Condo Unit Owners - Why Carry Building Coverage?
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Condo Unit Owners – Why Carry Building Coverage?
By David Thompson, CPCU
It’s a bizarre statement, but here goes anyway: “Condo unit owners, even those on upper
floors, should consider purchasing a dwelling flood policy that includes both contents
coverage and building coverage.”
Insurance professionals who provide insurance for condo dwellers know that explaining
and selling the proper coverages can be quite a challenge. The first major hurdle is to
convince the condo unit owner that they need any property coverage at all. After all,
many condo unit owners are under the mistaken notion that the association covers all of
the buildings items and they may feel like, “Certainly I don’t need to worry about the
building coverage.” That notion is of course mistaken, from both a homeowners
coverage perspective as well as a flood insurance perspective. This article examines the
insurance needs and coverages provided by both the dwelling flood policy purchased by
the unit owner, as well as the condo “master” flood policy, the Residential Condominium
Building Association Policy, or RCBAP for short.
The RCBAP
The RCBAP is written on the condo building in the name of the association and is
available when at least 75 percent of the floor space is used for residential purposes. The
maximum limit available for the RCBAP is $250,000 multiplied by the number of units,
or the replacement cost, whichever is less. For example, a 10-unit condo building could
purchase a maximum of $2.5 million of building coverage on any one building. The
policy has an 80 percent coinsurance feature, and if coverage is at least 80 percent (or the
maximum available) then building flood losses are paid on a replacement cost basis.
Coverage for personal property owned by the association (such as furniture in a
clubhouse) is paid on an actual cash value (ACV) basis.
The RCBAP covers all building items, regardless of who installed them, when they were
installed, or whether they are like kind replacements or upgrades. Florida insurance
agents are accustomed to thinking of Florida Statute 718.111(11)(b) which spells out the
insurance responsibility of unit owners to cover items such as carpet, paint, wallpaper,
appliances, cabinets, and air conditioning units. Remember, this is a Florida statute and
the National Flood Insurance Program (NFIP) policy is not bound by a state statute.
Therefore, items inside a unit such as paint, cabinet upgrades, wallpaper, air conditioners,
and even newly installed interior walls are all covered by the RCBAP. For more on this
issue, check our on-line Education Library article titled “Flood Policies, Condo Units,
and Additions and Alterations.”
The Unit Owner Dwelling Flood PolicyIf the RCBAP provides such broad coverage, why then should unit owners consider
purchasing their own flood policy providing dwelling coverage? Several reasons: 1>
Control of their own insurance coverages, and 2> Loss assessment protection.
Control of their own insurance: When unit owners rely on the association to purchase
flood coverage they, in effect, trust their insurance protection to someone else….not a
good thing to do. What happens when the association, for whatever reason, decides not
to continue the RCBAP? Are all the unit owners properly advised of this action? It is
very possible, if not likely, that many unit owners will never get the word about the
RCBAP not being continued. That leaves unit owners thinking that someone else is
covering their building items, when in fact such is not the case. By purchasing their own
building coverage they control their own coverage. The cost for building coverage varies
based on flood zone and base flood elevation, but in many cases the cost for some
coverage is only a few hundred dollars. Even if the unit owner is purchasing coverage
that may duplicate what the RCBAP covers, isn’t it better to have double coverage as
opposed to no coverage?
Loss assessment protection. The summer of 2004 in Florida proved many things, one
being that all the old rules went out the door. Things that were never supposed to
happen, did happen…over and over again. Condo unit owners, even those on higher
floors, could have been assessed by the association for losses that were not covered
because of the absence of an RCBAP. Remember, an assessment presented to the HO-6
(homeowners) carrier for a flood loss won’t be covered because the cause of loss (flood)
isn’t a covered peril under that policy. The only way for a unit owner to cover an
assessment for flood damage to the condo building is via a dwelling flood policy that
includes building coverage. When the unit owner selects a limit of building coverage,
that limit also doubles as the loss assessment limit. When a loss assessment claim is
presented to unit owners and covered by their dwelling flood policy, there is no
deductible. The assessment must be made because of direct physical damage by flood,
during the policy period, to the building’s common elements. Not all loss assessment
claims are covered though. Those not covered are:
• Assessments due to a deductible on the RCBAP.
