PROPERTY COVERAGE

Your Association’s Insurance policy Property Coverage must contain the following elements

• Coverage for the buildings and units: The Act limits the association’s responsibility for coverage up to the bare walls and include the prime coat finish, bare floors, and bare ceilings to a prime coat finish of the units.

Walls, Ceilings (finished paint coat) and Floor coverings (carpet, tile, wood, or other) are not required to be covered as part of the Association’s insurance policy.

***Warning to you as a condo unit owner: This is one area where your personal coverage needs to reach out to where the Association’s coverage leaves off***

• Coverage for Common Elements: Though we can generalize as to anything a community shares as a common element the Condo Act defines specifically what is considered a common element. These elements include; fixtures located within the unfinished interior surfaces of the perimeter walls, floors, and ceilings of the individual units initially installed by the developer.

• Limited Common Elements: No these aren’t scarce resources that your neighbors picked up and hid from you, its generally considered to be structurally part of building and shared by two or more units. Such as a piece of plumbing that feeds water to or removes waste from multiple units.

• Replacement Cost: You purchased insurance to make sure that if the worst happens its covered, you’ll also want to be sure that the limit for your building coverage meets your expectations. You should be covered for the full (100%) replacement cost of the property. That means to put it back exactly the way it was before it all happened

***Word of Caution – This does not include any legal changes your town, city, county, state or other governmental agency deems necessary. To comply with current building codes you’ll need to look into Ordinance or Law coverage (see below)***

Types of Replacement Cost You Might Find

• 100% Replacement Cost: Seems a little misleading so be careful as you are only covered to 100% of the stated “agreed amount”. This “agreed amount” can be found on the property coverage declarations page, which is essentially a quick outline of the coverage in the policy. Usually within the first few pages of your policy. Make sure the amount stated is the amount needed as the stated amount is the maximum that can be claimed.

• Extended Replacement Cost: This sounds interesting and it would seem that it provides coverage in excess of the 100% replacement cost values and it does. Yet you still need to heed caution as the stated amount is the base number that the extension is added to. Usually provided at 20% to 25% higher than the 100% stated value. When available, carriers don’t charge premium on the full amount of additional coverage, usually there is a small nominal charge for the extension.
• Guaranteed Replacement Cost: Just what it sounds like. This form of coverage will replace the property regardless of the actual value stated (which in this case is usually stated for rating purposes). When you have the option to purchase Guaranteed Replacement Cost type coverage don’t rush in too quick as though this is a powerful feature there are many other considerations as you’ll see as we go.

What type of policy should I purchase for the association? Policies are written in what’s called a from this allows for better standardization and regulatory compliance within the industry. The only type of policy you should consider is:

• Special Form (All Risk) Policy: Essentially each form as its own coverages or exclusions, knowing this be sure to request a policy form that will include coverages that other policies exclude. Such as water and sewer backup through a drain and Ordinance and Law.

WHAT IS ORDINANCE OR LAW?

Remember earlier when I warned you about potential government agencies changing regulations within building codes? This is where Ordinance or Law coverage comes into play.    This coverage is supplied in three parts; Coverages A, B and C. To understand how these coverages work together let’s use an example like when a major calamity strikes such as a large fire. Since Fire departments respond quickly usually the entire building is not lost. This leaves a remaining portion of the building standing.

COVERAGE A: Loss to the Undamaged Portion of the Building.

In the event that the fire mentioned in our example above the building, now uninhabitable, is ruled by a regulatory agency as needing to be torn down. Since insurance normally doesn’t cover what isn’t lost, special coverage is included for the intentional tear down of the remaining portion. But this now leaves you with a bill for the demolition crew and clean up which is why the insurers include…

COVERAGE B: Demolition Cost

Knowing that you’d be left with a very large “clean up” bill the insurers have included Coverage B to pick up that tab. Demolition of the undamaged portion is a separate cost then what it would be to repair or rebuild the building so in order to ensure that you’re insured there are both Coverages A & B, what about C?

COVERAGE C: Increased Cost of Construction

Back to our pals at the regulatory agencies, they often find that we need to change what we use or include to make our buildings safer places to live. As time and technology move on new discoveries are made as to what is the “best” way to build a safe building. When adopted into law most people will not need to be concerned. However, when a fire like our example above, occurs and the entire building must be rebuilt your builders will need to follow the law. This could mean adding sprinklers, an elevator or even “green” compliant windows or climate control systems. Any items that were not originally part of the building would otherwise not be covered without Coverage C.

***Caution this limit is often left at default or very low. This coverage is generally not terribly expensive and can literally save you millions if you ever need to use it  When working with a contractor recently he explained that $10,000 per unit is a rough cost of just sprinkler installation. This means a 100 unit association would need a million dollars in coverage for that alone. ***

WHAT ARE THE DIFFERENCES BETWEEN WATER DAMAGE, SEWER BACKUP, AND FLOOD?

