By Donn Gerelli, President
Condominiums are a business… Issues to consider when purchasing your homeowner's insurance
Condominiums are a business not unlike any other. Your Condominium has a playbook if you will. Your offering plan is in fact a playbook. It describes how every situation is to be handled. Just in part;
1. It describes your property in great detail
2. The services the condominium offers you
3. and conversely what your responsibilities are in ownership of your unit and well as in maintenance.
I hope this article assists you by supplying a summary of what you are responsible to “insure” as a unit owner versus the condominium association's responsibility to itself. First, it is important to clarify that we are not talking about “maintenance.” Your “maintenance” responsibilities are far different from what you are responsible to “insure”. In other words you have a “maintenance” responsibility to yourself and fellow homeowners around you, to make sure your washing machine hoses are in proper working order so that they don’t break causing water damage. When discussing insurance, we want to think of the “resultant damage.” That is in fact what insurance is defined to cover. If you think of it in terms of having a fire loss, or a water damage loss, your home needs to be put back to its original state; that is insurance pays to repair the “resultant damage” that was caused. In other words, although it is true, that it is your responsibility to maintain your washing machine hose; what happens when damage does occur? This responsibility is supported and funded by insurance. Both the master policy that the condominium holds as well as your individual (unit owner) homeowners policy (referred to as an “HO-6” Homeowners Insurance Policy) provides the monies to make you whole again after such a loss occurs and the two carriers (association’s master policy carrier and your individual homeowners carrier) do not work together…….. I promise. You need to have your policy protect your interest having nothing to do with what the master association policy covers. I’ll get back into more of this later.
Rumors; I hear them in every condominium I visit. As a unit owner “I am responsible for the middle of the studs in”, or “the association covers the sheetrock and the building and I am responsible for the paint and the inside of my unit” and/or “the association is responsible for my appliances” and/or even this one “everything that was in my unit when I bought it is the condominium's responsibility, I am responsible for my furniture, fixtures and all my personal belongings only.”
Of course I started off by stating these were rumors, so it’s no surprise that none of them are true. I am not poking fun, either. I mean, why would anyone not directly involved in insuring condominiums know any of this? After all, I not unlike you have attended a condominium closing as the purchaser. I never heard anyone explain (or at least not properly) what the unit owner is responsible for in insurance terms. And if the answer is to read the “offering plan”. Give me a break! Have you read yours recently? It’s as vague and confusing as it is mind numbing. In the real estate transaction or closing, you are asked for a certificate of insurance proving the complex has insurance. Great, so what. And if you have a mortgage, some banks will even ask for proof of your insurance, and even then, they don’t even know why they are asking for it, as it doesn’t protect or have anything to do with their mortgage interest! But don’t tell them that, because after all, “you have to have it in order to close”.
All fun and kidding aside, Yes, you guessed it………it goes back to the offering plan or playbook as I refer to it. The insurance that the condominium association has purchased follows it to a crossed “T.” Again, not a document that is easy to read but here is a synopsis:
Your condominium association calls for what is technically referred to as a “Single Entity” set up or “Original plans and Specifications.” In this type of arrangement the Master Insurance Policy is responsible for:
1. All Common Elements; patios, gazebos, the association pool, all access roads, sidewalks, mailboxes, a club house, etc.
2. All Limited Common Elements which are limited access type items such as your units’ balcony or deck.
3. And the unit itself or of course, the building. The “unit” itself also includes everything that was originally delivered as part of the unit.
Number One and Two are quite obvious, but for number Three I’ll get more specific. The buildings are covered on the association master policy, we know that. Your unit is usually described in the engineer’s report of the offering plan in what is called a “finished schedule.”
This finished schedule details what was on the ceiling, walls, floor in terms of a finished product (such as paint, carpeting, hard wood flooring, etc.) In addition permanent fixtures such as mirrors and vanities are described. Albeit, a vague description but the units are described.
Here is the point. It would be inconceivable for the insurance company holding the master policy to know how each and every unit was upgraded (remember this “upgraded” because we are going to get back into it) unless they took an inventory of every unit at least once per year. With all the units in your association this would be no small task. Therefore, the insurance company in a covered loss puts the units back together as they were originally offered with “like, kind, & quality”. Your individual unit owners insurance brings your unit above this “base,” if you will, to include all the upgrades - also known as “improvements and betterments” that have been done to the unit over the years. For instance: hypothetical case: you purchased your unit in 1999. There is a good chance the prior owner made permanent improvements and betterments to your unit, and then you again made further permanent improvements. The association master policy puts the unit back together as it was “originally” offered in the “finished schedule”. This “finished schedule” in your original offering plan, is the document that the association master insurance policy will follow for a covered loss.
