Condo insurance considerations

While the need for casualty and other insurance in connection with single-family homes is obvious, the issues that confront condominium owners need just as much scrutiny. While the condominium association’s "master policy" may cover some rebuilding costs, the unit-owner needs to be assured that there are no gaps (or costly overlaps) in coverage.

A review of the condominium association’s master policy is an essential place to start.

Master policy

Liability Coverage: The master policy includes liability coverage for common areas such as the lobby, hallways, elevator, garage, club house, tennis court, swimming pool, etc.

Property Coverage: The policy also includes coverage in the event of fire or other perils. Although master policies vary, there are two common methods to provide coverage for residential buildings.

1. The "bare-walls-in" method insures the basic building, i.e. the lobby, hallways, elevators, roof, walls, and floors, but leaves the unit-owner to insure fixtures inside the unit, e.g. cabinets, carpeting, wall coverings, appliances, and sometimes even the interior walls.

2. The "all-in" coverage whereby the common areas are covered, as well as the as items within the interior unit walls that are not considered personal property. The analogy often used is that if you were to pick up the condominium unit and turn it upside down and shake it, all the material remaining in the unit when you put it right-side-up would be covered.

Note that the fixtures and installations as were originally placed when the condominium was constructed would be covered and not upgrades by the unit-owner. The unit-owner’s personal property is not covered by the master policy.

Each master policy has a deductible. Although a $5000 deductible is common, many associations are buying policies with higher deductibles to save cost. The condominium bylaws will probably provide whether an individual unit-owner may be responsible for the entire deductible if the casualty originated in the unit. The unit-owner should ensure that his H0-6 policy covers that deductible (coverage is sometimes called “Condo Unit Owners’ Extended Protection).

Unit-owner policy

Once familiar with the coverage provided for by the master policy, coverage gaps are filled by the owner through a tailored unit-owner policy. This policy is known as condominium coverage or a form HO-6 policy.

Premiums may be lower when both policies are taken up with the same insurer. It may also eliminate disagreements between two different insurers as to which is responsible for a particular situation.

Liability Coverage: The HO-6 provides liability coverage for bodily injury or property damage caused by the insured occurring within the unit or anywhere in the world. The insured must be found to be legally liable.

Property Coverage: This is the area that merits the closest attention to make sure that coverage is coordinated with the master policy.

If a fire were to occur and the master policy provided "bare walls in" coverage, then the unit owner would be solely responsible for the cost of replacing cabinets, appliances, carpeting, and all personal property and would want such coverage in the HO-6.

Even the master policy is more generous and has "all-in" coverage, structural additions, alterations, and other value added to the unit by the owner after original construction, e.g. high-grade carpets or high-grade cabinets, will require additional coverage because an "all-in" master policy may only compensate for the original structure and fixtures. This additional coverage may be called "building improvements", "Building Property Protection", "Structural", or "building alterations and additions". Do not confuse this coverage with personal property/contents coverage.

Rarely would the master policy cover a leak from an appliance within a unit resulting in damage to a lower unit. The upper unit’s HO-6 should cover such liability.

While certain jurisdictions and lenders are now requiring that every unit owner have an HO-6 policy, unit owners should inquire whether the master policy provides coverage in the event that an upper-unit owner has inadequate coverage or no HO-6 policy in effect.

The HO-6 covers personal property within the unit against damage to or loss from several specified causes such as fire, weight of snow, windstorm, hail, theft, explosion, smoke damage, accidental discharge of water, and falling objects, among other causes.

A loss to property is settled in one of two ways:

1. "Actual cash value" is the traditional basis in which owners are given the value of the item, less depreciation.

2. "Replacement Cost" covers the value to replace the item, regardless of the age or condition of the item.

Items of higher value, such as collectibles, antiques, jewelry, or art work, then these items should be addressed through riders to the policy.

It is helpful to have a photographic inventory of the personal property, and of the improvements to the carpeting, cabinets, and countertops. The inventory can be accomplished by wandering around each room with a video or other camera, or can be more detailed to include purchase price, appraised value or other information.

We suggest that the inventory be updated on a yearly basis. For obvious reasons, the inventory should be stored outside the condominium unit.

Coverage for damage from sewer and drain back-ups is highly recommended for unit-owners. The coverage is usually missing from standard policies, but can be added for a nominal cost. However, owners should be aware that basic policies do not cover damage from floods or earthquakes.

Most HO-6 policies include an Additional Living Expense coverage which provides for up to 24 months of temporary housing in the event of a fire or other casualty.

Special consideration: unit rented to third party

A special situation arises when a unit-owner rents the unit to a third party, assuming that the condo’s bylaws permit rental and further assuming that the proper governmental license and rent control exemptions are obtained (in the District of Columbia, the landlord of a single condominium or house needs to have a license).

The landlord could chose between an HO-6 condominium unit-owner policy with an endorsement for additional coverage for losses associated with renting or a Dwelling Policy-3 ("DP3"), depending on what is available from the insurance company.

Under either scenario, the landlord should look for coverage for structural damage caused by tenants, liability to third parties for injuries occurring in the unit, damage to other units, loss of rental income due to a covered loss.

Tenants should be encouraged to obtain renter’s insurance. In fact, most landlords currently require proof of such coverage. The renter’s policy, the form HO-4, is relatively inexpensive and should include loss of use coverage, contents (personal property) protection, and liability protection.

In the event the unit is damaged and uninhabitable, the loss of use coverage provides the tenant with reimbursement for hotel and moving costs, usually for around a nine-month period.

About the author

Roy Kaufmann is counsel to Jackson & Campbell, P.C. and is a member of the General Litigation, Business, and Real Property and Asset Management practice groups.

His law practice focuses on litigation and transactional matters involving the purchase, sale, operation, titling, and financing of real estate and businesses, as well as licensing, employment, contract, and commercial leasing issues.

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