General Information About Condo Association Insurance
Doesn’t the Association Insurance Policy cover the
entire building?
This question is asked by owners all the time. Unfortunately, many do not think about this until after there is a claim, and they find out they were not properly insured.
While there are various ways to establish the value of your building, there is only one true accurate method.
A Replacement Value Appraisal of your building is one of the most valuable pieces of information you can have.
It can be used to protect you from:
- Coinsurance penalties
- Over-insuring the property
- Determining the value of the interior of each unit
Market value and assessed value are not used in determining an insurance value.
Insurance is based upon building cost. The cost to rebuild your building in the event of a fire or other catastrophe.
Condominiums are unique in the fact that most Associations are responsible for insuring the main structural walls, roof, foundation, etc. but each unit owner may need interior building coverage for their cabinets, carpeting, bath fixtures, doors, windows, and built-in appliances.
How does an owner determine the cost of his kitchen wall, or what it would cost to sheet rock and paint all the rooms in their unit? The best advice we can give you is to have a professional insurance appraiser determine this for you.
Using your Master Deed and By-Laws as a guide, the appraiser can determine the value of the building that the Association must insure as well as the amount of building the unit owners must insure. Usually the Master Deed will determine who owns which portion of the building. Your Master Deed explains what part of the building is a Common Element (owned by the Association), and the Description of Unit (owned by the unit owner). The By Laws generally determine whose responsibility it is to insure these different elements (regardless of who owns them)
It is your responsibility to read your Master Deed and ascertain the amount of insurance that you need to carry.
Once that is determined we as your insurance professional can advise you the best way to protect and insure that property.
As a board member you have a duty to uphold the Association by-laws and (in most cases) make sure the building is insured to the full replacement value.
As a unit owner you have an interest in the common elements of the building, and could suffer a substantial monetary loss if the proper insurance is not provided.
Three very important things we urge you to do:
- If you do not have a copy of your Associations’ Master Deeds And By- Laws, get one. All master deeds are on file at the County Court House. Then read the sections marked: “Description of Unit Common & Limited Common Elements Insurance”. That section will tell you what part of the building you own.
- In addition read the sections marked “insurance” usually found in the By-laws. This section will tell you who is responsible for insuring that part of the building you own.
- Obtain an appraisal, from a professional appraiser.
Protecting the Board of Directors for your Association is everyone’s responsibility
You make monetary decisions as a member of your Associations’ board, and many times it’s because no one else will. You make decisions concerning repairs, maintenance, raising fees, upholding the by-laws.
No matter how well thought-out and researched, your actions or inaction, can personally expose you to a lawsuit.
And what about the owners who sit on committees and volunteers acting on behalf of the board? They too can be held personally liable and named in a lawsuit.
It is hard enough getting people involved and willing to help, without them having to worry that they could be sued.
Directors and Officers Liability Insurance is important for every Association, no matter your size. It gives peace mind and security to those willing to get involved, that they will be protected as they donate their time for the betterment of the Association.
In today’s world, the number of suits filed, the cost to defend, and the monetary judgments awarded, are on the rise.
Whether your Association has 3 units or 300 units, if someone feels they were wronged, you may find yourself paying thousands of dollars for an attorney to defend you. Even if the lawsuit is groundless, you still need to defend yourself.
What is Building Ordinance coverage and why do I need it?
The Property Insurance that provides fire, windstorm, and vandalism coverage for your building, is written to replace parts of the building that may be damaged because of a covered loss.
Let’s take a look at this scenario:
Suppose a fire caused 60% of the building to be damaged, but the other 40% was undamaged. A normal ordinance may require any building which is more than 50% damaged to be entirely torn down and rebuilt to current building codes.
Without building ordinance coverage, you would be paid for the percentage of the building that was damaged, however, nothing would be paid to demolish, remove or rebuild the 40% that was not damaged.
Let’s assume:
The amount of insurance on the building is $500,000
The cost of the damaged part is $300,000
The cost of the undamaged part is $200,000
The cost to demolish the entire building is $50,000
The total amount of the claim to remove and rebuild the structure is $550,000
Without Building Ordinance coverage the amount paid would be $330,000. The owners must be assessed $220,000 to rebuild.
With the Building Ordinance coverage the amount paid would be $550,000.
Equipment Breakdown Coverage
If there is a power surge and it knocks out the air-conditioning system, will your Property insurance policy pay to have it repaired?
Probably not. Even “all risk” property policies do not provide coverage for sudden and accidental breakdown of equipment due to power surges, short circuits, or motor burnout.
Whether you have simple or complex equipment and computer exposures, Equipment Breakdown Coverage should be a supplement to your Property insurance.
What is Coinsurance?
Almost every property insurance policy contains a coinsurance clause. The most common is 80%.
Put simply, this means the amount of insurance you carry on your building MUST BE at least 80% of the full replacement value of the building. If it is less than the coinsurance percentage, you may not be paid the full amount of any claim you may have.
The formula is:
Amount carried x Amount of loss = Amount Paid
Amount Required
Here’s an example:
Replacement cost of building = $500,000
80% coinsurance applies
Amount of insurance carried = $300,000
Amount of insurance required = $400,000
The loss is $20,000.
$ 300,000 x $ 20,000 = $ 15,000
$ 400,000
You would be paid only $ 15,000.
Maintaining insurance for the full value of the building is the best option, you must review your Master Deed and By Laws to determine the Associations responsibility regarding insuring the building at full replacement cost.
Another reason for Flood Insurance
A Condominium Association was liable for purchasers’ increased mortgage commitment expenses incurred due the Associations’ lack of flood insurance.
Palermo vs. Consulate on the Park, 550 N.Y.S.2d 546
The purchaser obtained a mortgage commitment to purchase a condominium unit. The bank refused to close because the property was located in a federally designated flood hazard area and there was no flood insurance in effect.
The Associations’ by-laws required it to maintain multi-peril insurance. The court held that because the condominium was located in a flood area, flooding is one of the perils falling within the multi-peril definition. By failing to have flood insurance the Association was in violation of its by-laws.
The Association obtained flood insurance, however because of the delay; Palermo had to pay additional expenses. Palermo sued the Association to recover these expenses.
All properties are located in a Flood Zone. The National Flood Insurance Program (run by the Federal Government) classifies all properties in Zones A, B, C, D, V, and X. Even if you are in a “higher” zone, you are still subject to flooding. If your property is less susceptible to flooding, your premium will be less. All Associations should have flood insurance regardless of where they are located.
General Liability Coverage
It is also important to protect the common areas of the association outside of the individual units, such as sidewalks, stairways, and pool areas. The General Liability policy provides coverage for the bodily injury and property damage of others.
If a third party tripped and fell and was injured on the common areas of the premise and sues the association, the general liability policy would also provide additional coverage for investigating and attorney expenses. These expenses could become very costly on top of any money that might be paid out to the injured party if the association was found to be negligent.
Umbrella
An Umbrella or Excess Liability policy provides additional limits of liability coverage. The additional limits may extend the underlying policy limits on the Associations General Liability, Directors & Officers, Automobile, or Workers Compensation policies. The Umbrella policy may also provide coverage for losses that may be excluded in underlying liability polices.
Annual Review
At J Byrne, we strongly recommend you review your insurance coverage at least once a year. Your driving habits or living situations may have changed. Or, maybe you’ve made a few major purchases throughout the year that should have extra coverage. Inflation or depreciation can affect the value of your properties and their contents. Call J Byrne now to review, renew or establish your customized insurance policy that fits your world. |
