(July, 2014)

Coverages under condominium association and unit-owner policies mesh to provide sound protection for the individual's property exposures, an individual’s liability exposures and to cover collectively owned property and related exposure to third-party claims.

Condominium association forms are adaptations of general business property forms. Policy provisions have been modified for the distinct residential and commercial condominium needs. Condominium unit-owners forms are available under commercial condominium programs for business and professional occupancies.

Condominium Coverage Design

Building coverage in forms that insure condominium associations include property within the generally accepted meaning of "common elements." Property within the air space (condominium unit) enclosed by the unfinished surfaces of perimeter walls, floors and ceilings, to which a unit-owner has title and sole interest, is covered by the (homeowners) unit-owners policy.

Building coverage under a condominium association policy applies to the building(s) or structure(s) described in the declarations, for which a limit of insurance is shown. It includes: completed additions; fixtures outside of individual units; permanently installed machinery and equipment; association owned personal property (located outside the units and used for condo property maintenance); and, when in a unit, fixtures, improvements and alterations that are part of the building and appliances.

Business personal property coverage in an association policy protects personal property owned by the association (owned indivisibly by all unit-owners) and leased personal property.

Individual unit-owners property coverages are similar to the protection found under broad form homeowners and tenants policies. Dwelling coverage in the unit-owners form covers: alterations, appliances, fixtures and improvements that are part of the building, and property which is the unit-owner's insurance responsibility.

The association policy and the unit-owners policy contain carefully crafted language that clarifies which policy applies in certain situations, a prime example being loss to alterations, appliances, or improvements. Installations, at the unit-owner's expense, of such items as interior walls, bookshelves, wall mirrors, a whirlpool bath or sauna, a built-in stove, or microwave were subjects of uncertainty in the early days of condominium coverage.

Current association policies generally specify that building coverage therein applies, when the association is required by declarations and regardless of ownership to insure: fixtures; improvements and alterations that are part of the building (structure); appliances for refrigeration, ventilating, cooking, dishwashing, laundering, security or housekeeping. Other insurance provisions in a unit-owners policy state that insurance is excess over association insurance covering the same property covered by the unit-owners policy.

The owner of a condominium unit is well-protected in this and other property loss situations because of the corroborative design of the two important policies. Both policies are written for cooperative apartments, as well as condominiums, and these conclusions also are applicable to them.

Condo Unit-owners Coverage Options

Loss assessment coverage is especially important for condominium living and should be discussed and made clear to a unit owner. It applies to the insured's share of a loss assessment arising from perils or claims of a kind within the scope of the policy. Insufficient limits of fire insurance carried on the building by the association are examples of a situation that would give rise to an assessment. Policies issued by most insurers contain a built-in limit of loss assessment coverage under Section I in the amount of (typically) $1,000.

Loss assessment coverage in the amount of (typically) $1,000 is also basically included under Section II in forms used by most insurers. It applies to bodily injury or property damage within the scope of Section II, and also to liability for an act of an association director, officer, or trustee in that capacity.

There is good reason to discuss increasing the basic limit and to urge it in many cases. The business of many associations, especially large ones, is conducted by unit-owner volunteers who are experienced attorneys, accountants, contractors, insurance agents, etc. They keep abreast of property values and conditions and make certain that building and liability insurance is proper and adjusted for the association's needs when necessary. But all condominium unit-owners are not so fortunate.

In any event, when arranging insurance coverage for condominium unit-owners, it is important to discuss the option of increasing the basic limits of loss assessment coverage, and that higher limits be recommended. This is generally accomplished by endorsement for reasonable additional premium. Increase in loss assessment coverage under Section I and Section II from $1,000 to $10,000, for example, carries a $5 additional premium under several policies reviewed. Assessment for earthquake loss, not covered under the foregoing endorsement, is insured by various companies for an additional premium under a separate endorsement.

Related Court Case: ”Condominium Assessment For "Collapse" Of Common Elements Held Covered By Unit-Owners Policy”

A unit-owner policy contains exclusions for rental to others, making it essential that an agent determine if rentals have taken place or are contemplated, and to what extent. It is advisable to check periodically, logically on renewal, because a rental situation might develop that was not contemplated initially. The insurance provider/counselor can explain to the unit owner how coverage is restricted when the premises are rented and that the exposure may be covered by endorsement if warranted.

With respect to the theft peril under Section I personal property coverage, a loss is excluded (with incidental language variations in policies issued by various insurers) if it takes place in a part of a residence premises rented by an insured to someone else. If the unit is rented in its entirety, the exclusion applies to all contents. If the insured rents out only a part and retains occupancy of the rest, the exclusion is applicable only to the rented section.

When coverage for unit-owners' rental to others is made effective by endorsement, the theft exclusion for a rental situation is deleted. It must be made clear, however, that the endorsement does not restore theft coverage under Coverage C during rental for: money, gold, silver, coins and the like; securities, manuscripts, stamps, etc.; jewelry and furs.

A unit-owners policy, under Section II personal liability and medical payments coverages, effectively excludes claims arising out of rental or holding for rental of any part of any premises by an insured. However, exceptions exist for the rental of a residence that takes place only on an occasional basis; occupancy by the unit owner with no more than two roomers or boarders.

The addition of unit-owners' rental to others coverage endorsement eliminates the basic exclusion for rental or holding for rental of the residence premises. It minimizes uncertainty about the possibility and scope of rental and whether the basic coverage is adequate.

The importance of the rental coverage option is clear when we note the high percentage of residential condominium units that are "second homes" for eventual retirement living. The purchase of many, particularly warm-weather and resort areas, condos are made possible by steady, nearly year-round rental income. In addition to the income generated, the tax deductions for mortgage interest, property tax, maintenance, and depreciation are significant. Unit-owners' rental to others coverage is essential in such cases.

Many optional endorsements are available to adapt condo coverage to the specific needs of a given unit owner. A personal property replacement cost endorsement that converts coverage from an actual cash value to a replacement cost basis is of major importance. Flood insurance must not, of course, be overlooked where the risk exists.

Related Article: ISO Homeowners Optional Endorsements

The same package policy used for condominium unit-owners is generally issued by insurers to cooperative apartment unit owners because the exposures are similar. Their insurance meshes with that carried by the cooperative corporation, and the described coverage options are applicable.