Policy Issues: The Scary World of Condo Unit Coverage

How appropriate that in this month of goblins and ghosts, a spectre from the past has arisen to remind me of nightmares long buried and fears long suppressed.

I speak, Ebeneezer, of Condominium Unit Owner coverages. How scary? Rocky Horror Picture Show is a Disney cartoon by comparison. The Exorcist a mere pea-soup infomercial. And that monster from Alien would feel right at home in a good unit owner meeting.
Then again, if I could have attended such affairs by wheeling up in the Ghostbusters' vehicle, sirens blaring and music blasting, things might have gone slightly better. Of course, when the chorus gets to "Who ya gonna call?", I'd have screamed "Not me!"
Those who have worked in this alternate reality called residential condominiums know I exaggerate only slightly. There are people there who look frighteningly like your mother--or, worse yet, your grandmother. They have lived long, and miss no opportunity to remind you of it. Many is the time I swear I heard someone mutter under their breath, "Take that, you young whippersnapper!"
I recall one distinguished gentleman who the entire board looked to for confirmation or rebuke of every coverage point I made. He sat on that folding chair as if it was the White Throne of Judgment. With the demeanor of a Supreme Court Justice, he dispensed his weighty opinion on my efforts, sometimes verbally and at other times with his pontifical gaze. As he was introduced as a board member, they cited approvingly his nearly forty years in the insurance business before retirement.
Yet as the discussion proceeded, my original intimidation gave way to puzzlement: He didn't seem to quite grasp the coverage details and considerations. Well, we all get older and forget things, right? This apparent disconnect resolved itself when after the meeting I learned he had, indeed, pursued a successful insurance career--as a New York Life agent. Perhaps his ego left him unwilling to admit his expertise lay in annuities and estates, not additions and alterations.
Into this veritable maelstrom of personality conflicts and relational issues worthy of Freud we introduce the wondrous world of uniquely condominium coverage issues, where knowing your forms is merely a good start.
Specifically, I speak of the coordination of coverage between association and unit owner, often complicated by state regulators/legislators who deeply wish to protect both the elderly from abuse and the elderly votes from attrition. Yet even if you do not specialize in the condo market, I'm going to focus on three potential pitfalls wherein are lessons for us all.
1. Condominium unit owner coverage requirements are determined by a contract.

Ah, let those of you in the construction insurance world rejoice! If misery loves company, you gotta be happy co-travelers with the condo folks. Specifically, there are documents known as master polices, ownership agreements, and bylaws and declarations--all of which can have a bearing on the precise coverage needs of a unit owner. These specifications may arise from the original developer agreements, association bylaws as amended over time, state regulatory requirements, the individual unit purchase contract and/or any or all of the above. Those of you who recall my April 2007 Agent & Broker article about whether agents should review legal contracts for insureds already know my opinion--don't do it. I learned from the response to that article there are many learned insurance folks who disagree--and how they can be so learned and still so wrong is beyond me. But that's what makes life interesting, although from an agent viewpoint considerably more dangerous.
For example, one agent actually forwarded an 88-page condo document to the "ask-the-experts" e-mail at the IIABA Virtual University and wanted to know if he'd overlooked any key coverage issues. I think that question presupposes its own answer. I found it interesting that nearly every expert who responded put great emphasis on the need for an ironclad disclaimer to be attached to the agent's recommendations, making it absolutely clear that: (1) the agent was not an attorney; (2) thus the recommendations could not be considered legal advice; (3) the agent didn't promise to have reviewed the entire contract, just the obvious insurance requirement clauses; (4) any other interested parties should be clearly notified the agent was merely expressing an opinion, not certifying all insurance implications of the contract had been addressed; (5) all such recommendations and contract provisions should be reviewed in detail by the unit owner's own legal counsel; (6) said legal counsel should direct any specific questions and/or requests for clarifications to the legal counsel of the association/developer; (7) nothing contained therein promised total adherence to all applicable state requirements as to, for example, the association carrying "adequate coverage" on the master policy; and on and on.
May I suggest a simpler disclaimer? "I hereby certify: (1) I didn't read your documents, therefore have no clue what they do or do not say; (2) I have no legal obligation to read your documents, as I'm not an attorney and Lord knows don't get paid like one, so I have no intention of risking my E&O by acting as such; (3) since it's your unit and your assets at risk, I recommend you get with your legal and financial advisors and decide just how much of a betting person you are; (4) when you come to a decision, let me know and I'll tell you how much of it I can make happen in the current marketplace, and at what price. Then it's your call where to fish or cut bait."
2. Unit owner coverage must be precisely coordinated with the master association policy to avoid duplication.

