“Righting” Insurance For Coops and Condos—Who Insures What?
Bea and Ben Aden purchased a vacation condo in western New Jersey and were looking forward to some peace and quiet in the country. When their unit was devastated by fire, what they got was exasperation and expense.
First they were faced with the ordeal that any homeowner must deal with following a fire, but then they discovered that, under the terms of the condo association agreement, they were responsible for restoring the interior of the unit at their own expense. The cost of restoration was $21,000. The amount of insurance provided by their insurance: $1,000. Result: an errors and omissions lawsuit against their broker.1 Amazingly, the case went all the way to the New Jersey Supreme Court. The court ruled against the broker and awarded the insured damages plus interest, saying that the insurance broker was a professional and that insureds were entitled to depend on his expertise.2
It’s very doubtful that New York courts would impose a similar duty on the broker to advise the insured, but you don’t want to get dragged through the courts to find out. And if you do business in New Jersey, be forewarned. But, even ignoring possible professional liability, is this the way to treat your clients and build an insurance practice? Get good word of mouth instead of bad; write the insurance the right way.
Find Out What the Condo or Coop Agreement Says
Does a coop or condo unit owner need an HO 3 policy? Silly question. The HO 3 is for a homeowner; the HO 6 is for a unit owner. But that doesn’t always happen. My practice is centered on commercial insurance, so I don’t get to see many HO policies. Yet in the handful I’ve looked at as a favor for a client, I’ve come across two HO 3 policies written for condo unit owners. In both cases, the condo agreement called for the association to insure the structures, so my clients were paying for unnecessary coverage. Once in a great while, a condo agreement will put the burden on the unit owners to insure the buildings, but that’s rare. It’s more common in the case of homeowners associations, but even homeowners associations agreements may require the association to insure the structures.
How do you find out? As with so much else in insurance, review the documents. You should request a copy of the insurance requirements portion of the coop or condo agreement or ask your clients to find out from the board or the managing agent what they, as unit owners, are responsible to insure.
Insuring their personal property is universally the unit-owners’ responsibility. If the association is required to insure the structure, the next question is who is responsible to insure the real personal property within the unit?
There are two sides to condo/coop insurance: insurance for the unit owner and insurance for the coop and condo. Some basic principles apply to both and we’ll look at those first. Then we’ll review special problems in arranging insurance for unit-owners and for the association.
Bare Walls vs. Original Specifications vs. All-In
There are three different ways that the responsibility for insuring the real property within the “four-walls” is handled in condo and coop agreements: Bare Walls, Original Specifications, and All-In.
Bare Walls
The most usual arrangement in our area is referred to as “bare-walls.” Under this approach, the unit owner is responsible for the cost to restore everything from the bare walls in even when the damage is caused by an insured peril. This includes kitchen and bath cabinets, appliances, plumbing fixtures, decorating and more. In the Aden case discussed at the beginning of this article the association agreement made the association responsible up to the bare walls. The repairs beyond that were the unit-owners’ responsibility. It cost them $21,000. And this was for a oneroom studio in a seasonal resort. Imagine what it would be for a five-room high-end New York City apartment.
Most coops in New York City use the bare wall approach. Agreements drafted by attorneys who pattern the condo agreement on work they’ve previously done for coops are also likely to call for a bare walls approach.
Original Specifications
Original specifications coverage requires the association to insure the building additions that were part of the structure when it was originally developed. This is true even if the building additions are owned by the unit owner and not by the association. This option is often called for by condo agreements. If the Adens’ condo agreement had called for original specifications coverage, the $21,000 cost for interior repair would have fallen on the association. (Original specifications coverage is also sometimes referred to as single-entity coverage.)
All-In
All-in coverage is similar to original specifications coverage except that it includes improvements and upgrades made by the unit owner as well as those that were part of the original specifications. Again, it doesn’t matter whether the building additions and improvements are the property of the unit owner or the association. All-in coverage is not common in the tri-state area. I’ve reviewed numerous coop and condo agreements and I’ve never seen one that called for all-in coverage; I did come across one association that arranged its insurance as if it was required, despite the absence of anything in the agreement to that effect.
Insurance Coverage for Unit-Owners
Most insurance policies for unit-owners handle this problem quite simply. The Unit Owner Policy Form, HO 6, contains a dwelling coverage item that allows the unit owner to select an amount of insurance to cover those items that are the unit owner’s responsibility. Policies generally make clear that the insurance can apply regardless of who is the owner of the property if the agreement calls for the unitowner to insure it. Here’s what the ISO form HO 00 06 05 11 says … Property which is your insurance responsibility under a corporation or association of property owners agreement…3
Note the reference to the condominium association agreement as the basis for determining coverage. If you don’t know what it says about insurance requirements, how can you properly write insurance for your clients? If the unit-owner is responsible for building additions, the solution is to include an adequate amount of dwelling (real property) coverage in addition to the personal property coverage.
Insurance Coverage for the Association
The Condominium Association Coverage Form, CP 00 17, takes a similar approach. It defines building coverage to include:
(6) Any of the following types of property contained within a unit, regardless of ownership, if your Condominium Association Agreement requires you to insure it:
(a) Fixtures, improvements and alterations that are a part of the building or structure; and
(b) Appliances, such as those used for refrigerating, ventilating, cooking, dishwashing, laundering, security or housekeeping.