So, I trust we are clear that the building and unit itself is the insurance responsibility of the condominium. So now, what is an “Improvement and Betterment?” “Improvements and Betterments” are permanent installations to the walls, ceiling, and floors. Such as; bathroom and kitchen fixtures, the dining room lighting fixture that you changed, upgrading your kitchen cabinets, bookshelves, built in wall units, changing your linoleum kitchen floor to ceramic tile. Here's one for you; the “finished schedule” in your offering plan calls for one coat of paint. So therefore, the next two coats of “Benjamin Moore” (as an example) specific color paint is an “Improvement and Betterment.” After all, paint is permanent to the unit so your homeowner's coverage needs to provide coverage for those two coats of paint after the master policy pays for the base coat following this “finished schedule.” Wallpaper and wallpaper bordering, molding, banisters, and railings and “Laminate Flooring” Oh yes… (fourth typed written page in to this article) and I know you were looking for it! (as this is such an abundantly popular product)
Laminate wood flooring by such companies as “Pergo” is a unit owner’s improvement and betterment. As an example, your association’s units came with contractors’ grade carpeting for the most part (there are some exceptions where hard wood flooring was the floors finished product). But, Laminate flooring, such as “Pergo” is a definite specific upgrade to what is described in the finished schedule. So it is imperative to make sure your Homeowners HO-6 policy has adequate coverage for this improvement.
Also, it is noteworthy to explain that insurance carriers are not looking to draw inappropriate lines. Meaning, as an example, you may have contractors grade carpeting that is seven years old. The carpeting wearing out and needing replacement is a “Maintenance” issue as described above and not covered by any insurance policy. However, we could argue that today’s contractor’s grade carpeting is better than it was seven years ago. If you were to purchase new contractors grade carpeting to replace what was worn out and then subsequently had a fire or water damage loss, the insurance carrier would replace the carpeting with “like, kind, and quality” The fact that the carpeting was new to replace the old is not considered an “improvement and betterment.” Only such permanent additions that change or upgrade the “like, kind, and quality” become the homeowners responsibility.
I have attached simple homeowners’ coverage definitions to this article for your review and assistance.
I hope this article raises questions for your current insurance professional and at the same time puts you, at ease knowing more about how you can properly protect yourself. Your individual homeowners’ policy (HO-6) among other things covers your personal liability, contents, and “Improvements and Betterments.” You should share your thoughts and concerns with your current insurance agent or broker to ensure that your investment is properly protected. The truth is, purchasing the proper condominium homeowners coverage for your home does not create the need to “re bid” all of your insurance, it doesn’t cause upheaval within your current insurance program. All it takes is awareness. Homeowners’ policies are offered by hundreds of carriers in New York. Just because you are with a top echelon carrier doesn’t mean you have the proper coverage. Reviewing your personal insurance and asking your insurance professional the proper questions is the key to being properly protected.
Homeowners Coverage Explained
A Homeowners Policy is a package type of policy, which means that it includes protection for several types of losses. Listed below is a brief description of some of the more important coverage contained within our quotation.
Improvements and Betterments
This section of your policy covers your permanent installations to the walls, ceiling, and floors. These items are not covered in the Association’s Master Policy.
cy covers your permanent installations to the walls, ceiling, and floors.
Improvements & Betterments Valuation - The policy can be written on actual cash value, which is the cost to replace less depreciation. Or for a nominal premium, Replacement cost on Dwelling or Improvements and Betterments, which will replace your property with new property of like kind and quality.
Contents - Personal Property
All personal property, which is usual to the occupancy of the described residence, is covered for the insured and members of the household. Some, but not all of the perils insured are fire, lightning, wind, hail, explosion, smoke, vandalism, and theft. There are limitations for certain types of property such as: jewelry, furs, money, etc.
Personal Property Valuation - The policy can be written on actual cash value, which is the cost to replace less depreciation. Or for a nominal premium, Replacement cost on Contents, which eliminates the depreciation factor in valuing your property.
Loss of Use
This coverage will pay for the costs of temporary living quarters in the event you could not live in your home after a covered loss. It includes reimbursement for miscellaneous extra expense (such as food or laundry costs) up to the amount stated in the policy.
This coverage protects you against claims resulting from alleged bodily injury or property damage for which you may be legally liable. This normally excludes auto and business related claims. You would be covered up to the liability limit state in your policy for each accident.
This coverage pays for medical costs of non-policyholders (those not in your immediate family) up to the stated limit. It will pay many minor claims regardless of who is responsible.