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  • Writer's pictureDuxbury & Ray Insurance

Condo Association and Unit Owners Policy

WITH the large number of weather-related property claims in the past five years and with the dollar amount of claims far exceeding premiums, the pricing of habitational property insurance has skyrocketed; in some cases, the coverage has become unavailable. This development has adversely affected the finances of condominium and townhouse associations, which traditionally have insured the ownership interest of all unit owners under a single master policy. In the past two or three years, nearly all the major players-insurers who in the past have aggressively competed for these master policies have fled the scene. Only a handful today are open to new association business--and then only for very preferred risks (built in the last 20 years, no more than one or two claims in three years, roof recently replaced, no swimming pools, etc.). Often, coverage for associations with an unfavorable loss history must be sought in the surplus-lines market, where rates can be 300% to 800% higher.

When faced with overwhelming cost increases, most associations, even loss-free ones, do the prudent thing-they raise their property insurance deductibles. The usual $1,000 deductible becomes $5,000, $10,000, or even $25,000. Not only do the higher deductibles reduce today's premium, but they also eliminate most of the small losses. Fewer losses reduce future premiums and protect the policy from nonrenewal.

But here's the $64,000 question: If a master policy now has a $25,000 deductible, whose responsibility is it? The norm is for the unit owner or owners affected by a particular loss to pay for the master policy deductible. The association pays the deductible and assesses all members only when a loss affects all units; e.g., in event of a storm. (As we'll discuss a little later, however, associations' legal documents often aren't clear on this point.)

If you are a 40-unit association that just raised the master policy's deductible to $25,000, how can you insure that $25,000 exposure under your unit owners HO-6 policy? Which coverage does a unit owner need to purchase to cover that higher deductible? Does the unit owner need more building coverage (Coverage A) or more loss assessment coverage (found under Additional Coverages)? To answer that question, consider two claim scenarios: a $50,000 claim for a kitchen fire wholly contained to just one unit and a $300,000 hail-storm claim for replacing all the roofs in the association. In the first claim, your unit owner would be responsible for the entire $25,000 deductible. The only way to cover that risk is by increasing Coverage A by $25,000 on the unit owner’s policy. If the unit owner has $25,000 of increased loss assessment coverage thinking that it would cover the deductible, you'd be wrong.The HO-6 insurer normally would either deny coverage completely (loss assessment coverage covers only association-wide assessments for common areas) or would pay only $1,000. (Most endorsements for increased loss assessments usually contain a $1,000 cap for assessment of association deductibles.)

What the unit owner needs, then, is $25,000 of additional building coverage (A). Here's how the two claims should be adjusted for a 40-unit association with a $25,000 master policy deductible if your unit owner has $25,000 of additional Coverage A insurance:

-In the $50,000 fire, HO-6 Coverage A (unit owner policy) should pay the entire $25,000 master policy deductible.

-In the $300,000 hailstorm, your unit owner's HO-6 loss assessment coverage (unit owners policy) would pay the $625 assessment for your unit’s share of the deductible ($25,000 divided by 40 units).

1) Add "special perils" coverage to Coverage A (unit owners policy), changing the perils covered from "named perils" to "all risks" unless excluded. This is important for three reasons: You’re covered for more losses (e.g., water damage to walls and ceiling from roof leaks), you have improved coverage for losses subject to the master policy deductible, and you broaden the HO-6's loss assessment coverage to special perils from named perils.

2) Add special perils contents coverage (unit owners policy), (to cover damage to personal property from roof leaks, paint spills, etc.).

3) Add sewer backup and sump pump failure coverage. You want to do this for two reasons: first, to cover direct damage to the unit or contents from these two perils; second, to broaden the loss assessment coverage to include assessments for either peril. (loss assessment coverage applies only to assessments for losses from perils covered by the HO-6.)

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