The experts who advise condo associations on insurance matters admit that the basic policies are pretty standardized and often seem to be all the same. Trustees may tend to gloss over the details and assume that anything important relative to condo communities is already built in to their coverage—and much of the important stuff probably is. However, individual communities may require certain kinds of coverage beyond the basics. Needs can vary widely, depending on a community’s size, location and amenities.

 “Maybe 90 percent of a condo association policy is generic, but then it needs to be customized to each community… It’s all in the details,” states Glenn Montgomery, vice president and co-founder of Brownstone Insurance of Norwell, Massachusetts, a firm with a concentration of community association clients. “A two-unit condo has different needs than a 200-unit community, and the ones with amenities such as pools are open to so much more risk.” 

Unforeseen Expenses

He points out that “most condo boards are just looking to keep costs down,” and may not pay close attention to the fine points of their policy, although their insurance advisor should. “It takes trust and education,” Montgomery notes, for board members and their insurance provider to reach a consensus about what coverage you may not need and what is absolutely essential.  

He cites an example of an insurance need that no one would have foreseen—the Pawtuxet River flood in Warwick, Rhode Island, in the spring of 2010. The risk factor was low according to official flood-zone maps and easy to ignore by property owners and managers, so none of the big players in the densely-built area had flood insurance. “The problem was,” says Montgomery, “the Pawtuxet River hadn’t been mapped in over 20 years and the watershed had changed with all the [commercial and residential] build-out in that whole riverbed zone.” The flooding was unprecedented for the city of 86,000, shutting down major shopping malls for many months and forcing half the residents out of the 391-unit Villa Del Rio apartment complex.

Montgomery admits that “[premium] value is often limited on flood insurance, and some carriers don’t offer it at all.” He notes that condo managers or trustees would be wise to look into “loss” provisions in their policies. “We recently saw a situation with a property that had a big fire and the landlord didn’t have insurance for ‘loss of rent.’ An association could opt to include provisions for loss of maintenance fees after a catastrophe such as a fire.”

Surprise! We’re Covered

Whenever there is an emergency repair in a community property, managers should investigate their insurance policies as a first step before shelling out revenue for the fix. As an example, relates Montgomery, “There was a problem with the HVAC equipment in our office building. The system was old and the pipes blew out.” Since the building owner didn’t think he had the right boiler and machinery (B&M) insurance, he assumed he’d pay out of pocket. After checking the details, notes Montgomery, “I told him that the building damage was insured… It turned out he was covered… saving about $50,000.”

This illustrates the fine line dividing the situations for which insurance carriers will or won’t cover repairs or replacements. Brendon Kilcoyne, prsident of H&K Insurance of Watertown, Massachusetts, explains, as an example, “If a roof starts leaking and it’s old and needs replacement [as a matter of routine maintenance] then insurance won’t cover the cost. However, if [the same roof] is damaged by large hail or trees falling, then it’s probably covered. Most ‘acts of God’ are covered in standard property policies,” he adds, “except for flood and earthquake… These are specifically excluded on most policies. I recommend adding ‘earthquake’ since the cost is minimal, and we have some major fault lines throughout New England… and the scientists tell us it’s just a matter of time.”

Flooding and water damage can be another sticky issue and “fine line,” subject to interpretation. Kilcoyne states. “For insurance to pay for water damage, you have to be able to prove what the water source was. Water backing up from drains or sewers may be covered, and damage from excessive rainwater. These are covered under standard policies,” but a flood comes under a separate definition—and separate coverage. 

That difference between a water damage claim and a flood damage claim is spelled out by the Federal Emergency Management Agency's (FEMA) flood definition: a general and temporary condition of partial or complete inundation of two or more acres and two or more properties of normally dry land. 

