We are often asked what the most overlooked issue for a condominium association is. Insurance. The insurance provisions in a condominium’s master deed and how they interact with the maintenance and repair provisions are exceedingly important. For example, if a main water riser in a high-rise condominium bursts causing water damage in both common elements and units, how does the insurance provision for the association treat such a casualty?
In condominiums, the association maintains a master insurance policy. The unit owners also maintain their own insurance policy (typically a HO-6 insurance policy). The issue lies where the coverages for these policies potentially interact. Typically, a master insurance policy will insure the general common elements, limited common elements, and the original construction of the units (or another formulation is that the policy will insure to the bear walls of the units). Any improvements and betterments made in the unit are to be insured by the unit owner. What is an improvement and betterment? Let’s say that in the condominium development involving the hypothetical burst riser above, the units originally came with carpet floors, painted walls, and laminate countertops. A unit owner buys a unit, but wants a better finish on the unit. The unit owner, being an aficionado of HGTV opts to install, after obtaining any necessary approval from the association, terrazzo floors, quartz countertops, and subway tile back splashes. Each of these changes is an improvement and betterment as they change the initial construction of the unit. In a properly written insurance provision, the unit owner should insure these improvements and betterments because it is not equitable to require other unit owners to bear the financial loss if such improvements and betterments are damaged by a casualty. Put another way, why should I pay for my neighbor’s damaged floor?
The issue is that lawyers are not insurance agents, and vice versa. Often we find that the insurance provisions in Master Deed, particularly more recent Master Deeds, is incorrect. Consequently, the association is put in the position of insuring such improvements and betterments. In the hypothetical above, if the burst pipe is not caused by the negligence or intentional acts of the association, then the association is generally not responsible for the repair of such improvements and betterments. But, if the insurance provisions of the master deed includes such improvements and betterments in the coverage of the master policy, then it becomes a claim on the master policy.
So? You might ask.
Where is snowballs, is that often these provisions then provide that the cost of an insurance deductible is a common expense. Since condominium insurance is not cheap, many policies have high deductibles. So, in the above hypothetical, the association could have multiple claims to repair a unit owner’s improvements and betterments where the costs of the insurance deductible(s) become a common expense. The unit owners that were not impacted by the casualty will soon wonder why their assessments are being impacted by insurance costs to repair another owner’s improvements and betterments.
Consequently, it is vitally important for condominium associations to review their insurance provisions. These provisions need to be reviewed by both a lawyer and an insurance professional.