Insurance is a topic that seems to evoke one of two feelings: boredom in the best of times, and dread in the worst. It’s both complicated and expensive, frustrating yet necessary, mundane yet stressful. It’s also one of the most important defenses our communities have against catastrophic losses. In the past couple of years, as premiums have increased dramatically and coverage has been reduced—or even cancelled outright—for many policyholders, the topic of insurance has become even more fraught. Be that as it may, understanding the components of coverage and how much your community should carry is as crucial as maintaining your building itself. 

Property vs. Liability

There are many components to building insurance, but fundamentally, they fall into two broad categories: property and liability. Property refers to the physical plant—the building itself, the bricks and mortar of which it’s made. Liability refers more generally to those individuals and entities who might be held legally and/or financially responsible for actions arising from the property, its ownership, and its operation.

“There is a real difference between property insurance and liability insurance,” says Ryan Fleming, a senior partner with the Baldwin Group, a national provider of all types of insurance. “Property insurance is ‘first party’ insurance,” he explains. As such, “Coverage is provided for a specified property that is triggered by certain causes of loss.” 

“Liability insurance works differently,” he continues. “With property insurance, if a question of coverage arises, then the answer is simple: Tell me whether you have something sudden and accidental. Like water damage, for instance. Has there been a sudden occurrence? If that answer is yes, you have a claim. Liability, on the other hand, is coverage that provides either defense or indemnity for bodily injury.”

How Much is Enough?

“It’s critical to provide adequate property limits,” says Alex Seaman, senior vice president with worldwide insurer Hub International based in Woodbury, New York. “Construction costs have escalated dramatically in the past three to four years based on increased costs of labor, materials, transportation, and soft costs. Determining accurate replacement and rebuilding costs involves several factors including construction—frame, joisted masonry, or fire resistive—location, architecture, and design.” He notes that unusual or extraordinary design will result in higher replacement costs, as does being in a dense urban area where costs are higher in general.

The importance of having adequate property insurance coverage is multifaceted. “Adequate coverage ensures the building is protected from substantial financial burdens that may arise due to repairing or replacing your property after a loss,” says Todd Ross, managing director of One Point Brokerage, also a national provider of insurance coverage to the real estate industry. “Property insurance provides financial protection against unexpected events like fire, theft, natural disasters, or accidents that can cause damage or loss to your property.”

Additionally, Ross points out that mortgagee requirements will specify what constitutes adequate insurance coverage to replace the property collateral for the mortgage. “Lenders want to protect their financial interest in the property, and they insist on property insurance to ensure that interest is safeguarded.”

How Is Coverage Determined?

As is the case with most everything, what constitutes adequate coverage is a function of value—and that value is determined through an appraisal. What’s important to note is that there are many types of value and appraisal. As Ross notes above, insurance coverage is based on replacement cost valuation; essentially, what would it cost to rebuild what was destroyed? While that sounds straightforward, in reality it may not be possible to replace something that was built, say, a century ago at today’s costs. Given inflation, scarcity of materials, and dwindling numbers of artisan-level craftspeople, those hand-laid parquet floors may in fact be irreplaceable.

“When it comes to determining how much it would cost to replace your property with like kind or quality, one should take time to be accurate,” says Fleming. “What would it cost to replace it, and how is that determined? Typically, if you’ve got a property, a building, the most appropriate way is to have an appraisal of the property done. In today’s market what would it cost to put the building back up? It’s not market value, it’s replacement cost value. Insurance appraisers appraise replacement cost values, not market values. The two may be very different.”

“When determining the amount of coverage for an entire building, several factors are considered to assess the replacement or repair costs in the event of damage or loss,” Ross continues. “They include building construction and materials, square footage, local building costs, age, building features and upgrades, local codes and regulations, and any additional structures on the site. Insurance carriers use these general factors, along with their own internal underwriting guidelines, to evaluate and determine what the replacement cost of a building may be; however, the only way to get a truer understanding of what the replacement cost may be at any single point in time is to have a certified replacement cost study done by a qualified appraiser.”

Additionally, Seaman cautions, “Property valuations should be reviewed at least every other year. If valuations aren’t current, there’s a risk of being underinsured for a catastrophic claim.”

Fleming also notes that insurance limits should be considered when selecting a policy and making rebuild decisions. The insurance limit is the maximum amount a carrier will pay for any given loss. “If you want to rebuild, but not exactly what was there before,” he says, “insurance will pay for the rebuild. However, the policy pays the limit of dollars to the insured provided through the policy and gives the insured the ability to do with it what they would like. The only caveat is that the insurer will hold some of the claim payment back as a holdback until you prove you have rebuilt yourself. But, you don’t have to build an exact replica of what was there before.”

How Homeowner Policies Factor In

In addition to building-wide property insurance, apartment dwellers, whether renters or owners, are well advised to carry homeowners’ insurance. Homeowner policies cover the contents of your home, as opposed to the bricks and mortar that enclose those contents.

“Coverage in every community is different,” says Fleming, “and depends on the community’s governing documents. Coverage can be determined in three ways: bare walls, single entity, or all-in. Bare walls means the association’s insurance covers everything up to the unfinished interior surfaces of units; the unit owner insures the unfinished interior surfaces. Single entity means that the association insures everything, including the interiors of units, but excludes any upgrades and improvements made by owners inside units—things like upgraded stoves and finishes. All-in is all in; everything is covered. This is usually the case in co-ops, because you’re a shareholder, not an owner. You can’t insure what you don’t own, so they need this. Massachusetts and Illinois are all-in states. Upgrades and betterments are covered, but not your clothes, furniture, etc. If you can shake it out, it’s considered contents.”

“An individual homeowner’s insurance policy is specific to their unit, as opposed to the association’s insurance policies, which cover the areas and property that the association is responsible for,” adds Ross. “The individual homeowner’s policy should operate in conjunction with the association’s policies in the event of loss that impacts both; the coverage carried by each should work like puzzle pieces that fit together, and the building governing documents lay out and specify which party is responsible for what.”

Regular Reviews

“It’s important to regularly reassess and update coverage limits,” says Ross, “because building values, construction costs, and other factors change over time. Ideally, boards should adjust the property coverage amount every year to account for the changes in cost to rebuild a building. One way to do this is to incrementally increase your building value every year, so that the property is not hit with a one-time large property limit increase—which inevitably occurs. Also, at least once a year, when your property insurance renews, the board should review the insurance coverage for the co-op or association’s physical structures to ensure it aligns with the property’s value, potential risks, and the evolving needs of the community.”

Insurance reviews may not be as exciting as, say, renovating the lobby, but neglecting to review and maintain your coverage can have a number of negative consequences, including financial hardship when a loss occurs, limited options when rebuilding or repairing damage, legal and compliance issues, strained relationships, and in some cases board liability. In the end, insurance is one of the pillars on which your building and community stand, and it pays to keep those pillars stable and strong. 

A.J. Sidransky is a staff writer/reporter for New England Condominium, and a published novelist. He may be reached at alan@yrinc.com.