• Assessments for damage to personal property owned by the association.
• Assessments due to the RCBAP being written for an amount less than 80 percent
of the building’s replacement cost, or the maximum permitted ($250,000
multiplied by the number of units) under the flood act.
• Assessments when the amount paid under the RCBAP plus the any other coverage
for loss assessments under the dwelling policy exceeds a total of $250,000 for one
person. (More on this later)
What assessments then would be covered if a unit owner were to purchase his own
dwelling policy including building coverage? Several examples include:
• Situations where the RCBAP had been written for an amount of at least 80
percent of the replacement cost of the building, but less than 100 percent to value.• Assessments due to there being no RCBAP in place at all.
• Assessments for damage to a non-covered building. For example, after major
flood damage to the stand-alone condo clubhouse, it is learned that there was no
flood policy covering the structure and each unit owner is assessed $6,000 for
damage.
The $250,000 Limitation and Loss Assessments
Recall from the discussion above that the RCBAP can be written at a maximum limit of
$250,000 multiplied by the number of units. In the example of a 10-unit condo, that was
$2.5 million of building coverage available. Suppose that a unit owner in that condo
building had taken it upon himself to purchase his own dwelling flood policy with
$60,000 of personal property coverage and $100,000 of building coverage. Further
suppose that due to a total loss of the condo building, the RCBAP paid the limit and the
association board met to approve an assessment of $50,000 per unit owner to rebuild the
condo. Such assessment to the unit owner who purchased the building coverage is not
covered because that unit owner has already benefited for $250,000 under the RCBAP
payout. Regardless of how many unit owners had purchased dwelling flood coverage,
none of the dwelling flood policies will cover the loss assessment because no
combination of flood policies is permitted to pay out more than $2.5 million for the
damage to this particular building. Therefore, does this mean that in such a “RCBAP
maxed out” situation that no unit owner should purchase dwelling flood coverage?
Absolutely not, for all the reasons cited above. It’s very possible that the RCBAP was no
longer in place, this fact being unknown to the unit owners who occupied the condo units.
This coverage analysis applies for all unit owners, whether they be on the ground floor or
the 15th floor. For an insurance professional to tell a condo unit owner, “You don’t need
to purchase building flood coverage” is little more than an open invitation to a future
E&O claim.
Summary
Several FAIA members have reported that they have heard various “other people” make
statements of:
• “A condo unit owner should never purchase building flood coverage in his own
name.”
• “There is no loss assessment coverage available to a condo unit owner.”
• “The only way to cover interior building items in a condo unit is via the RCBAP.”
Clearly these statements are incorrect. There are very valid reasons why condo unit
owners, regardless of their floor of occupancy, should consider purchasing building flood
coverage. At times the coverage may not respond, but at other times it clearly will
respond.
