Condominium coverage can be confusing—and the FC&S staff receives myriad questions regarding condominiums and how to insure them. We recently received this inquiry regarding how a condo owner might cover the mortgagee’s interest in the condo.
I am struggling with how to properly cover the mortgagee’s interest under a Condominium Unit-Owners’ policy.
When a Homeowners’ policy is issued to a homeowner or either a BOP or Commercial Property policy is issued to a commercial-building owner, the Coverage A or the building limit reflects the cost to rebuild the structure—which in most cases would also be sufficient to cover the mortgagee’s interest in the property, less the cost of the land and subject to co-insurance and other policy provisions.
Is it appropriate to draw a similar parallel to Condominium Unit-Owners’ policies?
Under either a Personal or Commercial Condominium Unit-Owners’ policy, would the limit shown for Coverage A in the HO-6 or Business Personal Property under commercial policies include the property covered as described in each policy and the amount of the mortgage?
For example, if I obtain a $250,000 mortgage for a $300,000 condo, it would seem that the value of the items described in the policy would not approach this value—yet my financial interest is $50,000 plus I am responsible for the entire amount of the mortgage. As such, it would seem that the coverage amount shown in the Declarations should be at least $300,000.
Am I looking at this wrong, or is there another/better way to cover the mortgagee’s interest when a Condo Unit-Owners’ policy is issued?”
The first place to check in figuring out this dilemma is the condominium bylaws, which explain what insurance is the responsibility of the association. Generally, the association covers the realty under a master policy, and the financial institution will be issued a certificate reflecting coverage for its financial interest as the mortgagee on the association’s master policy.
The HO-6 is used to cover the unit owner’s insurable interest, which is personal property and improvement and betterments. (Much will depend on what the association picks up under its bylaws.)
If the association, for some reason, does not obtain a master policy, then the entire amount dealing with the realty and personal property is added to the HO-6 and a mortgagee clause should be issued by the insurer.
Likewise, the condo forms under the commercial-property program work in a similar manner. The Unit-Owners’ Coverage form, CP 00 18, applies to business personal property, while the Condominium Association Coverage form, CP 00 17, covers the building and the association’s business personal property.
If the bylaws require the unit owner to insure the building as well as the business personal property, then the unit owner may utilize something like the Condominium Commercial Unit-Owners’ Optional Coverages form, CP 04 18, which allows miscellaneous real property to be covered.