Condominiums became popular largely because they allowed people to own property without having to take care of everything owning a home usually entails.

They were perfect for older couples who were downsizing and busy singles interested in things other than mowing lawns and trimming hedges. Unlike an apartment, condo payments do not increase annually. Unlike a house, they offer no home maintenance issues.

For some, a condominium is the perfect place to live. Insurance professionals, however, do not always see it that way. A condominium isn't a home so it doesn't fit on a homeowner's policy. Because it's not an apartment, a tenant's policy won't do either. The unit owner's policy was developed specifically for condominiums, but there are gray areas between the unit owner's policy and the association policy.

One of the first things to establish when dealing with a condominium is who owns what: what part of the building is the unit owner responsible for maintaining, and what part is the responsibility of the condominium association? The condominium master agreement will detail the association's and the insured's responsibilities. Likewise, many states have statutes that establish the elements for which the association is responsible. Many state statutes are very specific. Typically the association is responsible for common areas and usually plumbing, wiring, and items between the inner and exterior walls. Walls in, everything from the interior wall including paint and wallpaper are usually the responsibility of the unit owner, while walls out, everything beyond the interior is usually the responsibility of the association.

Unit Policy Language

The ISO 2011 Unit Owners form clearly states that alterations, appliances, and fixtures within the unit, as well as real property that pertains to the unit, are covered in the policy. Items such as built in bookcases, stainless steel refrigerators, and washers and dryers would be covered by the unit owner's policy, as well as a shed that would “pertain to the unit.” Items under the responsibility of the unit owner as dictated by the association agreement are also covered. The association could dictate that the unit owner is responsible for coverage for the patio or balcony, for example.

Conversely, the association policy typically covers the building itself, including exterior walls, and the common areas such as stairwells and courtyards.

The Unit Owners policy states that when an association policy is present, the unit owner's policy is excess over the association policy whether or not payment has been collected by the association of property owners. For example, a building with multiple units sustains a large fire; the association collects $500,000 for the loss to the multiple units, but the individual's unit damage has not been completely covered. The unit policy will provide coverage above the association policy since the total amount of the loss has not been covered.

Had there been no other insurance, the unit owner's policy would be primary for the amount not covered by other insurance because of the application of the deductible. For example, a loss is sustained to a unit including its exterior walls, and the association policy portion of the loss is below the association deductible. Under those circumstances the unit owner's policy will provide coverage for those exterior walls specific to the unit because no payment was made by the association policy.

Loss Assessments

There are two types of loss assessments that appear in the ISO condominium form: one for assessments made for damages to common property owned by all unit owners, such as the pool, clubhouse, or parking areas, and the other for liability claims. Under the first, the policy limits coverage to $1,000 regardless of the number of assessments for one loss. If the pool is damaged in May and an assessment is of $800 per unit owner is made in May, and then in June a second assessment of $600 is made as a continuation of the same loss, only $1,000 is paid for both of the assessments.

The other loss assessment appears in the liability section of the policy. This provides coverage for the unit owner's share of an assessment made to all unit owners when the assessment is from bodily injury or property damage to others. For example, if a resident throws a party at the clubhouse and the balcony collapses, injuring several visitors, the unit owners may be assessed for the injuries to the visitors. The policy will pay up to $1,000 for the unit owner's loss assessment.

Assessments can also be made for liability for an act of a director, officer, or person on the board. This person must be elected by the members of the association of property owners and must serve without any income from the association. If the board allows a children's group to temporarily erect a trampoline and children are injured, a claim may be made against the board members for poor judgment. Such an assessment to the unit owners is covered up to $1,000 per assessment.

Endorsement, ISO HO 04 35 05 11, Supplemental Loss Assessment Coverage, allows the unit owner to increase the limits of the loss assessment coverage. The amount is selected by the insured.

These are just some of the main points of confusion found in condominium policies. The policy must dovetail with the association policy in order for the association and the unit owner to be completely covered. Both unit owner and association must adhere to state statutes that dictate where coverage is found for certain parts of the building.

Christine G. Barlow, CPCU is an associate editor with FC&S®. She has an extensive background in insurance underwriting. She may be reached at cbarlow@nuco.com. Additional information about FC&S Online is available at www.NationalUnderwriter.com.

Special Reports /

The Condo Conundrum

Related Stories

Recommended For You