By  Roy L. Kaufmann[1] of Jackson & Campbell, P.C.  and Margarita Dilone, President and CEO of Crystal Insurance Group, Inc.

Owners of condominium units should review their condominium insurance needs carefully.  A unit-owner’s policy is essential. In fact, in some jurisdictions, such as the District of Columbia, it is required by law. Even with a policy in hand, all too often, when a problem arises, a unit owner may be disappointed that certain perils are not covered.   Although 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 injuries or events occurring in common areas such as the lobby, hallways, elevator, garage, club house, tennis court, swimming pool[2], etc.

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

The “bare-walls-in” method insures the basic building, e.g.., 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.

The second possibility is 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 and this should be made clear in any lease agreement by owners who rent.

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.  In fact, DC Law allows the condominium association to set its own, higher, deductible levels for claims made under the Master Policy that are triggered by an event originating within a member’s unit.

UNIT-OWNER POLICY

Once a unit-owner is familiar with the coverage provided for by the master policy, coverage gaps need to be filled through a tailored unit-owner policy.  This policy is known as condominium coverage or a form HO-6 policy[3].  Premiums may be lower when both the HO-6 and the master policy are provided by 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 to the unit-owner for injuries or events that occur within the unit as opposed to in common areas.

Casualty Coverage:   This is the area that merits the closest attention to make sure that property damage 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.

But, even if the master policy had “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 most likely require building improvements coverage because an “all-in” master policy may only compensate for the original structure and fixtures.   Thus, the dollar amount for structural coverage needs to be high enough to cover upgrades.   Do not confuse structural coverage with personal property/contents coverage.

The HO-6 covers personal property within the unit against damage 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.  The coverage is usually available in one of two bases.   “Actual cash value” is the traditional basis in which owners are given the value of the item, less depreciation.  “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 before a problem occurs. 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. There are several home inventory programs available on-line.  Quicken products, for example, allow you to scan a copy of a receipt or any other document and store it along with the check-entry.  We suggest that the inventory be updated on a yearly basis.   For obvious reasons, the inventory or a copy thereof should be stored outside the condominium unit.

Coverage for damage from sewer and drain back-ups is highly recommended for owners with units in the first few floors of the building.  The coverage is usually missing from standard policies, but can be added for around $25 per year.  However, owners should be aware that basic policies generally do not cover damage from floods or earthquakes.

Coverage for Gaps in Master Policy Deductibles:   Unit owners should:

• Review the condominium’s governing documents to see if the condominium has set a higher deductible; and

• Ensure that his policy covers the deductible discussed above under “Master Policy”. This deductible may be called a “loss assessment” by insurance companies.  If the condominium association sends a notice of such a loss assessment, it is important that the condominium association’s description of the assessment reference the specific loss otherwise the unit-owner’s insurer may not recognize it as a “loss assessment” and may categorize as some other type of assessment, for which there would be no coverage.

SPECIAL CONSIDERATION: UNIT RENTED OUT

A special situation arises when a unit-owner rents out the unit to a third party, assuming that the condo’s bylaws permit rental.  Keep in mind that there may be licenses required and exemptions from rent control.  The repercussions can be severe if you ignore these requirements and your attorney or property manager can assist.

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

The two options are essentially the same and, 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 an uninhabitable unit for at least nine months and, if available, loss of income due to untimely rent payment.

Tenants should be encouraged to obtain renter’s insurance.  In fact, diligent 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.

 

SUMMARY

 

Policy:	Condominium Coverage –  What to Look For:
Master	All policies generally include liability protection and structural coverage for common areas such as the garage, club house, tennis court, swimming pool, etc. Bare-Walls-In Coverage Method—the master policy insures the basic building, e.g., 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/wallpaper. All-In Coverage Method—the master policy insures the basic building as well as items within the interior unit surfaces not considered personal property. Usually covers all original fixtures and installations. Highly unlikely to cover owners’ personal property. Inquire: Does it provide comprehensive or blanket coverage to protect an owner against other owners who do not have adequate coverage? Generally, deductible is ~$5,000. Depending on the damage and loss circumstance, and the bylaws, the deductible can be divided among and paid for by all unit-owners, by select owners, or by a single unit-owner. Some buildings may have set their own deductible amounts.
Unit-OwnerOwner-Occupied	Policy form known as an HO-6 policy. Premiums may be lower when the master and unit-owner policies are taken up with the same insurer. Umbrella liability provides broader coverage than the standard liability coverage in the master policy. Structural additions, alterations, and other value added to the unit by the owner, e.g., high-grade carpeting or high-grade cabinets, will likely require higher building-improvements coverage. Damage from sewer and drain back-ups will likely require additional coverage and is highly recommended, especially for 1st and 2nd floor unit-owners. Insure personal property (unit contents) through this policy.  Items will be covered against damage 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. Basic policies generally do not cover damage from floods or earthquakes. Items of higher value, such as collectibles, antiques, jewelry, or art work, might need additional coverage through rider policies. All personal property is covered either for “actual cash value” or “replacement cost.” Master Policy deductible pass-through coverage if the master policy deductible is high or if the building has set its own higher amount (often called “loss assessment coverage”).
Unit-Owner as Landlord	Option 1: HO-6 unit-owner policy with endorsement for additional coverage for losses associated with renting. Option 2: Landlord’s rental condominium (DP-3) policy. Prudent Landlords require that Tenant have an HO-4 Policy in effect (some state require this). Either option should include coverage for: Structural damage caused by tenants Damage to appliances and other personal property left in the unit Liability for injuries or property damage occurring in the unit Medical payments Loss of income due to untimely rent payment Loss of rental income due to an uninhabitable unit (coverage for up to around nine months) Master Policy deductible pass-through coverage if the master policy deductible is high (often called “loss assessment coverage”).
Renter	Policy form known an HO-4 policy. Include contents (personal property) protection. Include liability protection. Include medical payments. Include loss of use coverage—provides the tenant with reimbursement for hotel and moving costs in the event the unit is uninhabitable (coverage for up to around nine months).

 

[1] Original version of this article drafted by Claudio Sayan Lazarte, Intern to the Firm, 2011

[2] Recently, most carriers are declining to cover diving wells with diving boards.

[3] In situations, such as when the condo is rented to others or titled in the name of an LLC, a DP-3 policy is used, in which event a second, inexpensive liability policy should also be purchased.