Finally, consider the hypothetical (but very possible) conversation during a trial:PLANTIFF’S ATTORNEY: “So Mr. Smith, did you have a flood policy in your own name that provided building coverage?” PLAINTIFF: “No sir, I did not.” PLANTIFF’S ATTORNEY: “Will you please tell the court why you didn’t have such policy Mr. Smith?” PLANTIFF: “Because my agent didn’t offer me one, plus he told me it was a waste for me to buy my own flood policy because there was this RCBAP thing out there.” PLANTIFF’S ATTORNEY: “Mr. Smith, who is that gentleman that you are pointing to…the one who told you these statements?” PLANTIFF: “He is my insurance agent and it’s all his fault. If he had given me all the facts about why I should have considered buying my own flood policy, I would have done it. I see now how much better off I would have been if my insurance agent had only explained it to me. I’ve been wiped out and now I don’t have any insurance money coming in. This just isn’t right…I trusted my agent to advise me correctly.” --------------- Copyright FAIA, 3/22/12. David Thompson
Drive Other Car Coverage A very common question posed to FAIA involves a business auto client who supplies an auto to an employee. If the people provided the company car do not have their own personal auto policy (PAP) a serious gap in coverage exists, but can be easily corrected by one of several ways. Consider XYZ Store Incorporated, provided coverage under a standard ISO Business Auto Policy (BAP) and an employee, Bill Smith, who is given a company car for his regular use. Bill lives with his wife, Sue, and son Billy-- none of whom owns a vehicle. Bill is listed as a driver under the BAP with symbols 1 for liability, and symbols 2 and 8 for medical payments, UM, and physical damage. In addition the CA 20 54 – Employee Hired Autos endorsement is on the policy to assure that a vehicle rented by an employee for business purposes of XYZ Store Incorporated is a covered auto and that the employee who rented the vehicle is an “insured” for liability coverages. (For more on the CA 20 54 endorsement see our article titled “Employee Hired Autos” in our on-line Education Library.) Coverage would be provided for XYZ Store, Bill, Sue and Billy (as well as for damage to the company car) in all of the following situations: 1> Bill is driving the company car on personal business, injures another driver and damages the company car. 2> Sue or Billy, (as drivers of the company car with permission) runs a light, damaging another car and the company car. 3> Bill is sent out of town on business and rents a car, damaging it and another vehicle in an at-fault accident. Thus, as long as Bill, Sue, or Billy occupies the company car there are few coverage gaps since they have access to the coverages provided by the BAP. Additionally, while Bill rents, hires, or borrows an auto for company business he has coverage under the BAP since the symbols used will make those autos “covered autos.” So, where is the problem? Consider the following situations (all very likely to happen) not covered at all by the BAP. 1> Bill rents a car for personal use on vacation and damages another vehicle. 2> Sue travels out of town and rents a car for business for her employer. 3> Billy borrows a friend’s vehicle, is negligent, and injures a pedestrian resulting is a lawsuit naming Billy, Bill, and Sue. 4> Bill, Sue, or Billy are struck as a pedestrian and injured by an uninsured motor vehicle. In all cases the BAP provides no coverage since there was not a “covered auto” involved in the accident, resulting in a serious gap in coverage for Bill, Sue, and Billy. The solution is to add two endorsements to the BAP: CA 9910 – Drive Other Car (DOC) Coverage and CA 2201 – Named Individuals Broadened Personal Injury Protection Coverage. With the DOC endorsement coverages available include liability, medical payments, uninsured motorist, and physical damage. In our example if Bill is named on the DOC endorsement then the entire family becomes “an insured” for medical payments and UM coverage. For liability and physical damage coverages only the spouse becomes “an insured.” Each “family member” other than a spouse, must be named on the DOC endorsement in order to be provided liability and physical damage coverage. For example, Bill is named
and Sue rents a vehicle for personal use on vacation. She is provided liability damage, medical payments, uninsured motorist coverage, and physical damage while renting the vehicle. However, had Billy rented the same vehicle he would be provided only medical payments and UM coverages unless he had been named on the DOC schedule under those two coverages. This points to the importance of determining who coverage is intended for – just the person named and spouse, or the entire family. Another issue to be aware of is the type vehicle covered by the various different DOC coverages. Liability, medical payments, and uninsured motorist coverage is provided for an “auto” as defined in the policy. The policy defines “auto” as, “A land motor vehicle, ‘trailer’ or semitrailer designed for travel on public roads…” In other words, these three coverages respond for almost any type vehicle that might be seen on the