The Complete Condo Package, Part 1

Fitting the Pieces Together for a Comprehensive Association or Unit Owners’ Coverage Picture

Completing the condominium insurance picture necessitates jigsaw puzzle tenacity. Quite a few pieces must be snapped together to assure a proper insurance picture. Any missing information can leave a gaping hole in either the association’s or unit owner’s coverage picture.

Regardless of the client’s status as an association or individual unit owner, the puzzle cannot be completed until the agent can connect the answers to two questions: 1) Who is responsible for what property? and 2) What is the value of the insured property?

The first part of this two-part article will discuss who insures what, provide real property definitions for condominiums, define associational responsibility classifications and discuss flood coverage.

Part two, to appear in the Sept. 1 issue of Insurance Journal, will discuss Fannie Mae changes, default setting, and how to value an association’s and unit owner’s property.

Who Insures What?

Associational responsibility is divided into three definitions. Each definition is viewed from the association’s perspective delineating which part of the real property they are responsible to insure. Property not insured by the association must be protected by the unit owner’s insurance policy.

Original specifications, all-in and bare walls are the three associational responsibility classifications. To fully understand these classifications first requires the four categories of condominium real property be specifically described.

Condominium Real Property Definitions

Common elements are owned by and benefit all members of the association. Land, parking lots and each building’s structural foundations and load-bearing walls are examples of common elements. Also included in this definition are club houses, pool houses, pools, fences, gates, playground equipment, tennis courts and other property owned and allocated to all unit owners. Not all property categorized as a common element is insurable in standard property policies, but most can be scheduled.

Limited common elements are beneficial to more than one but less than all unit owners. Examples include common hallways or corridors providing access to several units; walls and columns containing electrical wiring or sprinkler piping serving or protecting multiple units; or a plenum enclosure providing heating and cooling to multiple units. Doorsteps, stoops, decks, porches, balconies, patios, exterior doors and windows or other fixtures designed to serve a single unit but located outside the unit’s boundaries are often categorized as limited common elements because the appearance and safety of these fixtures directly affect multiple unit owners although connected to just one unit.

Unit property is defined by the association’s declarations or statute and is limited to and benefits none but the unit owner. The inside of the exterior walls, interior partition walls, counter tops, cabinetry, plumbing fixtures, appliances and any other real property confined to the unit are examples. The unit property’s definition can vary widely with no universal designation.

Unit improvements and betterments like unit property benefit no one but the unit owner. Differences in the three associational responsibility classifications require improvements and betterments be classed separately. Unit improvements and betterments are best demonstrated by a unit owner engaging in any activity or improvement that increases the value of the real property within an individual unit.

Associational Responsibility

Original specification requirements, known as single entity coverage, make the association responsible for common elements, limited common elements and unit property. Unit improvements and betterments are not the responsibility of the association.

Connecting the pieces — The association insures the common elements, limited common elements and unit property, while unit owners insure unit improvements and betterments and personal property within the unit.

A majority of statutes default to some form of original specification wording as recommended by the Uniform Common Interest Act to govern the insurance requirements of condominium associations.

All in (all inclusive) statutes differ from original specifications in one major aspect. In addition to insuring common elements, limited common elements and unit property, associations are also charged with insuring unit improvements and betterments.

Snapping the parts together — Associations insure common elements, limited common elements, unit property and unit improvements and betterments, while unit owners only insure personal property within the unit.

Approximately half of the remaining states not dedicated to original specification requirements utilize some form of all inclusive wording. Only a few of those states apply statutory terminology that could be exclusively interpreted as all in.

Bare walls limit associational insurance responsibility to the common elements and limited common elements.

To complete the puzzle — The association insures the common elements and the limited common elements, while unit owners insure unit property, any unit improvements and betterments and personal property within the unit.

At issue in bare wall situations is the definition of unit. Unit does not have a universal or even uniform definition. Unit boundaries — the beginning of the area the association is not responsible for insuring — can be everything from the studs; or the unfinished walls (meaning the paint is insured by the unit owner); or the sub-floor and underside of the ceiling; to any other variation.

Dividing responsibility for insuring real property may not be the most advantageous for the association or the unit owner. However, several states and associations continue to apply some form of bare walls wording.

Flood Coverage – A Special Case

Two standard flood insurance policies connect in condominium forms of ownership: the Residential Condominium Building Association Policy (RCBAP) provides coverage for the association and the Dwelling Form is purchased by the individual unit owner to cover personal property. These forms apply as per National Flood Insurance Program standards regardless of any statutory or associational declaration regarding insurance responsibility.

The RCBAP policy form specifically states that coverage is provided for all real property to include real property that is part of the unit. FEMA guidelines further clarify in rule IV.

Flood insurance policies do not comply with statute or associational guidelines. When insuring a condominium association or unit owner, agents must be aware of the differences mandated by the NFIP.

Topics Flood Property