2006 Issue 7

Important Coverage for Associations and Unit Owners To Consider

By Rich Bouvier       

Not all condominium association policies are created equal.  There are numerous areas where some insurance companies provide better, more comprehensive policies.  From guaranteed replacement cost on property coverage, to the intricacies of Directors and Officers coverage, it’s now more important to review your current coverage and compare it to the newer updated and most importantly, available coverage provided by today’s condominium insurance providers.

Most associations have experienced an increase in the amount of property coverage that their insurance company recommends – or even mandates – they purchase.   In the past few years this “replacement value” has escalated dramatically.   This is due to standard inflation, scarcity of materials and the increased cost of labor.  

To combat this potential lack in property coverage, many policies build in an inflation guard – this is an automatic increase in property coverage upon renewal, usually a set percentage such as 2, 4, or 8%.  While an inflation guard is a step in the right direction, I have seen increases in building coverage well beyond these “suggested” increases.  Ask your agent if he or she believes that your current limits are adequate.

It’s important to regularly review your property coverage limit and to compare it to the suggested replacement costs of similar style construction.  There are two popular replacement cost estimation systems used by many insurance companies and I’ve found that they are often very similar to each other under most circumstances – particularly when they are provided with all the details of the style, year built, accurate square footage, etc.  With the premiums of these package policies rising, it makes sense to truly understand what coverage you are purchasing, whether it’s adequate, or, although rarely, excessive or even not applicable.

Directors and Officers (D&O) coverage is an extremely important coverage in my opinion.  Those included in this coverage should be the past, present and future directors and officers, elected or appointed directors and officers, committee members, employees and members acting at the direction of the board or the board of directors. 

Ever since a valuable article was printed in the New York Times last February, our agency has been bombarded with calls from property managers and board members concerned if their D&O coverage is a quality set of coverages synchronizing with the specificities suggested in the article.  The hard answer is that there are numerous sources of this coverage and not all are created equal.

Two notable coverage features that set apart quality D&O policies are the payment of defense costs for alleged fraudulent behavior and having “full prior acts” coverage.  It simply doesn’t make sense to volunteer or sit on a board of any organization that doesn’t have the best coverage available to that organization to protect the directors, officers, and volunteers.

Furthermore, many associations have been advised to purchase excess liability policies, also known as “umbrella policies.”   Does this excess liability policy extend to the underlying D&O coverage?   Similar to the better D&O policies, the higher quality umbrella policies can extend to D&O policies if this is requested.

Does your current master policy provide the proper coverage for your association?  Normally there are three types “insuring agreements” available, Bare Walls, Single Entity, and All-In.  Not every insurance company can provide all three.  The most common policies written and the most often seen in bylaws are the Single Entity and the All-In coverage.  If during the quoting process your agent doesn’t request a copy of the insurance section of your association’s bylaws, be concerned as this document determines which type of coverage needs to be purchased.

Finally, it is important to understand how the unit owner policy (HO-6) interacts with the master association policy.  State Statute will determine where to begin determining if the loss is to be covered by the association policy or the unit owner policy.   Once the State Statute illustrates where the coverage should originate, the association bylaws further define which policy is responsible for what damage within the association.  At this point, the master association policy property damage deductible further determines if the association policy will respond, or is the damage amount below that threshold.

Unfortunately, very few condominium unit owners refer to their bylaws to guide their HO-6 purchasing process.  Also, not every personal lines insurance agent has experience with the intricacies of unit owners’ needs to properly write the necessary coverage.  As a quick rule of thumb – buy as much coverage that you can afford and ask your professional agent for coverage recommendations.

In addition to covering your contents and personal liability needs, consider purchasing “improvements and betterments” coverage for at least the same amount as your master policy deductible – if you are unsure of that amount, don’t guess, ask a board member or call the association’s agent.  This coverage will cover the physical changes or updates that your unit received since the original declaration date.  You may not know what previous owners have changed or updated. 

Consider purchasing “loss assessment” coverage, which will cover an assessment to all unit owners for a covered loss where the master policy limits were exhausted or limited.  As with all insurance policies, be sure to read your policy for any limitations with these coverages that may not have been clearly explained to you at the time of purchase.

It’s vitally important that your association’s insurance needs are properly evaluated and covered – the same goes for all unit owners.  Unfortunately deficiencies in coverage usually come to light at the time of loss when it’s too late to purchase the proper coverage.  By taking a proactive approach to insurance review and working with an agent that is experienced with association and unit owner needs, the proper insurance products can be purchased at competitive premiums.     

Rich Bouvier is with the insurance firm of Bouvier, Beckwith & Lennox, Inc.  Rich currently serves as chair of the CAI-CT Golf Tournament Committee.