interstate highways… a Ford Taurus, U-Haul truck, flatbed truck, or cement mixer to name a few. However, for physical damage coverage the DOC endorsement applies for “…any private passenger type auto you don’t own, hire, or borrow…” Since “private passenger auto” isn’t defined there is some possible ambiguity about what is and isn’t covered under physical damage coverage. Most authorities clearly see a vehicle such as a Ford Taurus or Chevrolet Corvette falling under the private passenger auto category. Likewise a Ford F-150 pickup truck, Chevy Astro Minivan, or Ford Bronco are considered as “private passenger autos” by most sources. Viewed as not covered for physical damage under DOC should be vehicles such as a Winnebago motor home, U-Haul moving truck, flatbeds, 18-wheelers, and other such commercial vehicles. If there is sufficient doubt about whether a vehicle is a “private passenger auto” it should be referred to the company….prior to the claim. Of course, adding the entire family for all coverages under DOC creates an additional exposure for the BAP insured and may be an exposure that is not desired by the named insured, agency, or company. Completing coverage for the employee is accomplished by adding the Broadened PIP endorsement. Only the employee needs to be named since all “family members” are covered for PIP. Adding Broadened PIP has the effect of giving all family members PIP while occupying a defined PIP vehicle anywhere in Florida, or as a pedestrian struck by a defined PIP vehicle in Florida. The cost for both endorsements is amazingly inexpensive. Should the company, agency, or employer be unwilling to add DOC to the BAP then the employee should consider a Named Non-Owner Personal Auto Policy. This policy provides only liability, medical payments, and uninsured motorist coverage for the person named so it’s essential that each family member (and spouse) be named on the policy. Under such policy there is no way to pick up PIP and physical damage coverage, forcing the family to rely on others (vehicles they are occupying) for these coverages. Some companies may be willing to add PIP upon request. Company cars can be a great benefit to employees. With the benefits come insurance gaps, most of which can be corrected by endorsement.
Two Acres – Two Premises Rule
By David Thompson, CPCU
The following question was submitted to the Independent Insurance Agents & Brokers of
America’s “Virtual University” Ask an Expert service:
“We have a client who has a flood insurance policy. With all the rain in Georgia,
he had water coming in from the outside into his basement. The flood insurer
denied the claim and sent a letter stating that since two contiguous homes were
not affected and less than two acres of land was affected, this was not a “flood” as
defined in the NFIP policy. So how do we provide coverage for this insured in
this situation; a homeowner has a retention pond that overflows due to large
amounts of rain and comes into the house or with all this rain water that comes
into the basement?”
This is an excellent question and it points out the fact that an insured with both a flood
policy and a property policy (homeowners or commercial property) can suffer a water
loss that might not be covered by any policy.
Let’s look, however, at this situation and see what it takes for water to be considered a
“flood” under the NFIP policy. The term “flood” is defined as follows:
Flood, as used in this flood insurance policy, means:
1. A general and temporary condition of partial or complete inundation of
two or more acres of normally dry land area or of two or more properties
(at least one of which is your property) from:
a. Overflow of inland or tidal waters;
b. Unusual and rapid accumulation or runoff of surface waters from any
source;
c. Mudflow.
Note the reference to, “…two or more acres of normally dry land area or of two or more
properties…” Putting this statement into “plain talk” language it says, “If the water
covers two or more acres you have a flood, or if the water is not confined to your
property you also have a flood. Common misconceptions are: two separate structures
must be damaged and the water has to cover at least two acres. Examples will help
illustrate this concept. (All examples are based on actual claims.)
• Bill owns a house on 1/4 acre of land. His neighbors along the street own
property of similar size. Heavy rains cause surface water to damage Bill’s house.
No other structure on Bill’s street was damaged. The water, however, was in the
public street. In this case, the water touched two or more properties (Bill’s house
and the public street); thus, Bill has suffered a “flood.”• Sue owns a house on 1/2 acre. During heavy rains, water pools upon the ground
and gets into Sue’s house causing damage to carpet, walls, furniture, and other
personal property. No other house near Sue sustained any damage. The adjuster
initially denies the claim, but after further investigation a supervisor goes to the
property and can see what is referred to by some as “the trash line.” The
supervisor recognizes this “trash line” as the small line of leaves and yard debris
that often shows how much area the water covered and where the water stopped.
