Condo Insurance Requirements Not Cookie-Cutter

By | June 30, 2008

“Given the great interdependence of the unit owners in the stacked unit condominium situation, mandating property insurance for the entire building is the preferable approach.” This one explanatory sentence from the Uniform Condominium Act of 1980 forever transformed condominium association insurance programs.

Prior to the National Conference of Commissioners on Uniform State Laws’ (“National Conference”) adoption of this act, condominium associations customarily insured only a building’s common elements and limited common elements; unit owners were charged with insuring real property unique to and within the individual unit. Beginning with the Uniform Condominium Act and continuing today in the Uniform Common Interest Act, condominium associations are advised by the National Conference to insure all real property regardless of location or classification, whether considered a common element, limited common element or part of the defined “unit.”

Improved loss adjustment is a motivating force behind the National Conference’s mandate. Simplified claim management is realized since one carrier adjusts and settles a real property loss rather than several (each with competing interests). Secondary rationale relates to property values. Given that each unit owner depends on all other unit owners to maintain associational and thus individual property values, leaving to chance the rebuilding of a damaged unit is unreasonable. All real property is inextricably linked; therefore it is more appropriate that all real property be rebuilt at the same time, by one contractor and paid for by a single insurance carrier.

Unit owner-installed improvements and betterments are excepted from the National Conference’s mandate. Associations subscribing to this code are not responsible to replace any upgrades made by unit owners. If, for example, the unit owner replaces the originally installed laminate countertops with granite, the association is only responsible for the cost to replace the laminate. Updating to granite originally and following a loss is considered an option and the financial responsibility of the unit owner. Associations are not necessarily expected to know about such improvements, thus they are not expected to insure them.

States and associations that apply the Uniform Common Interest Act (or similarly worded code) as the default insurance requirement are designated as covering property per “original specifications.” Original specification requirements dictate that the association is responsible for all real property, regardless of location or classification, but only the kind and quality originally installed by the association developer and/or required in the bylaws.

“Original specifications” is but one of three condominium association insurance coverage mandates commonly found in statute and associational bylaws. “All in” and “bare walls” are the two other insurance settlement provisions. Each will be explored in the following paragraphs.

Original Specifications

Original specification protection, also known as “single entity coverage,” was described above. Restated, the association is responsible for all real property; but only the cost necessary to return the building and units to their original condition using materials of like kind and quality. Unit owner upgrades are not included in original specification loss settlements.

Developing replacement cost values may be easiest when single entity insurance requirements are applied as valuation programs and original specification requirements overlap in their result and mandate. Property valuation programs calculate the cost of rebuilding the structure utilizing modern materials of like kind and quality; and original specification insurance requirements limit associational responsibility to the cost of replacing original construction materials with modern materials of like kind and quality.

A majority of states has adopted the mandates of the Uniform Common Interest Act, as written or with jurisdictional modifications, to statutorily govern the insurance requirements of condominium associations. However, this wording has been challenged in a recent Maryland court case.

Maryland statute read as though it was cut-and-pasted directly from the Act, yet the Maryland Court of Appeals recently ruled in direct contradiction to its own statute. The ruling will have unknown and maybe adverse affects in all states employing original specifications statutes.

All In

“All in” (a.k.a. “all inclusive”) statutes and bylaws are similar to single entity requirements. Condominium associations are responsible for insuring common elements, limited common elements and all real property that makes up a “unit.”

All inclusive statutes differ from original specifications in one major respect: the association is not only responsible for all real property, but it is also charged with insuring unit owner-installed upgrades. Statutes and association bylaws mandating coverage on an all inclusive basis increase an association’s standard of care. Associations subject to this insurance settlement mandate are forced to closely monitor building and unit values (including value increases created solely by a unit owner) to avoid inadequate insurance and a possible coinsurance penalty.

Few states apply Condominium Act terminology that could be exclusively interpreted as “all in.”

Bare Walls

“Bare walls” is the last of the three commonly encountered insurance requirements. Bare wall settlement provisions were the standard before the Uniform Condominium Act of 1980.

States applying this code limit the association’s insurance responsibility to the building’s common elements and limited common elements. Unit owners are responsible for insuring all real property defined to be a part of the “unit.”

At issue is the definition of “unit.” “Unit” does not have a universal definition among states, nor is the term uniformly established in association bylaws. 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; or any other variation. Problems with such diverse boundary definitions are compounded by the potential confusion surrounding interior partition walls that may contain limited common elements.

Claims management in a bare walls situation can be a long and possibly litigious process. First, valuing a bare walls property can be difficult for both the association’s insurance carrier and the unit owner’s insurance carrier. Second, deciding who is responsible to rebuild or replace which real property must be debated. Then all involved insurance carriers must agree to a builder and coordination of payments (involving multiple deductibles).

Conflict continues if the unit owner does not have coverage, or enough coverage, to rebuild what is defined as the “unit.” Contractors will not just leave the unit unfinished. Interior walls often contain limited common elements (such as electrical, HVAC, possibly fire protection, water lines and other such equipment) that cannot be left exposed. Assessments, liens and/or court action may follow.

Associations generally try to avoid insurance coverage conflicts by requiring the unit owner to purchase and maintain property insurance coverage on the defined “unit.” Some bylaws go so far as to require the unit owner to place coverage with the same insurance carrier providing the association’s coverage (a potential restraint of trade issue/lawsuit if the unit owner has an agent with whom they want to place coverage, but the agent doesn’t represent the particular company (but that’s a wholly different discussion)).

While such required insurance coverage is a good risk management solution to potential problems created by bare walls insurance provisions, two questions arise:
1. Who deciphers the definition of a “unit” allowing the unit owner, the association and the respective insurance carriers to know who is responsible to insure what? and
2. Who calculates the amount of coverage needed?
Attorneys, appraisers, agents and other professionals may be required to answer these questions and design the correct programs (one for the association and a separated one for each unit owner). A lot of professional expertise is required to avoid insurance disputes.

Dividing responsibility for insuring real property may not be the most advantageous for the association or the unit owner; however, there are several states that still apply some form of bare walls wording in their statute.


As previously stated, statutes are associational insurance default settings. Bylaws and declarations are the governing documents of all shared ownership regimes. These documents supersede statute as per the statute itself. Division of ownership and insurable interest is dictated by these documents allowing associations to adopt their own rules regarding insurance coverage and requirements. Associations can chose among original specifications, all in or bare walls as they desire.

Insuring associations and individual unit owners within an association is not “cookie-cutter” insurance. Statutory, bylaw and valuation requirements must be factored into any insurance program involving common ownership of real property.

About Christopher J. Boggs

Chris Boggs, CPCU, ARM, ALCM, LPCS, AAI, APA, CWCA, CRIS, AINS, is a veteran insurance educator. He is Executive Director, Big I Virtual University of the Independent Insurance Agents and Brokers of America. He can be reached at More from Christopher J. Boggs

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