Completing the condominium insurance picture necessitates “jigsaw puzzle” tenacity. Quite a few pieces must be snapped together to assure the proper insurance picture is presented; any missing information can leave a gaping hole in either the association’s or unit owner’s coverage picture. Regardless of the client’s status as the association or individual unit owner, the puzzle cannot be completed until the agent can connect the answers to three questions:
- Who is responsible for what property?
- What is the value of the insured property?
- Who can be held liable for injury or damage?
Who Insures Which Property?
Associational responsibility is divided into three levels: “Original specifications,” “all-in” and “bare walls.” Remember, each definition presented in this chapter is from the association’s perspective – delineating which part of the real property it is responsible to insure. Property not insured by the association must be protected by the unit owner’s insurance policy.
To fully understand the three levels of associational responsibility first requires the four categories of condominium real property be specifically described. The four categories are 1) “common elements;” 2) “limited common elements;” 3) “unit property” and 4) “unit improvements and betterments.”
Condo Real Property Definitions
“Common elements” are owned by and benefit all members of the association. Land, parking lots and the building’s structural foundations and load-bearing walls are examples of common elements. Also included in this definition are clubhouses, pool houses, pools, fences, gates, playground equipment, tennis courts and other property owned by and allocated to all unit owners. Not all property categorized as a common element is insurable in standard property policies (i. e., land), but most can be scheduled.
“Limited common elements” are beneficial to more than one but less than all unit owners. Common hallways or corridors providing access to several units, walls and columns containing electrical wiring or sprinkler piping serving or protecting multiple units or a plenum enclosure providing heating and cooling to multiple units are examples. Doorsteps, stoops, decks, porches, balconies, patios, exterior doors, and windows or other fixtures designed to serve a single unit but located outside the unit’s boundaries are often categorized as limited common elements because the appearance and safety of these fixtures directly affects multiple unit owners although connected to just one unit.
“Unit property” is defined by the association’s declarations or statute and is limited to and benefits none but the unit owner. The inside of the exterior walls, interior partition walls, countertops, cabinetry, plumbing fixtures, appliances and any other
“Unit property” is defined by the association’s declarations or statute and is limited to and benefits none but the unit owner. The inside of the exterior walls, interior partition walls, countertops, cabinetry, plumbing fixtures, appliances, and any other real property confined to the unit are examples. “Unit” property’s definition can vary widely with no universal designation.
“Unit improvements and betterments” like “unit property” benefit none but the unit owner. The three previous definitions of associational responsibility classifications require improvements and betterments be classed separately – excluding improvements and betterments from the definition of covered property under the association’s policy. A unit improvements and betterments is created by the unit owner’s engagement in any activity or improvement that increases the value of the real property within an individual unit – such as updating the flooring from carpet to hardwood or other such improvements.
Levels of Associational Responsibility Explained
Original specification requirements, known as “single entity coverage,” make the association responsible for the common elements, limited common elements, and unit property. Unit improvements and betterments are not the responsibility of the association. Connecting the pieces:
- The association insures the common elements, limited common elements, and unit property;
- Unit owners insure unit improvements and betterments and their personal property within the
A majority of states default to some form of original specification wording as recommended by the Uniform Common Interest Act governing the insurance requirements of condominium associations.
“All in” (“all inclusive”) statutes differ from original specification wording in one major aspect: the association’s additional responsibility to insure unit improvements and betterments. In addition to insuring common elements, limited common elements, and unit property, associations are also charged with insuring unit improvements and betterments in “all in” jurisdictions. Snapping the parts together:
- Associations subject to “all in” wording insure common elements, limited common elements, unit property and unit improvements and betterments;
- Unit owners insure only personal property within the
Approximately half of the states not applying “original specification” requirements utilize some form of “all inclusive” wording. Only a few of those states apply statutory terminology that could be exclusively interpreted as “all in.”
“Bare walls” wording limits associational insurance responsibility to the common elements and limited common elements. To complete the puzzle:
- The association insures the common elements and the limited common elements; unfinished walls (meaning the paint is insured by the unit owner); or the sub-floor and underside of the ceiling; or any other variation.
- Unit owners are tasked with insuring unit property, any unit improvements and betterments and the owner’s personal property within the
Dividing responsibility for insuring real property may not be the most advantageous for the association or the unit owner; however, there are several states and individual associations that apply some form of bare walls wording.
