In some cities, developers are maximizing the use of property by building multi-family housing, often high-rise condominiums as well as low-rise, garden-style buildings.
In suburban areas, real estate development is taking shape in the form of townhouses with condominium ownership.
Every residential condominium project has three distinct features:
- Dwelling units: There is a single housing unit with each one exclusively owned by the persons purchasing it.
- Common elements: There are hallways, stairs, and elevators, for example, jointly owned by all the unit owners as tenants in common, with each unit owner’s interest measured by the proportionate value the unit bears to the total value of all units.
- An association or administrative framework: There is an association, usually headed by a board of managers made up of unit owners, established to manage the common areas and the assets of the association, as well as set out the rights and obligations of the unit owners.
The key to understanding insurance coverage for the condo association — not the individual unit owners — is to be able to clearly draw lines around ownership as well as around who is covered, what is covered, where coverage applies, when it applies and how it applies. It’s all complicated by state regulation of condominium development and insurance law.
When putting together an insurance program for condominium associations, one of the first things to establish is who owns what and who is responsible for insuring it. Some items are the association’s responsibility while other items fall within the unit owner’s insurance.
Another concern that arises with condo associations is the way the members of the association’s management will be protected from lawsuits and whether additional insurance is needed beyond the association coverage form to address personal liability.
Here are five significant issues agents and brokers need to be aware of when advising condominium association clients.
1. Association responsibilities
The condo association is responsible for insuring the common areas of the condo complex but not the interior—from the walls in—of the individual units.
Most states’ condominium acts require the association to carry insurance on the common elements and the bare walls, floors, and ceilings of the unit.
The ISO Condominium Association Coverage Form, CP 00 17 10 12, meets the requirements of most condominium property acts by including fixtures outside of individual units and personal property not contained within individual units.
2. Necessary documents
In putting together coverage for the condominium association, three sets of documents provide the basis for the scope and extent of coverage.
- The condominium property act of the association’s state, which defines the boundaries of coverage responsibility,
- The condominium declaration, which is subject to the condominium act, and
- Bylaws and other instruments, which could further clarify the scope, extent and type of coverage as permitted under the act.
Armed with these documents, it becomes easy to identify and itemize the coverage areas and to add limits to each area and item subject to coverage.
3. Coverage for personal property
The condo association may insure some personal property. For example, fire-extinguishing equipment, outdoor furniture, floor coverings and appliances used for refrigerating, ventilating, cooking, dishwashing, or laundering are covered by the ISO Condominium Association Coverage Form, CP 00 17 10 12.
This type of property must be owned by the association itself, be used to maintain or service the building and not be contained within individual units.
4. Errors and omissions coverage
Directors, officers, volunteers, committee members, and others who manage the condo association are not covered for errors and omissions in the performance of their duties under a standard association policy.
State condominium acts, the condo association bylaws, or other governing documents of most associations often require the purchase of directors and officers (D&O) liability insurance. Even when not required to do so, most associations voluntarily choose to purchase the coverage.
Although some states limit the personal financial liability of volunteer directors and officers, many states do not. As a consequence, it’s sometimes difficult in the absence of D&O insurance for nonprofit organizations such as homeowner associations to get qualified volunteers to serve as directors, officers or committee members because they are afraid of being sued as the result of performing their duties.
5. Protecting volunteers
The Volunteer Protection Act of 1997 is not sufficient to protect volunteers who manage condo associations from D&O lawsuits because it doesn’t prohibit lawsuits against volunteers. The act is designed to protect volunteers from tort liability, usually meaning liability for acts that result in bodily injury or property damage to others. (Most, if not all, homeowner associations already protect themselves and their directors and officers from such liability by purchasing general liability insurance.)
The act does not protect a volunteer director or officer from liability for gross negligence, willful or criminal misconduct, reckless misconduct or a flagrant indifference to the rights or safety of others—frequent allegations in lawsuits filed against directors and officers.
States can opt out of the Volunteer Protection Act and are allowed to override its provisions with their own legislation. Many states have, in fact, enacted their own laws that limit both the personal liability of volunteer directors and officers and the organization’s ability to indemnify directors and officers in the event they are sued.