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Condo Insurance 101

from McCredie Insurance

Condominium Association Insurance

One of the largest budget items for Condominium Associations is the insurance that must be purchased to protect the interests of the Association. With the differences in coverages for the various insurance companies in the marketplace, it is sometimes difficult for a Board of Directors to determine what the best value is for their Association. The information provided in this article would hopefully assist the Board of Directors in making their decision on the purchase of insurance.

The bylaws of your Association require that the buildings be insured to 100% of the replacement value. Determining the proper amount of insurance is important so that the bylaws are followed, as well as having the correct amount of coverage to replace all the buildings in the event of a total loss. Most experienced insurance agencies can provide replacement cost information to assist the Board. The typical condominium association will cost between $120 to $150 per square foot to replace. It is also important to have the coverage written on a blanket basis. Under this method of coverage, the building limit is applied individually to each building until it is exhausted. Some carriers will also provide guaranteed replacement cost, which will respond to pay the amount to replace the structures over and above the limit on the policy if it is inadequate.

Most municipalities have ordinances that require that a structure be demolished if it is damaged by more than fifty percent. Insurance policies will not pay for the undamaged portion of the building, the cost to demolish the undamaged portion, and the additional cost to bring the buildings up to the current building codes. Ordinance of Law coverage is available to cover these exposures. This is a very important coverage and no Association should be without substantial limits for this coverage.

The bylaws of most associations require that the units be insured as they came originally equipped with standard items. Any upgrades made at the time of purchase, or improvements made since the time of purchase, is the unit owner’s responsibility to insure. It is inexpensive to purchase this coverage. The typical cost is $25 for every $10,000 in coverage. Some carriers will insure unit owner’s improvements and betterments. While this coverage assures that the unit owner will have their unit restored, there are two areas of concern. The cost of claims is increased which will lead to higher insurance costs. The unit owners who have done more in terms of upgrades and improvements benefit more from the insurance than those that have not.

Most insurance policies provide a $1,000,000 limit of liability. I am often asked how much liability an association should carry. The probability of a liability claim exceeding $1,000,000 is very small. The cost of commercial umbrella coverage is also relatively inexpensive. A Board of Directors should choose a limit of liability that provides them with an amount of coverage with which they feel comfortable. Umbrella limits of $2,000,000 to $5,000,000 are most commonly purchased.

Fidelity or Bond Coverage is another area that a coverage decision must be made. If the management company of the association is responsible for the funds and the board members do not sign any checks, a bond may not be necessary. This would have to be true in both the operations account and the reserve account. If this is not the case, a bond protecting the association should be purchased. The amount of coverage should be equal to two months of fees plus the amount in the reserve account. If the board only signs checks on the reserve account, the bond should be in the amount of the funds in this account.

Directors and Officers Liability is a coverage area that should be reviewed in detail as board members are individually liable for their actions. Most of the forms in the marketplace that are attached as endorsements to the property and liability insurance are limited in their scope of coverage. The following list of questions should be asked:

  1. Who is included as an insured. The board (past and present), volunteers, committee members, and employees should be included.
  2. Will the policy cover non-monetary damages? Eighty percent of all claims fall into this area. Most arise from unit owners who do not like the enforcement of rules or feel that the application of the rules are being unfairly applied to them.
  3. Is discrimination coverage excluded? This is an another area where there are a large number of claims.
  4. Will the policy provide coverage for claims that have occurred in the past? It is especially important if a change is made in insurance carriers to determine if the new carrier will respond for past claims if one is filed. If your policy contains a retroactive date, you do not have coverage for claims that occurred prior to that date.

There is much confusion concerning Workers Compensation coverage. The law requires that this coverage be purchased if there is one full time or three part time employees. It must also be purchased if subcontractors are hired in the name of the association. Please note that if there are no employees and certificates of insurance are on file for subcontractors, some carriers will return all but $250 after the annual audit is completed.

I would also suggest that the service standards of the agency chosen should be determined. For coverage evidence for mortgage companies, the agency should be willing to take the information by phone or fax and provide the information to the mortgage company within one working day. It is also suggested that if insurance carriers are changed, a letter should be sent to all unit owners indicating who should be contacted to provide information to the mortgage companies. Unit Owners should also be informed as to the coverage that they should provide to protect their own units.