NFIP – A Special Case
Two standard flood insurance policies (SFIP’s) connect in condominium forms of ownership: The Residential Condominium Building Association Policy (RCBAP) provides coverage for the association, and the Dwelling Form is purchased by the individual unit owner to cover personal property. These forms apply as per NFIP standards regardless of any statutory or associational declaration regarding insurance responsibility.
The RCBAP policy form specifically states that coverage is provided for all real property to include real property that is part of the unit. FEMA guidelines further clarify in rule IV. COVERAGE: A. Property Covered: The entire building is covered under one policy, including both the common as well as individually owned building elements within the units, improvements within the units, and contents owned in common. Contents owned by individual unit owners should be insured under an individual unit owner’s Dwelling Form. In essence, the RCBAP is “all in” coverage.
Flood insurance policies do not have to necessarily comply with statute or associational guidelines. When insuring a condominium association or unit owner, agents must be aware of the differences mandated by the NFIP.
Bylaws and declarations are the governing documents of all condominium or unit owner regimes. These documents supersede statute as per the subject statutes themselves. Division of ownership and insurable interest is dictated by these documents. Statutory wording is only the “default setting” if the bylaws or declarations are silent or are ambiguous regarding the insurance requirements.
Three distinctly different property “values” can be assigned to associational property: actual cash value, replacement cost and market value. Two are common to insurance, and one generally has no relevance in insurance, until the government or an unknowing attorney gets involved.
Actual cash value (ACV) is the cost new (replacement cost) on the date of the loss minus physical depreciation. Physical depreciation results from use and ultimate wear and tear meaning that the insured does not get paid for the “used up” value of the property.
Attention must be paid to the beginning point in the calculation of ACV, the cost new on the date of the loss. ACV is not based on the value when it was built or at any point between the construction date and the date of the loss. Only the cost new on the date of the loss matters; this is key when choosing limits.
Replacement cost is the cost to replace with new material of like kind and quality on the date of the loss. There is no allowance or penalty for age, depreciation or condition. The insured must simply insure the property at what it will cost to buy or build it today.
Market value is negotiated between and agreed to by a willing buyer and a willing seller. It can fluctuate up and down based on the economy, condition, use or need and has little relation to the true cost to rebuild a particular structure. Normally market value has little relationship to insurance. The rise and fall of the market value does not necessarily change the cost to rebuild a building following a loss.
If the market value is the rule applied in a particular state or association’s declarations, the agent must be prepared for and be able to explain this concept regardless of the fact that such value is not normally associated with property insurance values.
Values and Coverage Provided by the Unit-Owners Form (HO 00 06)
Unendorsed the Unit-Owners Form provides replacement cost coverage on the building (Coverage “A”) and actual cash value on personal property (Coverage “C”). Coverage “A” is limited to a specified amount ($1,000 or $5,000) unless specifically increased by the unit owner. The owner’s need to increase Coverage “A” is a function of the coverage required to be provided by the association based on the level of associational responsibility defined above.
Both Coverage “A” and Coverage “C” apply Broad Form Named Perils coverage unless endorsed to cover “Special” causes of loss. Expansion to “open perils” coverage can be accomplished by attaching HO 17 31 to Coverage “C” and the HO 17 32 to Coverage “A.”
Coverage “C” can be transformed from actual cash value to replacement cost with the attachment of the HO 04 90 – Personal Property Replacement Cost Loss Settlement endorsement.
Developing Property Insurance Values
Establishing associational and unit owner property values requires knowing who is responsible for insuring which property and which valuation method (AVC, RC, or market value) is being applied.
Cost estimators are effective tools for developing accurate values in most replacement cost and actual cash value settlement scenarios, as are discussions with knowledgeable builders in the area. If market value is the method of valuation, a market analysis by a licensed appraiser may be required to develop the necessary value (it is not recommended that market value ever be used as the insurance value). The accuracy of these calculations varies based on the level of associational responsibility.
Original Specifications: Developing relevant values may be easiest when single entity requirements apply as the valuation program, and original specification requirements overlap in their result and mandate. Property valuation programs calculate the cost of rebuilding the structure utilizing modern materials of like kind and quality; original specification insurance requirements limit associational responsibility to the cost of replacing original construction materials with modern materials of like kind and quality.
All-In: All inclusive statutes and associational bylaws increase an association’s standard of care. Associations subject to this insurance settlement mandate are forced to closely monitor building and unit values (including value increases created solely by a unit owner) to avoid inadequate insurance and a possible coinsurance penalty that could arise because they (the association) are insuring all real property regardless of location or who installed it. Cost estimators work well in these associations provided the association, and the agent are aware of any individual unit owner upgrades.