But Building does not include personal property owned by, used by or in the care, custody or control of a unit-owner except for personal property listed in Paragraph A.1.a.(6) above, (A.1.a.(6) Personal property owned by you that is used to maintain or service the building or structure or its premises…4
Warning: At least one major writer of condo insurance uses ISO form CP 00 10 instead of CP 00 17 for condominiums. That’s a potential problem. CP 00 10, the most frequently used commercial building and business personal property form, does not include the wording quoted above. Therefore, in the event of a loss the insurer may refuse to pay for building additions and improvements installed by the developer no matter what the condo or coop agreement says. If you see a policy for a condo or coop written on the 00 10 form, try to get it changed to 00 17. Failing that, try to get a written commitment that the policy will be interpreted to meet the requirements of the condo or coop agreement. If you can’t do that, take two aspirin and call me in the morning.
Effect of State Law
Some state laws go into much more detail about condominium insurance than New York law does. If your client is in another state, you’ve got to check the state law in addition to the association documents. Connecticut, for example, requires that developer-installed improvements be insured by the association for multi-story or town house buildings.5
The National Conference of Commissioners on Uniform State Laws drafts recommended laws for state legislatures to adopt in numerous areas to create greater uniformity between states. The Conference published a Uniform Condominium Act that, in essence, calls for at least original-specifications coverage for multi-unit attached or stacked condominiums. 6
My Preference: Original Specifications Coverage
I feel that original specifications coverage is the way to go for all condos and coops, particularly in the New York metropolitan area where so many coop and condo unit-owners have more of a tenant than owner mentality. It’s one thing to specify in the agreement that the unitowners will insure the building additions and improvements that are their responsibility, it’s quite another for the unit-owners to actually purchase adequate insurance. Without insurance, it becomes a fight over who pays for what. Even if there is insurance, there can easily be four or five units damaged in one loss in a multi-tenant structure. That means that there may be five or six adjusters (one for each unit plus one for the building). Simplifying the adjustment of losses was one of the principal reasons for adopting the Uniform Condominium Act.7
My Recommendations If the coop or condo agreement does not call for original-specifications coverage or is unclear, suggest changing the agreement. Insurance requirements often read as if they were drafted in the middle of the last century by people who were getting paid by the word. It’s common to see currentlydrafted insurance requirements that call for “extended coverage,” despite the fact that extended coverage endorsement hasn’t been used by standard insurers since 1986. Amending an agreement can often require a super-majority of the unit-owners— not easily done. Sometimes the insurance provisions are so ambiguously worded that it’s worth the effort. To just change to original specifications, I’ve found that some insurers will accept a resolution passed by the condo board as a sufficient amendment. Check with the insurer to be sure that they’ll accept that as triggering coverage for original specifications, if your client goes that route. Coincidentally, just as I was finishing up this article, one of our clients sent us the insurance requirements for a new condo to review. Surprisingly, I like it. Here’s an excerpt:
The all-risk hazard policy shall cover the interests of the Board of Managers and all Unit Owners and Permitted Mortgagees, as their interests may appear. Coverage shall be for 100% of the insurable replacement cost of the Improvements (excluding land, foundations, excavations, footings and other items normally excluded from such coverage), including fixtures (to the extent they are Common Elements), building service equipment and supplies, and other personality comprising Common Elements. The hazard policy maintained by the Board is not required to cover, but may cover, in the sole discretion of the Board of Managers, improvements and betterments made by Unit Owners in their Units, fixtures that form part of Units and other interior elements of Units… (emphasis added)8
This lets the Condo Board choose bare walls, original specifications, or all-in coverage, whichever they feel fits their needs the best.
Setting the Amount of Insurance for Unit-Owners
If your client is the unit-owner, find out what their responsibilities are and tailor the insurance accordingly. (Did I mention that you want to check the insurance provisions in the coop or condo agreement?) This can be a win for all parties.
The producer writes more insurance and has more satisfied clients, the insurer collects more premiums and, when the loss occurs, the insured gets reimbursed promptly and adequately.
I’ve asked three brokers that I know how they set the amount of insurance for condo or coop unit-owners. Two passed the exam with flying colors; they ask HO6 applicants about the need for real property coverage—one even suggests $100 to $150 sq. ft. if the unit-owner is responsible for the interior. That’s high, but high-end kitchens and baths renovations in our area can run $100,000 to $200,000 or more.
Setting the Amount of Insurance for Coop or Condo Associations
Setting the amount of insurance for coop or condo associations is more problematic. It’s not unusual to find a new coop or condo that’s over-insured. The amount of insurance was set using details supplied by the developer and the developer’s costfigures included the cost of interior work in the unit. If that’s the obligation of the unit-owner, it should be deducted in setting the amount of insurance. I’ve even seen cases where marketing costs were included in the building-cost calculation. The same problem often exists with older units, but often inflation has eaten up the cushion. In any case, the amount of insurance should be set based on just what property the association is obligated to insure.
Setting the amount correctly can reduce the amount of insurance by 10 percent or more. Nothing makes you look more like Super-Insurance Man or Woman than showing clients how to reduce their insurance cost.
1 Full Disclosure: Bea and Ben Aden were part of our circle of friends when we lived in New Jersey. I wasn’t involved with their insurance and I had moved to New York before this loss occurred. I saw a report of the lawsuit in the insurance trade press; I didn’t hear about it from friends.
2 Benjamin Aden, etal. V Robert Fortsh, etal. NJ Supreme Court 169 N.J. 64 (2001)
3 Copyright Insurance Services Office, Inc., 2010
4 Copyright ISO Properties, Inc., 2007.
5 Based on email correspondence with James Orlando, Office of Legislative Research, Hartford, CT May 21, 2012.
6 Christopher Boggs “Condo Insurance Requirements Not Cookie-Cutter” Insurance Journal June 30, 2008 http://www.insurancejournal.com/news/national/2008/06/30/91454.htm 7 ibid.
