-8347 | 800-564-AAIS | Fax  630-681-8356