This “trash line” clearly touches Sue’s yard as well as her neighbors. It was not
necessary that the neighbor’s house sustain damage; it was only necessary that the
water was not confined just to Sue’s property. In this case the water touched two
properties so Sue suffered a “flood” under the NFIP policy.
• Lisa lives on a five-acre tract. Heavy rains cause surface water to damage her
house. Lisa takes photographs of the water and they clearly show a vast expanse
of area covered. While the water was confined to her five-acre tract and did not
touch any other property, the adjuster can see from the photographs that the area
of displacement is over two acres. Lisa’s claim is covered.
• Fred gets a “deal” on a half-acre vacant lot, mainly because the lot is located in a
sinkhole area. During heavy rains surface water damages Fred’s house. Due to
the low-lying nature of Fred’s lot, the water is confined to his property. Since
neither two acres were flooded nor two properties were touched, Fred does not
have a valid “flood” loss under his NFIP policy. Additionally, his homeowners
policy excludes the loss due to the water exclusion.
• Lucy owns a house on a typical 1/4 acre lot. Her street has about 20 houses on it.
Heavy rains cause surface water to damage Lucy’s house. While neighbors on
either side of Lucy sustained no flood damage, three other houses on her street
(just a few hundred yards away) did sustain damage. This fits the “general
condition” of flooding. Since water touched two or more properties Lucy has a
valid flood claim.
So, in the question asked by the agent it would be key to know all the specifics of the
damage. The agent said the claim was denied because two contiguous homes were not
affected. As pointed out in the examples, such requirement does not exist; it’s only
necessary that the water was not confined to the insured’s property.
Let’s assume, however, that in this particular case the insured lived on one acre and the
water was in fact confined to his property. Such being the case, this is not a covered
claim under the NFIP. As pointed out earlier, too, the homeowners policy would exclude
the loss also. Is this an exposure that can be covered? Yes, but seldom does a market
exist. There is no endorsement to the NFIP or homeowners policy to fix this gap. A few
insurance companies write flood insurance under their own private, non-NFIP, form.
Underwriting is quite selective, but for those who qualify for this “private flood
insurance” one benefit is that the policy often has a broader definition of “flood.” It’s
common that the reference to two acres or two properties is not present, meaning thatalmost all surface water claims would be covered under this non-NFIP policy. Additionally, some excess flood policies do not impose the two acres/two properties limitation so it’s possible that the underlying NFIP policy would exclude the loss but the excess might cover it. Of course, these private and excess policies are company specific and each policy must be read to determine coverage. The Independent Insurance Agents & Brokers of America’s “Virtual University” (VU) is a great resource for insurance professionals. Any FAIA member is automatically eligible for the VU. Their web site is available by clicking here. While the use of site is free, registration is required. To obtain a free account, send an e-mail to logon@iiaba.net with your name and your agency/company information. A username and password will be sent to you promptly. ----- Copyright FAIA, 12/29/09, David Thompson
Home Associations
By David Thompson, CPCU
Many people today are looking for ways to simplify their already too complex lives. One
method to accomplish this goal is to purchase a home or townhome in a homeowners’
association, thus reducing the amount of time required for “mundane” chores such as
cutting the grass, painting, and making major repairs to the typical single-family, stand-
alone home. Along with the advantages though, come some disadvantages…insurance
being one of them. It’s very unlikely that many purchasers of a townhome or a stand-
alone home in an association ever consider the insurance implications of such purchase.
Only when it’s time for the agent to provide coverage, does the issue surface. This article
examines some of the insurance aspects of owning homes in a homeowners’ association.
Condominium or Homeowners’ Association?
Of key importance in structuring insurance coverage for any risk is knowing what the risk
really is. There are two main types of associations, with important differences that are
not obvious to the untrained eye. While a “condominium association” and a
“homeowners’ association” do have things in common, they are considerably different on
several key points. For example, here is a recent e-mail sent to FAIA:
Have you ever heard of there being any real difference between
homeowner associations and condominium associations? I have a condo
unit owner that says they are set up as a homeowners’ association, but
that the documents are “like” a condo association. I know that the
statutes are very clear regarding what a condo association is responsible
for. Is there anything similar for a homeowners’ association?
