Master Condo Association Insurance Policies – Should you cover unit interiors or not

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Unit interior coverage errors are a very serious and common problem I frequently uncover when conducting insurance risk reviews for condo associations. The reason it happens so often is because many managers, boards and agents are under the misconception that coverage of interiors is a choice or preference much like choosing deductibles etc. The fact is that the board has a fiduciary duty to obtain the proper coverage that is in strict compliance with the association’s CC&Rs. If your master policy is not written to match the CC&Rs requirements, then the association can potentially be over-insured or dangerously under-insured and it can possibly create situations where coverage is purchased and then denied at the time of loss.

If your current agent is not an expert in association insurance then he may never have read your association’s CC&Rs.  Even if he did, he may not have understood what they dictated for coverage.  There are no standard rules when it comes to associations and what is required.  The only way to do it properly is to read the insurance clause of the associations CC&Rs and understand how they need to be applied as well as the coverage that they dictate the association purchase.  Here’s the rub. Each CC&R doc is unique and because they are written by lawyers they are not easily understood by the novice. I myself have read hundreds and hundreds of these and over the years have developed quite a knack for decoding them. Be sure to find someone you can trust to do this for your association.

There are several ways in which the CC&Rs can describe coverage needed. In some instances, the CC&Rs will dictate full coverage for unit interiors on the master policy, and in others it will tell you to exclude them. In even other instances, the CC&Rs will dictate that the association must restore the units to the original condition they were in at the time they were built.

If the association’s CC&Rs dictate that the association’s policy provides coverage for the unit interiors, yet the agent fails to sell a policy that includes the necessary coverage, and if there is a loss that includes the interior of the unit, the association will be required to pay that portion of the loss out of its own pocket. The master policy will decline coverage for the claim because it was excluded on their policy. The unit-owner policy will also decline coverage because owners will look to the CC&Rs, which state that coverage is to be provided by the association, and therefore the owner is not responsible for paying the claim.

On the other end of the spectrum, if the association’s policy provides for full coverage of the unit interiors when they should be excluded, you can end up with one of two possible problematic outcomes. The first outcome is that the association’s policy will cover the loss when it should be denying it. This will lead to higher premiums and possible cancellation from your current insurer when your policy renews. The alternative is that the association’s adjuster will review the CC&Rs and deny the claim, insisting the association has no insurable interest in the interiors. In this situation, the unit-owner’s policy should pick up coverage. However, some unit-owner contracts state that they will refuse to pay a claim if there is coverage stated under the master policy’s contract. The result could be that you have purchased the coverage twice and neither insurance company will pay the claim.

Don’t risk exposing your HOA to these potential problems:

1)      Make sure that the agent handling the HOA’s insurance is knowledgeable about the unique requirements necessary to properly insure condominium associations

2)     Check that your  insurance agent has read the insurance clause of the CC&Rs and has tailored coverage to match CC&R requirements

3)     If you are unsure whether or not you have the correct coverage then contact an HOA insurance expert for a risk review

Remember, that if the wrong coverage is in place then insurance carriers have the right to deny claims due to either a fatal coverage gap or the fact that the association has no “insurable interest” for the claim. However, this situation is easily avoidable if you simply check to make sure your agent has sold you the proper coverage in the first place. If you are worried about your HOA’s insurance coverage or have any questions about unit interior coverage please give us a call at (310) 945-3000.

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