Water is water right? Not when it comes to insurance. Insurance covers your stuff against certain “acts” so depending on where the “water” comes from it may or may not be covered unless you request the coverage.

Water damage: Almost always an included coverage. This type of damage occurs most commonly due to pipe breaks, rain or melting ice, and even includes water damage from a fire sprinkler system discharge or the water damage caused from the fire department extinguishing a fire.

Back up through a sewer or drain: Most policies exclude this coverage though it can be added back into a policy with endorsement or by using the Special or enhanced coverages. If water or sewage backs up from a drain then the loss is not going to be viewed in the same way as water damage discussed above. The primary reason for this is because these types of losses usually occur due to factors that are beyond your control. Yet, a thirsty root systems from nearby plants have the power of mother nature and can find their ways into your drain system, restricting water flow and during heavy use could cause water to back up through the sewer drain.

Flood: No matter how high the water gets in your basement, even if it’s four feet, if its due to a pipe break its NOT a flood (it would be covered by water damage).  A flood is a very specific term defined by the National Flood Insurance Program (NFIP), in simplest terms, as an unusual or rapid accumulation or inundation of water (or mudflow) on land that is normally dry and must cover either 2 acres or effect 2 or more properties.

Flood is a standard exclusion in a property policy though even the properties not located in a “flood zone” should consider having this coverage as mother nature can be unpredictable and once it happens its too late.

UNIT OWNER VERSUS CONDO ASSOCIATION COVERAGE

Certainly one of the more important and confusing areas for everyone involved. As we saw earlier the Condo Association is responsible for certain coverages though leaves off at particular points. As an owner of a unit you will want to make sure that your policy picks up where the association leaves off. The Condo Act as well as the Association’s Declarations & Bylaws are a great place to start, as the Board of Directors may have elected to cover more than what is legally required. This would be good to know before you double insure your condo and pay for coverage you could never use.   

This is what the Association typically covers:

• The Building structure from the foundation up;
• The units up to the unfinished surface of the drywall (most carriers will prime it).
• Permanent fixtures and built in appliances. This includes, developer installed; cabinets and bathroom fixtures, HVAC equipment, plumbing and electrical systems.
• Limited Common Elements; Windows and doors (exterior and interior) and would include balconies or decks attached to the structure. (Unless the associations operating agreement states otherwise).

This usually leaves for you as a Condo Owner:

• Wall coverings ­­­ decorative finishing on the walls and ceiling
• Floor coverings ­­­ carpet, tile, or wood.
• Any upgrade to the unit of fixtures or limited common elements
• Personal Property in the unit and stored elsewhere on the Association’s common elements (regardless of the circumstance or origin of loss).

Betterments and Improvements

So you bought this beautiful condo in the perfect neighborhood and wanted to upgrade your kitchen to meet your standards. Certainly you find it better now that you improved it, this would be a “betterment or improvement”. These items are usually covered by the association only when original, which means you will need to make sure that your personal policy covers the upgrades. What if they were original to you when you moved in but not to the association when built? Good question, glad you asked! Not covered by the Association but can be added to your personal policy.

The Condo Act defines Betterments and Improvements as all “decorating, fixtures, and furnishings installed or added to and located within the boundaries of the unit, including electrical fixtures, appliances, air conditioning and heating equipment, water heaters, or built in cabinets installed by the unit owner.”

THE ASSOCIATION’S DEDUCTIBLE:

As a member of the Board of Directors you may be faced with an insurance claim. Nearly every policy has a deductible which is the portion of the loss that is “out of pocket” to the association. The deductible you decide upon should be something that wouldn’t put the association in financial hardship though there are options for how you handle recovering/funding the deductible. You have three options:

1. As a common expense: simply paid out of the operating or reserve account

1. Assessed against the owner(s) who caused the damage or from where the loss originated.
2. Require the unit owner(s) of the units affected to pay a prorated or shared portion of the deductible.

Before you decide to use options 2 or 3 consult with your attorney as improper use of these could result in a lawsuit. Though don’t shy away from these either as the association’s budget may not be in the situation to “absorb” the loss and may otherwise need to.

If you’re worried about your community members being able to cover the cost, don’t be. Your agent should have advised you to inform your community of what a unit owner should have to pick up where the association leaves off. This includes the deductible as a special assessment which is coverage that can be added to most personal policies for a few dollars.

GENERAL LIABILITY

Whether your Association is at fault or not you may find yourself brought into a lawsuit for something that your Association is otherwise considered potentially liable for. The courts will ultimately decide where fault lays though cost of an attorney alone is worth the value of the policy. In the event that your association is found liable this is the coverage that would pay out.

General Liability provides coverage for the legal costs, compensatory and general damages arising from suits against the Association for personal or bodily injury, property damage to others, and advertising injury.