Yes and no. Yes, proper coordination may prevent duplication. But no, life as we know it will not end if you just ignore the master and insure the unit owner to the full extent of their financial risk. For those who think duplication is anathema, I simply ask what then is the purpose of "other insurance" clauses? Duplication of coverage is far superior to the alternative, which some euphemistically refer to as "coverage gaps." I prefer to call them "E&O claims." No, we don't want to oversell, but in pursuit of that noble goal, how many times must we read of trusting insureds whose coverage at time of greatest need fell far short, all because an agent or underwriter thought it far better to be known as the "good guy" instead of "the sales guy?"
For example, the master policy typically provides some coverage for unit owner property, normally some portion of the building items. This is where the terms "all-in" versus "air space" condo coverage arise. (Sounds like a cross between a poker game and the '60s drug haze. "Whoa, dude, I totally grok your air space!" "No prob, bro. I prefer my condo like my Texas Hold 'Em--all in!"
So why would an agent risk reputation and professional liability to determine just how little building coverage the unit owner can get away with under the HO-6? If for any number of perfectly valid (or invalid) reasons, the association policy fails to provide sufficient coverage to make the unit owner whole, then what? The unit owner will look to his own coverage to fill the gaps, only to find that his "good guy" agent cut him off at the knees with inadequate coverage A. Sure, it's a worst case scenario, but isn't that exactly what insurance is for? So the insured will swear they just took the agent's word that the association was going to cover all this. Now who is going to get cut off at the knees?
3. Needless duplication of coverage costs insureds money they don't have or don't need to spend.
Particularly with retired folks, you hear this argument a lot. Of course, no one at any age wants to waste money. But where is the waste? A unit owner wants assurance he has adequate coverage for his financial risk. Like any other insured, one of those financial risks involves saving a minor amount of premium up front while risking a major loss at claim time. Dirty Harry had it right: You feeling lucky, punk?
The best possible minimization of risk is for the unit owner to fully insure his entire financial asset--all property owned by him, either acquired as part of the unit purchase or separately.
If the insured wants to fall short of full coverage, then back off slowly, only with the insured's full agreement on the potential risk versus the premium saved. That the agent should never be the one to suggest backing off is clear.
Besides, we often used to wonder why we were expending so much time and effort to save anywhere from a few dollars to a couple hundred bucks for someone who just bought a condo that cost hundreds of thousands. As my mom used to say, if you can't afford to dance, stay off the floor.
In the classic Halloween season movie The Wizard of Oz, Dorothy had to work through her fears of "lions and tigers and bears, oh my!" only to find she had risked her life for a false promise from a fake wizard. She had given up when Glenda bailed her out.
Sometimes when dealing with condominiums and unit owners I, too, felt surrounded by animals seemingly circling for the kill. Yet there is a better lesson to be learned from another story of dangerous lions and a man named Daniel. In his situation, he was literally "thrown to the lions."
Yet he recognized the dilemma presented both grave danger in the risk but also immense opportunity in the successful survival. Instead of taking short cuts or negotiating a middle ground, he decided his best course was to stick to his beliefs, keep the faith, and let the chips fall where they may. And we all know how that worked out.
So in your dealings with insureds who sometimes ask much of you, expecting you to bear all the risk while they sit in their palace ready to lay blame if you fail, the question is simple: Do you want to be Dorothy? Or Daniel?
Your lions await.
Chris Amrhein is an insurance educator and speaker with more than 30 years in the industry. He is also chief fun officer of www.insuranceisfun.com and author of "Yes, Virginia, There is Insurance." Readers may contact Chris at chris@
insuranceisfun.com.