1. What does your master policy say?
Owners of condominium units obviously do not own the entire condominium complex. Typically, they own their own unit outright and share ownership of the rest of the complex with all the other owners.
From an insurance point of view, that means all individual unit owners have a collective responsibility for insuring areas of the complex owned in common — building exteriors and hallways, the pool area, etc. A condominium association typically collects monthly dues from unit owners and uses a portion of these funds to insure common areas.
Meanwhile, the unit owner typically is responsible for separately insuring everything within the four walls of his or her individual unit.
The condo association’s master policy, as well as association rules, should spell out clearly which parts of the complex are insured through association dues, and which parts are not.
There are two broad categories of master polices, according to Steve Slattery, property underwriting manager of Liberty Mutual Group in Boston.
- Bare walls-in. Covers all real property from the exterior framing inward, but does not cover the fixtures and installations within the condo unit. So, things like granite countertops, bathroom and kitchen fixtures, and the flooring are not covered by the master policy. This condo owner will probably have the greatest coverage need, according to Slattery.
- All-in. Covers fixtures, installations or additions within the interior surfaces of the perimeter walls, floors and ceilings of individual units. This condo owner will probably have a more limited coverage need, according to Slattery.
There are also variations of the two types. These details should be spelled out in the condominium association bylaws.
“Most bylaws will talk about anything within the four walls of the unit you own,” says Matthew Cullina, director of product management for MetLife Auto & Home in New York. “Everything else is owned by the condo association ownership. Knowing specifically what you own when you buy that condo is the first thing I recommend.”
Condo association insurance typically includes commercial insurance coverage for the commonly shared building and common areas. Such policies typically have an association deductible.
“Basically, in the event of a natural disaster or hurricane or whatever, it is spelled out in the policy,” Cullina says. “If the condo association needs major work or there is major damage to the structure, the condo association will tender the claim to their commercial insurer and they would get covered for their loss.”
“But there would be a deductible and that deductible would be assessed against all unit owners — so if there are 10 unit owners, it would be divided 10 ways.”
Cullina notes a recent trend in many states toward more expensive condo deductibles.
“In the past it might have been only $5,000, but we’ve seen $25,000 and up to $50,000,” he says. “That’s the biggest one I’ve seen. You could really be hit with a bill that you weren’t expecting or didn’t know about if you didn’t do your homework up front.”
The coverage should be spelled out in the association’s bylaws, Slattery says.
“A copy of the association’s insurance agreement should have been given to the unit owner at the time of purchase,” he says. “It specifies the responsibilities of the association and the individual owners.
“If the owner does not have a copy, he or she can obtain one from the association’s board of directors, its business manager or anyone from the association responsible for addressing individual unit owner questions. The owner’s condo insurance sales representative should be able to assist in answering questions about the insurance agreement.”
Once you’ve determined exactly which parts of your condominium unit you must insure individually, you need to decide how much coverage to acquire.
Eileen Sutz, an agent with Allstate Insurance in Chicago, suggests estimating coverage by paying attention to how much other owners in the development paid for recent upgrades, such as new flooring, cabinetry and countertops.
“Another way we can roughly estimate that is we go by about half the market value for interior structures,” Sutz says. “So, if there’s a fire, for instance, people have enough to replace their flooring, their cabinetry and their walls — anything else that’s actually considered their personal responsibility. That’s a pretty good way to estimate it.”
Once you determine the appropriate amount of coverage, you’ll need to decide how much coverage to purchase. You need to pick between two basic categories: cash value and replacement cost.
What’s the difference? Thousands of dollars, in many cases.
Cash-value coverage only replaces the value of the insured item minus depreciation.
“With actual cost-value coverage, there’s depreciation based on the age of your contents,” Cullina says. “If the TV was 2 or 3 years old, we’d go see what it costs today and calculate the depreciation.”
In this example, the person who lost the TV would receive a check for the amount that the TV was worth after two or three years of wear and tear.
By contrast, a person with replacement-cost coverage would receive a check for what it would cost to replace the old TV with a new model. Depreciation is not used in the replacement-cost model.
“I strongly recommend replacement-cost coverage for your contents, especially in a condominium association,” Cullina says. “So if you had a loss, the insurance compensation would replace what it would cost if you were to buy it today.”
5. Have you insured contents and structure?
When insuring your condo, make sure you have coverage for contents and structural items.
What’s the difference?
Examples of content
Examples of structure
“I often tell my customers that if they were to turn their condo upside down, everything that falls out is a ‘content,'” Sutz says. “Everything that stays is ‘interior structure.'”
Condominium owners should approach insurance needs from a slightly different perspective compared to owners of single-family homes. Someone who owns a standalone single-family home typically looks at the price of replacing the structure (usually a house) first before determining insurance coverage for the possessions or content inside the structure itself.
In contrast, condominium unit owners should take the reverse approach, Cullina says.
“Condominium coverage is really built off your contents,” he says. “You look to see what you have: electronics, furniture, furnishings, rugs, etc. That would be the first thing you need to assess to determine the value of your contents.”
Next, determine which structural items inside your four walls you are responsible for insuring.
“You definitely need to gauge what all those things would cost if you had to replace them,” Cullina says.
Sutz notes that from time to time, there are gaps between what the condominium association covers and what your personal condo policy covers.
“I often ask customers to fax me the part of their bylaws that describes the common elements so I can figure out if they need anything in between or expanded coverage,” she says.
For example, people need coverage if there is damage to the building that begins in a common area but continues through a unit owner’s front door and into the unit.
“There are so many different possibilities of where there could be a gap,” she says.
Sutz also specifies the need to insure special items, such as artwork, jewelry and furs.
“Every customer should be aware and talk to their agent about any special items and possessions they might have,” she says. “An agent will typically ask about art or jewelry or fur, but things like baseball card collections, stamp collections and things of that nature may not come up in conversation. They should really think about what they have that is important to them so they can make sure they’re covered in case their policies are limited — jewelry, for instance, can often be limited unless you get expanded coverage.”
The U.S. government offers flood insurance to all homeowners. This coverage is often optional, but may be mandated by the mortgage holder if the property is in a flood zone.
“These would all be discussions you’d typically want to have under the guise of an association, because a flood would generally affect the actual structure of the building, so it would fall under the condo association’s master policy,” Cullina says.
It is also worthwhile to consider personal flood insurance, Sutz says.
“The individual unit owner can buy their own flood insurance because the association’s flood coverage probably won’t cover anybody’s personal contents or the interior structure,” she says. “The association insurance will rebuild the building, but if you’re in a flood plain and the mortgage company requires the condominium association to have flood insurance, they’re going to require the unit buyer to bring a certificate saying you have flood insurance to the closing.
“This is a warning light to the buyer and the customer to get personal flood insurance.”
Sutz is careful to note that there is a difference between flood insurance and water backup coverage.
“Water backup coverage isn’t federally mandated, but it’s a very good idea to have if you’re in a space where perhaps the basement has a lot of storage area and there’s potential for damage to your personal items if water backs up through your sewers and drains. Sometimes people get this mixed up with flood insurance.”
Slattery notes that coverage for windstorms would generally be covered under the standard condominium policy unless there is a specific exclusion attached to the policy.
“If windstorm is excluded, the consumer may purchase wind coverage through the state’s wind pool association,” Slattery says.