From an insurance perspective, it’s either a homeowners’ association or a condominium
association…it can’t be both; the only way to know for certain is to read the association
documents. Once a determination has been made as to the organization, then insurance
coverages can be structured. It’s critical that a correct determination be made at the time
the policy is written, since many residents (and even some association boards) may not
know how the body is legally organized.
Types of architecture/ownership.
Some individuals may feel that since the structure they purchased “looks like a
townhouse,” then they purchased a townhouse within a homeowners’ association. While
the structure may architecturally look like a townhouse (multi-story, several units in a
building, possibly separated by firewalls), it could be legally organized as a condominium
association under the corporate documents.
In a true condominium, the ownership is vested in the unit owner who owns: (1) the air
space in the individual unit; (2) an undivided interest with all other unit owners in such
common elements as the building structure, land, recreational facilities, and the like; and,
(3) certain property attached to the building within the unfinished perimeter walls, floors
and ceilings.In a homeowners’ association, individuals own their property on a “fee-simple” basis,
meaning that only they own their house or townhouse and the ground below. There is no
common ownership of any part of their dwelling or townhouse.
Florida Statutes.
Once a determination has been made as to the legal organization of the association, it is
necessary to consult the Florida Statutes to see what, if any, statutory mandates for
coverage exist. The statutes differ for condominium associations and homeowners’
associations.
Condominium Associations: Chapter 718 of the Florida Statutes dictates
coverage issues for condominiums, and they spell out in detail a list of items
that must be insured by the condominium association. The statutes outline a
wide variety of issues and requirements for condominium associations,
including the stipulation that the association documents must be filed with the
Secretary of State’s office. If condominium documents conflict with a
Florida Statute, then the statutes prevail.
Homeowners’ Associations: The provisions of Chapter 720 of the Florida
Statues regarding homeowners’ associations are nowhere near as extensive
and specific as those for condominium associations. Notably, there is no
stipulation or guidance on the insurance issues for homeowners’ associations.
This can be both good and bad, depending on what requirements individual
associations come up with. In fact, many insurance provisions in
homeowners’ association by-laws are often difficult or impossible to meet.
Lacking any statutory mandate for coverage, the sole source for insurance
matters in a home association becomes the association documents.
Insurance Issues.
While there may be numerous ways to structure coverage for homeowners’ associations,
it likely boils down to three basic options:
• One master policy, covering all of the building items, combined with tenant
homeowners (HO-4) policies for the residents.
• Individual policies (HO-2, HO-3, HO-5, or HO-8 type) for the residents, and no
master policy.
• A combination of a master policy covering portions of the building, with the
association documents making residents responsible for some building items
under their own homeowners policy.
Suffice it to say, regardless of which way insurance coverages are structured, there will
be advantages and disadvantages associated with the method. The following is a
discussion of the three options presented above. For the sake of discussion, assume thatthe homeowners’ association is made up of one building, there are ten separate fee-simple
units, separate firewalls, and each unit has a replacement cost of $200,000. The same
coverage analysis below could just as easily be applied to a homeowners’ association
composed of ten separate stand-alone, single-family, fee-simple homes.
One Master Policy Covering All Building Items
Overview.
In a homeowners’ association or subdivision, the homes (single family or townhome) are
individually owned in fee-simple and are not collectively owned by all members of the
homeowners’ association. Therefore, when a homeowners’ association seeks to put in
place a “master policy” covering all homes, several fundamental problems may arise.
Given that Chapter 720 contains no clear guidelines or requirements for insurance, this
leaves the individual homeowners’ associations to devise insurance programs of their
own choosing, often with little real understanding of the consequences. Insurance
requirements that homeowners’ associations devise may often be patterned after the
insurance program used by condominium associations, and, as has been discussed earlier,
these are “two separate beasts,” and requiring different methods of structuring coverage.