We recommend the following coverage as basis:
• Minimum of $1,000,000
• Include as insured, the association, the board and managing agent
• Include Unit owners as additional insureds

There are 6 typical elements of a General Liability Coverage

I. Each Occurrence Limit: $1,000,000

2. Personal and Advertising Injury Limit: $1,000,000
3. General Aggregate Limit: $2,000,000
4. Products and Completed Operations Limit: $1,000,000

5. Legal Liability Property Damage: $ 100,000
6. Medical Expense Limit: $ 5,000

Element 1: Each Occurrence limit sets a maximum amount the carrier will pay for any one claim. Any amount owed to a claimant beyond the covered limit will need to be picked up by an umbrella policy, if you have one in place. 

Element 2: Personal and Advertising Injury limits will pay for any claim arising out of personal injury; such as libel, slander, false arrest, discrimination, and invasion of privacy. And advertising injury; claims made for the same elements of of personal injury, but were committed via the media of advertising. This is not physical harm

Element 3: The General Aggregate is the maximum amount a carrier will pay during the policy period for all claims incurred. So if you have a $1,000,000 occurrence limit with a $2,000,000 aggregate you can sustain TWO­ $1,000,000 claims within the policy period.

Element 4: Products and Completed Operations usually not applicable for the community associations. As it provides coverage for Liability arising out of defective products or completed work.

Element 5: Legal Liability also known as Rented Premises is coverage for damage caused by the insured to a third party’s property. So if you hold your board meetings in a library or other rented facility and happen to bring a coffee pot which somehow fails and starts a fire, this is the coverage that pays for the damage as a result.

Element 6: Medical Expense is coverage to provide medical expense compensation for person’s injured on the insured’s premises. It keeps your friends, your friends as they do not need to file a legal claim against you or the association for this to payout. Often times by responding quickly to an injured party with this coverage they are not as inclined to sue for significantly larger amounts, causing your insurance costs to rise.

DIRECTORS AND OFFICERS COVERAGE:
As a member of the Board of Directors you are faced with many decisions which will carry an impact in someone’s life. If that someone deems what you’ve done to be unfair, a lawsuit will be filed. Decisions reached by you and the Board are not covered under any element of General Liability which is why you need a Director’s and Officers policy to cover legal fees as well as any claims awarded.

Not all Directors & Officers liability policies are created equal. Cost aside, coverage can be and often is quite different from one insurance company to the next. We recommend you consider the following guidelines as a starting point in your quest for quotes.

• A minimum limit of $1,000,000.
• Provide indemnity to volunteer Board members and Committee members
• 3^rd party non-employment discrimination
• Full Prior Acts coverage
• Cyber liability protection 
• Legal Defense Cost outside policy limits
• Coverage for Property Managers
• Full Prior Acts coverage
• Full limit defense costs for 3^rd party breach of contract claims
• Failure to maintain or obtain insurance
• Legal fees for demands seeking non-monetary relief.
• Employment practices liability

COVERING THE ASSOCIATION’S MONEY

Protecting your association means protecting your association’s money too. No one expects to vote a money laundering swindler onto the board or into office for that matter. Yet, we both know this occurs and those who don’t have the default built in limit adjusted to fit the needs of the association get hit hard, that money is gone forever, never to be recovered. Coverage for criminal acts and acts of dishonesty are a sad necessity.

To protect your association make sure you have at least a limit equal to your operating account + reserve account + three months assessments. This rule of thumb will help get you pretty close to exactly what you need. 

You may come across three types of policies; Fidelity Bond, Employee Dishonesty & Crime. These policies do NOT provide coverage for accounting mistakes or loss of money due to poor work performance. It does NOT cover for losses due to the normal operations, or interruption of operations of the organization. What does do?

Fidelity Bond covers dishonest acts of employees and will provide coverage to an organization for financial loss of money, securities, and other property due to fraudulent activities of one or more employees. And is a stand alone or additional policy.

Employee Dishonesty is generally included in standard package property policy and it deals with loss of money and securities from dishonest acts of employees

Crime is the broadest form of this class of coverage as it covers dishonest acts and extends to include coverage for theft, depositors forgery, loss of money orders, and losses arising out of counterfeit paper currency.

***Word of Caution some policies exclude the property manager. Be sure to request a policy that extends to cover your property manager. ***

UMBRELLA COVERAGE EVEN WHEN ITS NOT RAINING
Umbrella coverage, sometimes called Excess Liability provides EXTRA coverage over your general liability or other underlying coverages. As we discussed before the general liability limit has 6 elements and when one of those elements are exceeded the umbrella will step up to pick up the rest. These limits essentially are added to one another to provide limits more suitable to your needs. An Umbrella Policy of $2,000,000 is a great starting point which demonstrates prudence to the courts.

A good umbrella policy will extend over…
General Liability

• Hired and Non Owned Auto Liability
• 
Directors and Officers Liability
• Employers Liability (Work Comp)
• And if applicable: Employment Practices Liability.