Insurance for a condominium association is designed to finance the insurable exposures for the association. These exposures include the property and several liability exposures, including what would be covered by a commercial general liability policy, directors and officers liability policy, and potentially other liability policies.
The concept is as simple as any in insurance. When there is a covered loss, the appropriate insurance policy should respond to pay the loss. That policy should indemnify the claimant, whether it is the association on the property policy, or a third-party on any liability policy.
What happens if there is a loss that isn’t covered by the association’s policy, the amount of the loss exceeds the available limit on the policy, or there is a deductible that applies to the loss? Where does that money come from? Any unit owner would hope that the association has liquid assets (cash in the bank) to pay for such an event, but where does that cash come from after the association pays for it, or if there isn’t enough available money in the bank?
Guess who gets to pay that portion of the bill that isn’t covered by the insurance policy. If you guessed that it comes from the members of the association (the unit owners), you guessed correctly. So how does that get handled?
Here’s the scenario. There is a covered loss to association property — a fire at the building that houses the community recreation room, conference room, and offices. The association has appropriate coverage in place, but the association’s policy carries a $10,000 deductible. The association has an emergency fund with more than enough to cover their deductible so they write a check to the contractor, the contractor gets to work, the money comes in from the insurance policy to cover the rest of the loss and all is right in the world.
How does the association recoup that $10,000? They could choose to rebuild that emergency using the normal association fees that come in from the members. They could also choose to assess all or a portion of that amount to the association members. In choosing to assess the 100 members of the association (we all like easy numbers), the board sends a letter to all association members letting them know what happened, that they are being assessed for their portion of the deductible, the amount of the assessment ($100, because $100 is $10,000 divided by 100), and when it’s due.
Here’s what we find in the ISO Homeowners 6 – Unit-Owners Form.
We will pay up to $1,000 for your share of loss assessment charged during the policy period against you, as owner or tenant of the “residence premises”, by a corporation or association of property owners. The assessment must be made as a result of direct loss to property, owned by all members collectively, of the type that would be covered by this policy if owned by you, caused by a Peril Insured Against under Coverage A, other than:
1. Earthquake; or
2. Land shock waves or tremors before, during or after a volcanic eruption.
In our scenario, it looks like the unit-owner has some coverage for that $100 assessment, but what if the loss was a little different? What if the loss was a flood loss? We’re not talking about the non-weather-related water loss (can you tell I’m in Florida?) that the insured would call flooding. We’re talking about National Flood Insurance Program flooding. We’re talking about grab the dog and run to the top floor flooding. What about that?
The problem comes up from these words, “…caused by a Peril Insured Against under Coverage A…”
We’re pretty sure that fire would be a Peril Insured Against, but flood?
Let’s look at how this policy reads. For brevity’s sake, we’re only listing the names of the perils. Descriptions have been left out.
We insure for direct physical loss to the property described in Coverages A and C caused by any of the following perils unless the loss is excluded in Section I – Exclusions.
1. Fire or Lightning
2. Windstorm or Hail
4. Riot or Civil Commotion
8. Vandalism or Malicious Mischief
10. Falling Objects
11. Weight of Ice, Snow or Sleet
12. Accidental Discharge or Overflow of Water or Steam
13. Sudden and Accidental Tearing Apart, Cracking, Burning or Bulging
15. Sudden and Accidental Damage from Artificially Generated Electrical Current
16. Volcanic Eruption
This is a named peril policy, which means that only those perils that are listed are covered, unless they are excluded or limited anywhere in the policy. This tells us that if the association suffers a flood loss to the covered property, even if the association has a policy that covers that flood loss, there is no coverage for it here. The worse scenario is that the loss is not covered at all by the association’s policy and then the cost of the loss potentially gets assessed to the members of the association.
Instead of $100 per member to cover the fire loss deductible that is covered by the unit-owner’s policy, the flood loss turns into a much larger assessment, which is not covered by the unit-owner’s policy.
This is among the reasons that a condominium association needs to consider its risk management and financing program very carefully.
Wraight is the director of the Academy of Insurance. Phone: 800-897-9965 ext. 130. Email: email@example.com
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