Monthly Archives: September 2011

Understanding the Unique Insurance Needs of Condominium Owners

A number of significant issues come to mind when looking at the coverage unique to those who live in an association. While the condominium insurance policy owner faces the same property and personal liability insurance issues as any other homeowner, condo owners have the added concern of integrating their coverage with the larger association insurance policy. Two issues are key in this integration:  loss assessment and building coverage. This post will explore these two issues and then end with a simple action plan to check your own situation.

First, loss assessment comes in two flavors: property loss assessment and liability loss assessment. Let’s begin with property coverage.  If your master policy is inadequate to cover a property loss, either through miss-management of the policy or through inadequate coverage, you can select a limit of coverage to respond to your portion of the shortfall. For instance, let’s assume you’re one of 100 owners in your association. If your board fails to pay the insurance and there is a $100,000 loss, you may find yourself responsible for a $1,000 assessment. (We’ll ignore potential recoveries on an association management policy for sake of simplicity for now.) So you should make sure you have adequate limits for the highest potential loss possible, as this coverage is very inexpensive. Most reputable companies automatically grant at least $5,000 coverage, but you can request more.

Liability loss assessment operates the same way, but responds to a liability claim. If the association insurance is inadequate, you may find yourself “assessed.” Many associations carry $1,000,000 general liability insurance, and perhaps an additional $1,000,000 umbrella policy. What happens, if the lawsuit is successful for $3,000,000? In this case, with a 100-home association, you would be assessed  $10,000 to cover the uninsured $ 1,000,000 shortfall. So you need to be sure you are comfortable with your liability loss assessment limits.

The second issue is building coverage. How much is enough? This coverage cannot be accepted generically for the conscientious condominium unit owner. Each association is able to write their declarations differently, and even change them as time goes by. Some associations cover the building for their owners “as it was built,” leaving out coverage for improvements and betterments. Some associations only cover “to the studs,” leaving all cabinets, paint, wall coverings, appliances, floor coverings, even doorways and windows to be covered, in the event of an insured loss, by the unit owner. You must check with your association management team to find out how your situation is handled.

What are my recommendations?

For the loss assessment issue, identify how many units are in your association. Ask yourself what the largest potential uninsured loss may be, and consider whether you want to rely upon the board and the management company to pay the insurance bill. (Perhaps you’ll want to join the board!) Then, divide the largest potential loss equally between the owners in your association, and compare this potential assessment to your current loss assessment insurance coverage. Is it enough? Ask your agent to let you know how much it costs to increase your loss assessment limits. You may be surprised at how inexpensive additional coverage can be.

In response to the building coverage issue, find out definitively how your joint property is covered by the association policy. You may be surprised by the answers you get, because some management companies don’t even understand this issue. I advise you to get the documents and read them yourself! Think about your unit and see what it might cost to pick up the shortfall.

And finally, if you’d like help with these decisions, call me or Chelsea. We’ll be glad to help you!

— Mary Beth Brunston