Bare Walls: Conflict arises if the unit owner does not have coverage, or enough coverage, to rebuild what is defined as the “unit.” The association is only responsible for the common elements and limited common elements. To arrive at the insurance value, a cost estimator has to be completed, and the value of each “unit” must somehow be subtracted out of the calculation.
Two questions arise regarding the value of property in a bare walls association:
- Who deciphers the definition of a “unit” allowing the unit owner, the association and the respective insurance carriers to know who is responsible for insuring what property? and
- Who calculates the ultimate amount of coverage needed? There is no available method to produce a verifiable “unit” property value.
Attorneys, appraisers, agents and other professionals may be required to answer these questions and design the correct programs (one for the association and a separated program for each unit owner). A lot of professional expertise is required up front to avoid future disputes, and the valuation answer is still just a little better than a guess.
Legal liability is liability imposed by the courts or by statute on any person or entity responsible for the financial injury or damage suffered by another person, group, or entity. Legal obligations, or legal liability, can arise from intentional acts, unintentional acts, or contracts.
When the potentially liable parties are mutual beneficiaries and users/occupiers of the same location, the need for each party to be properly insured is of paramount importance. Residential condominium associations and individual unit owners are prime examples of this need to close all gaps in liability protection.
Essentially there are three legal liability possibilities following bodily injury or property damage at a residential condominium property. Legal liability is placed on 1) the condominium association; 2) the unit owner; or 3) jointly on the association and the unit owner.
When legal liability is assigned to only one party, whether it be the association or the unit owner, defining coverage is easy. The cost of the bodily injury or property damage is covered, subject to policy limits, by the at-fault party’s insurance policy:
- The association’s commercial general liability (CGL) coverage pays if the association is found to be solely negligent; or
- The unit owner’s HO-6 pays if legal liability is solely placed on the
The unit owner’s liability coverage (most commonly provided by the HO-6) is generally first dollar protection. Likewise, the association’s CGL may be written providing first dollar protection; however, many associations utilize a deductible or self-insured retention (SIR). If the association’s deductible is high, or there are several liability claims against the association, the unit owner(s) may suffer an out-of-pocket expense because of the association’s decision to use a deductible or SIR.
Unit Owner Assessments
When the association is subject to a deductible or SIR, it generally collects the resulting out-of-pocket expense by assessing all the unit owners a share of the deductible/SIR (however such division is calculated). The unendorsed HO-6 provides the insured with $1,000 for such assessment with two main requirements: 1) the loss must be one that would have been covered under the HO-6, and 2) $1,000 is all the policy will pay for assessment in aggregate for any one incident leading to an assessment.
Obviously, the association’s choice of a deductible/SIR can be detrimental to the unit owner. However, the unit owner does have the opportunity to increase the coverage for assessment by purchase of the HO 04 35 (Supplemental Loss Assessment Coverage). However, the attachment of this endorsement may not solve the unit owner’s deductible/SIR assessment problem – depending on the endorsement’s edition date approved and used in the unit owner’s state.
Attaching Insurance Services Office’s (ISO’s) HO 04 35 allows the insured unit owner to incrementally increase the loss assessment limit up to $50,000 (relatively inexpensively). However, the limit of coverage for an assessment related to the association’s use of a deductible/SIR has been historically limited to $1,000 – even when the HO 04 35 endorsement was attached. This limitation was removed in ISO’s 05/11 edition of the endorsement. The HO 04 35 05 11 extends the full amount of loss assessment coverage purchased to all assessments, including those resulting from the association’s use of a deductible/SIR.
However, the new endorsement may not yet be approved in the insured unit owner’s state (and may not be for some time), or the insurance carrier providing coverage may not be using the new wording (depending on the rules of the state). Agents cannot make assumptions; a review of the insured’s policy is required to confirm which loss assessment wording is in use or available. The difference between the old and new endorsement language can mean hundreds or even thousands of dollars to the insured unit owner’s bank account.
If both the association and unit owner are held jointly liable for the injury or damage, court involvement will likely be required. The first problem the court will address is the amount of liability assignable to each party. Once liability has been assigned, the second question to be considered is what happens when liability limits differ (which they most likely will)?
Both questions can and might be governed by the legal concept of joint-and-several liability, along with how each state applies this concept. Losses are shared equally or unequally among tortfeasors based on the facts of the case, each tortfeasor’s level of “fault,” and statute. The concept of joint-and-several liability is designed to assure that the victim is fully compensated for their injury or loss.
