Property Insurance insures against physical loss or damage by fire or other risks to buildings or other common area improvements. The amount of insurance should equal the actual replacement cost of the buildings. It is important to know the scope of insurance coverage under the association’s property damage insurance policy (commonly referred to as the "master policy"). Generally, there are three levels of insurance for a master policy:
- "All Inclusive" or "All In" Coverage. As the common terms suggest, this is the most inclusive scope of coverage. All non-personal property items within the individual owners’ units (e.g., cabinets, appliances, countertops, wall coverings, floor coverings, etc.) are covered. In addition, any upgrades made after the developer conveys the unit are also covered. Examples include changing tile countertops to granite or marble.
- "Single Entity" or "Walls In" Coverage. This is a common scope of coverage. All non-personal property items within the owners’ units (see those listed in 1.) are covered. However, unlike the "All In" policy, the owners’ upgrades are not covered.
- "Bare Walls" Coverage. "Fixed" items within the units (e.g., cabinets, appliances, countertops, wall coverings, floor coverings, etc.) are typically not covered, nor are any upgrades made by owners. Rather, the master policy covers replacement up to the drywall. This form of insurance is less expensive for associations to carry because coverage is limited, i.e., the association has no duty to insure inside an owner's unit beyond the unfinished surfaces of perimeter walls, ceilings and floors, i.e., "bare" walls. If there is a flood or fire in one or more units, the association's insurance does not pay for improvements to the unit such as fixtures, appliances, interior partitions, wall coverings, floor coverings, cabinetry, etc. Instead, the owner is responsible for carrying his own insurance to cover these items.
CC&R Requirements. Before switching from full coverage to bare walls, associations must first review their CC&Rs to see if they are obligated to carry "All-In" insurance which requires replacement of a unit to the condition it was in at the time of the loss, including all improvements made to the unit from the date of its original construction. If so, the association will need to amend its CC&Rs to allow for bare walls coverage.
FHA Requirements. Another consideration before an association switches to bare walls coverage is whether FHA guidelines require more comprehensive insurance before it will certify the association for loans.
Owner Insurance. If an association reduces the scope of coverage under its master policy to bare walls, owners will be required to carry their own insurance to meet lending guidelines. Associations that amend CC&Rs to allow for a “bare walls” scope of coverage should also have the CC&Rs require owners to carry their own insurance.
Water Intrusion. In the case of water intrusion, there must be a "sudden and accidental" discharge of water. Long-term slow drip leaks may not be deemed a loss under the insurance policy. See "Water Damage Checklist."
Personal Property. Under each scope of coverage described above, the association’s master policy does not cover owners’/tenants’ personal property such as clothing, computers, televisions, furniture, etc.
Important Coverage. Boards and managers should talk to the association's insurance broker about the following coverage:
- Building Ordinance. This endorsement covers any increased costs of construction following a covered loss which may be imposed due to changes in the building codes. Most city and county building codes require compliance with current building codes whenever 50% or more of a building repaired. The requirement will apply regardless of the source of the damage--flood, fire, earthquake, etc. The older the building, the more costly the code upgrades for plumbing, electrical, elevators, fire sprinklers, seismic stability, and the like. The costs can be substantial and result in significant special assessments on the membership if a "Building Ordinance" endorsement is not part of the association's insurance. NOTE: Condominium associations need building ordinance coverage if they wish to be compliant with Fannie Mae requirements. See Form 4335's highlighted description of the coverage.
- Demolition and Debris Removal. This important endorsement covers demolition and debris removal costs. Following a major fire, the debris will need to be removed and disposed of. It is quite likely that undamaged portions of structures will need to be demolished and removed as well. Once the site has been cleaned, a new building can be built. If the association's insurance policy does not cover this expense, it will be borne by the membership in the form of a special assessment.
- Maintenance Fees Receivable. This coverage covers the loss from unpaid or uncollected assessments resulting from a covered property loss.
- Boiler and Machinery. An endorsement for boilers covers the loss or damage to or as a result of boilers, pressure vessels and pressure pipes. It also provides coverage for mechanical breakdown of items such as elevators, sump pumps and pool equipment.
- Garage Keepers Liability. This is for associations that have vehicles in their care, custody and control. This is most common for highrise buildings.
Reporting Requirements. Actual and potential claims must be timely reported to the association's insurance carrier or the association risks loss of coverage.
Insurance Menu. See "Insurance Menu" for more information.
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