Condos and Unit-Owners

William R Ross Jr, CPCU, CIC

Condominium associations, their declaration documents and by-laws, and how these impact the obligations of both the association and unit-owner alike has to be the most misunderstood area of personal insurance today. The good news is in PA we do have the Pennsylvania Uniform Condominium Act to refer to for guidance. The bad news there remain plenty of pitfalls a unit-owner or association board may fall victim to if not alert and well-informed.

The Condo Act states the association must maintain "property insurance on the common elements and units, exclusive of improvements and betterments" ... This is big. It means not only must the association cover the outside structure, they must also insure the individual unit, which goes all the way in to include the floor covering, wall covering, fixtures and built-in's that were included with the unit as "standard" when first constructed or converted.

What it does NOT include or need to cover are any improvements, betterments or personal property belonging to the unit-owner. That means any upgrades are the responsibility of the unit-owner ... upgraded fixtures or faucets, higher-grade carpeting or hardwood flooring, higher quality countertops, wallpaper where perhaps there wasn't any before, appliances, etc. all fall under items the unit-owner needs to insure.

Enter the "Unit-Owners Policy" commonly called the HO-6. This is very similar to a regular homeowner policy, but has special features and coverages unique to the condominium unit-owner. Its main coverages are broken into several major parts: Building, Contents, Additional Living Expense and Liability. In addition to these basic coverage parts, there are countless endorsements that can be added for additional coverages or increase limits for particular exposures.

Building Coverage - Also referred to as "Coverage A" ... why is this needed if the master association policy must cover all the way in? For one thing, it's rare when there aren't some improvements to the interior of the unit. Plus, as insurance costs continue to increase, many associations have responded by increasing their deductibles on their master policies. What used to be a $500 deductible, could easily be $5000, $10,000 or even $25,000 today. If a property loss (a burst pipe or kitchen fire for example) impacts only one unit, that unit-owner may be held solely responsible to pay that entire deductible.

Beware; there are some insurance companies out there who will balk at paying the deductible under Coverage A. They may try to argue that they'll only pay a percentage of the deductible because of wording in the policy regarding "other insurance". Check with your company, and if this is the response you get, find another carrier.

The unit-owner should have enough of this coverage to at least match the master policy's deductible plus the replacement cost of any interior improvements or betterments. This coverage should also be bumped up to what is called "Special Form". The standard HO-6 only covers the building for a list of named perils, but for just a few more dollars of premium this can be made to be "all-risk" except for those perils that are specifically excluded by the policy ... and that's a big difference in coverage.

Contents Coverage - This should be written on a "Replacement Cost" basis, and, similar to a renters policy, should be in an amount adequate to replace the unit-owners belongings, including appliances. And just like a homeowner or renter, it is strongly recommended to have an inventory of the contents kept off-site. A video tape it ideal for this. Go through room-by-room, opening closets and drawers, and recording everything. Include make, model, and serial numbers for larger ticket items. This documentation is going to be a huge lifesaver in the event of a catastrophe.

Additional Living Expense – Usually an automatic percentage of the contents coverage limit, this covers the additional costs to live elsewhere temporarily while the unit is being repaired. Rent, higher food costs, extra transportation costs, etc. can all be included here.

Liability - This covers defense costs and judgments against the unit-owner and family members in the household for third-party injury or property damage claims due to the unit-owner's negligence. Lots of exclusions apply here, among them liability stemming from business endeavors, automobile-related losses, and intentional acts.

Loss Assessment Coverage - This is one of those critical add-ons that should be part of any unit-owners policy. This does not cover routine maintenance or condo fees, but it does pay for damage to the common property from a covered peril that the association spreads out among all the members. With a loss that impacts only one or two units (burst pipe for example) the association will look to recover the deductible only from those unit-owners affected. Again, this is where you need Coverage A (Building). But in the event of a loss broader in scope such as hail or windstorm, where all or most units are impacted, the deductible will typically be divided up among ALL unit-owners. This is where Loss Assessment Coverage comes into play.

Other considerations for unit-owners should include sewer backup and sump pump failure, flood, earthquake, coverage for any "toys" such as boats, RV's or ATV's, and always, always, a personal umbrella liability policy.

Remember to get your hands on the condo document (declaration). Review it carefully; check the master policy and its deductible. Ask questions if something is unclear. Seek the advice of a knowledgeable independent agent, and have them shop around for the best value for your insurance dollar. Proper protection for condo unit ownership is one of the trickiest issues in personal insurance, but taking the time to get it right can mean the difference between peace-of-mind and financial disaster.