Insurance is a mystery
to many. Ownership
does not necessarily determine insurance obligations--an association's governing documents can assign duties unrelated to ownership. Moreover, insurance carriers sometimes deny claims that should be covered and pay
claims that should be denied. The rules of coverage seem to shift from carrier
to carrier and from claim to claim.
. Insurance carriers do not cover all forms of water damage. Generally, their coverage is limited to sudden, accidental water damage. For example, losses associated with storm damage, burst pipes and drain line backups. As a rule, they do not cover losses from lack of maintenance.
If an association carries "bare walls
" insurance, the
carrier will not pay for an owner's damaged cabinets, counters and carpets--it
pays only for bare walls.
However, some CC&Rs require coverage for unit improvements in addition to
the common areas. This type of insurance is referred to "original builder's specs," or “all in” policies.
In that case, the association's insurance will cover the owner's carpet,
cabinets and fixtures even though
he caused the loss.
Sometimes CC&Rs are irrelevant.
Some master policies provide broader coverage than required by the governing
documents. As a result, even when CC&Rs exclude unit improvements and require
owners to carry their own insurance, carriers will confound
boards by covering a negligent owner's loss. This encourages more claims by negligent owners and drives up insurance
. Many boards try to
keep premiums under control by managing which claims are submitted and which are
not. Unfortunately, some CC&Rs allow owners to make claims directly against the
association's policy. This encourages owners to go uninsured and file claims, no
matter how small, against the association's policy. The higher the claims
history, the higher the premiums.
One of the best methods for controlling
claims is to adopt a deductible policy
that spells out that whichever entity (association or
homeowner) causes the damage is responsible for paying the deductible, and then
increase the deductible. Association deductibles used to be in the
$500 to $2,500 range. Now they commonly vary from $5,000 to
$25,000 with most at $10,000. If negligent owners are made responsible for the
deductible, and the deductible is high enough, owners will be less inclined
to file claims or "run naked," i.e., be uninsured.
Boards should have their
insurance broker compare the association's insurance against their CC&Rs to make sure
the policy meets or exceeds what is required by the governing documents. To keep
insurance premiums down, associations should amend their CC&Rs to clearly assign
maintenance duties, broadly define exclusive use common areas, add mitigation
provisions, require owners to carry insurance, make owners responsible for losses originating in
their units, and define liability for deductibles. In addition, boards should
consider raising their deductibles.
: Associations needing legal assistance can contact us
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