This is especially important for condo associations because federal lending programs insist on flood insurance for the unit buyer as well as the common areas. Tim French, vice president at Knapp Schenck Insurance in Boston, states, “FNMA (Federal National Mortgage Association, or ‘Fannie Mae’) and others want to make sure that they are protected and want proof that the association has extra coverage for the common area buildings. The minimum limit has to be 80 percent of the building’s total value…”

The NFIP [National Flood Insurance Program] requires a higher limit for the association, he adds, or the unit owners may not qualify for a federally-backed mortgage. “The FNMA may not require insurance [flood] insurance if the property is not in a flood zone,” French adds, but if the property is adjacent to a high-hazard zone, any refinancing or purchase may be denied by lenders. The Pawtuxet River flood, for instance, has changed all the risk factors in that entire area.

What Else is Needed?

Among the issues that boards often overlook, says Kilcoyne, “is workers’ compensation… to cover anyone working on the property. I recommend it for all my associations, or have it spelled out in writing if they don’t want it. Even though we get insurance certifications from contractors, [the documents] don’t last forever. We call this an ‘if any’ policy, meaning that ‘if any’ workers are on the community’s property, the association can be liable.”

He points out that one aspect of an association’s insurance policy that needs regular scrutiny is building/property value, intended to reflect the cost to rebuild. As this is a major factor dictating the cost of premiums, he explains, “Some properties are overpaying, while others may be underpaying. I’ve seen an ‘inflation guard’ that’s built into many policies that could be up to eight percent,” which would over-value property and raise the premiums. In the current economy, he adds, “I would try to adjust it down to two to four percent… and check it every few years.”

“The basic needs for a condo community’s master policy are similar,” says French, “but ultimately, coverage depends on size and any unique features. An insurance provider has to do a lot of fact-finding… and ask a lot of questions.”

BASICS OF A MASTER POLICY

The condominium master policy must cover two main risks: general liability and property (meaning the common areas). These two parts are the basics of a master policy. The building and physical plant as well as the condo association board need coverage against physical damage to the property along with liability protection, as follows: 

Standard coverage for all communities:

General Liability: This covers the condo association from responsibility for accidents such as a “slip & fall” where someone is injured on your property and files a lawsuit. The master policy provides liability protection with coverage that is often $2-5 million dollars.

Property: This typically provides coverage for the common areas including hallways, elevators, sidewalks, roofs, common basements, and building equipment such as HVAC and mechanicals.  Much like a homeowner policy, it kicks in after a disaster such as a fire or storm damage—although there are exclusions such as flood and earthquake. Coverage limits are based on the value of the building or property and can be either actual cash value or actual replacement cost. Actual cash value pays the amount needed to replace the damaged item--minus depreciation. Actual replacement cost will pay whatever is needed to fully replace the damaged item, regardless of depreciation at the time of loss. 

Additional coverage:

Directors & Officers: This provides protection for the directors and officers of your association in the event they are sued because of their performance as association members. This add-on coverage typically doesn’t cost much, but can be a lifesaver for any condo board member.

As an example: If you are the board member who hires a landscaper who subsequently applies the wrong lawn chemical, causing a health problem with someone who then sues, you will have protection from lawsuits against you.

Demolition & Increased Cost of Construction: This provides for potential extra expenses incurred after a covered loss. It covers those expenses that inevitably occur in order to bring a property up to the current building code after damages have been repaired or replaced.

For example: When a property is rebuilt, it must meet the newest laws for fire protection and other safety regulations—and these can be substantial.

Backup of Sewer & Drain: This provides coverage for a specified dollar amount for damage related to sewer or drain backup. Many master insurance policies do not cover damage caused by the backup of sewers and drains, but it can be added with this special coverage.

Hired & Non-Owned Auto: This provides auto liability coverage to board members or staff for accidents while using a personal vehicle and conducting association business.

Crime & Fidelity: This provides coverage for the theft of condo association funds or other financial misconduct by a board member or trustee. Coverage against embezzlement from others, such as vendors and contractors, should also be considered.

Marie Auger is a Massachusetts freelance writer and a frequent contributor to New England Condominium.