Joint means that anyone tortfeasor can be held responsible for the entire amount (each tortfeasor is responsible for all others). Several means that each is responsible only for its share of the fault (liability can be “severed” between or among parties). Each state applies the joint-and-several liability differently:
- 9 states apply pure joint-and-several laws: Each defendant is responsible for the entire amount regardless of its amount of fault;
- 27 states utilize modified joint-and-several laws: One specific tortfeasor is potentially responsible for the entire only if they are judged at-fault beyond a specific level or amount. Additionally, some of these states bar recovery if the injured party is found to be a certain percentage liable; and
- 14 states employ pure several laws: Each party shares the financial consequences based on its amount of
Generally there is a wide gap between the association’s CGL limits and the unit owner’s HO-6 liability limits; maybe as much as $900,000 ($1 million in the CGL vs. $100,000 in the HO-6). Because of this gap, the association may be called upon to cover more than their share of damages in pure and modified joint-and-several liability states.
To avoid this potential gap, the association may decide to require each unit owner to carry relatively high limits of liability coverage (maybe even an umbrella).
Many state laws related to condominium ownership prevent an association from subrogating against the unit owner if the unit owner’s negligence leads to a liability loss. Again, this could be very costly for the association from an insurance perspective; and it is even more costly if the association does not have enough protection to cover the cost of the injury or damage.
Deciding Which Party is Legally Liable
Disclaimer: This section shall not and cannot be construed as legal advice. Any ruling of negligence and legal liability must be made in a court of competent jurisdiction. The following is simply a guideline that may be useful in determining which party and therefore policy may be called upon to cover the cost of injury or damage suffered by a third party.
Where did the Injury/Damage Occur?
Arriving at the more correct answer to the question, which party (the association or the unit owner) may be ultimately responsible for paying the cost of injury or damage suffered by a third party, first requires the answer to this question. Knowing where the injury occurred provides clues as to who is most likely going to be held financially responsible.
Like analysis of the property coverage, analysis of the liability coverage requires knowledge of and a deep understanding of three definitions: common elements, limited common elements, and unit property. The definition of each (presented earlier in this article) indicates which party (the association or the unit owner) is responsible for the care and upkeep of the property; and also, who is responsible for any injury or damage suffered on the property.
Injury or Damage on or Caused by a ‘Common Element’
Because a common element benefits all unit owners, the association is nearly always going to be ultimately responsible for covering the cost of any bodily injury or property damage that occurs on a common element. This is true even if a unit owner in some way contributed to the injury or damage.
When written correctly, and depending on the state, condominium liability policies generally include unit owners as insureds or name them as additional insureds using the CG 20 04 (Additional Insured – Condominium Unit Owners). This endorsement grants all unit owners additional insured status for liability arising out of any portion of the premises not reserved for the unit owner’s exclusive use or occupancy. This means that the unit owner is an insured for any injury or damage on or caused by a common element. Further, as an insured, the insurance carrier cannot seek recovery from the unit owner if he/she is somehow responsible for causing the injury or damage on the common element.
Injury or Damage on or Caused by a ‘Limited
Assigning financial responsibility for an injury or accident occurring on a limited common element is a little more complicated. Largely, the rules that apply to common element apply to limited common elements (meaning the association will most commonly be held financially responsible); however, there are gray areas.
Of particular interest and problem are those defined limited common elements that benefit only one unit owner, such as stairs, stoops, balconies, decks, etc. Although these elements benefit one unit owner, often the association is responsible for the care and maintenance of these features. Might there be joint negligence or liability assignable to both parties?
Picture a unit owner and his guests sitting on the deck enjoying the evening. They decide to move the party inside nearer the food. As one of the guests crosses the threshold from the deck into the unit, he trips on “something” and breaks his arm in the fall. Which party will be held responsible?
The injury occurred leaving a limited common element and moving into unit property. Based on statute, the associations bylaws, and policy wording, who knows? Some situations may require court involvement.
As stated previously, most situations involving limited common elements will follow the rules for common elements. However, some may end up in a court of competent jurisdiction to decide if one or both parties will be held responsible for the injury or damage.
Injury or Damage on or Caused by Unit Property
Like assigning responsibility for injuries that occur on or caused by common elements, it is rather simple to assign financial responsibility for injury occurring within a unit or caused by unit property. The unit owner will be held responsible, and his HO-6 will be called upon to pay for any injury or damage within the unit or caused by defined unit property.