The association’s documents and bylaws may state that the association shall obtain
property insurance for the replacement cost of all of the buildings. In such case, the
Insurance Services Office (ISO) Building and Personal Property Coverage Form (CP 00
10) would be appropriate, and coverage should be structured to reflect an amount of
coverage adequate to rebuild the entire building. Items such as the roof, interior and
exterior walls, built-in cabinets, wall-to-wall carpet, tile, windows, and doors should be
included. It would not be appropriate to use the ISO condominium form (CP 00 17) for a
homeowners’ association. This would especially be true if the Florida specific
endorsement (CP 01 91) were attached to the CP 00 17. The Florida endorsement
excludes various items from coverage…items such as carpet, interior paint, floor tile,
water heaters, and cabinets to name a few. If the bylaws required the association to
insure these items and the CP 01 91 were attached to the policy, a serious coverage gap
would be present. The CP 00 17 should be used only for a true condominium association.
Insurable interest.
Some carriers may resist the “single master policy” concept, citing the lack of insurable
interest. Unlike a condominium, no one has a direct insurable interest in an individual
home except the homeowner (and his mortgagee). With a master policy in which the
homeowners’ association is the named insured, a potential conflict is created. While
insurable interest may be created by a variety of methods, contracts being one, some
carriers may be unwilling to write one policy in the name of the association when
individual townhomes or homes are owned fee-simple by individuals.
Advantages.
This “single policy” approach does offer some advantages. Assuming the association
obtains and maintains an adequate policy, the concerns over one townhome or homebeing damaged and the home owner having no coverage would be minimized. If the
association did not cover the building at all, and relied upon the owners to obtain
adequate coverage, a loss to an uninsured home would be an “eyesore” to the entire
association. By obtaining one master policy, the association has the greatest control over
making sure adequate coverage is in force.
Disadvantages.
In foregoing their own HO-3 type policy and relying on an association to obtain and
maintain adequate property insurance, individual owners trust someone else to insure
what is most likely the most substantial investment they will ever make. The individual
owners have no control over the master policy, have no way of knowing if coverage is
adequate, don’t know the terms and conditions of the policy, and have no realistic way of
knowing if the policy lapses.
Lenders for the individual owners may not be willing to accept a single master policy, or
may request (or demand) to be added as a mortgagee to the master policy. If numerous
lenders were shown on the master policy, complications could result at the time of loss
when the time comes to issue the claim check.
Also, in the event of damage to an individual unit, the claims check under the master
policy will likely be paid to the named insured…the association. That leaves the
individual owner relying on the association to disburse funds, something that could
develop into a problem.
Individual Owner’s Policy Still Needed.
If this “one master policy” approach is used, the individual owners still need their own
homeowners policy, and the HO-4 type policy would be appropriate in such situations.
It’s important to remember that the HO-4 policy will not provide any building coverage,
so if the master property policy is not in effect (or is inadequate) the HO-4 would be of
no help to the individual owner.
Insurance coverage for loss assessments is not an issue unique to condominium unit
owners. Many homeowners’ association bylaws do permit assessing members of the
association, thus it is important for individuals to carry higher limits of loss assessment
coverage under their homeowners policies, even under the HO-4 policy. Both property
and liability loss assessments are possible under many association bylaws. The HO 04 35
endorsement is available, at a very small premium charge, and should be recommended
to all residents in any type of homeowners’ or condominium association. An in-depth
article on loss assessment is available by clicking here.
Individual Policies Purchased By Owners
Overview.
Another option is for the association to purchase no master property policy, thus leaving
the sole insurance responsibility up to the individual owners. In such case the individual
owners would purchase their own policy, typically the HO-2, HO-3, HO-5, or HO-8form. Company underwriting will dictate the availability of a homeowners policy, but, in
general, many carriers will provide such policy for fee-simple homes, even if there are
multiple units in a building. Under ISO rules, the use of the HO-2, HO-3, HO-5, or HO-8
is permitted with a “townhouse factor” for rating. The use of the HO-6 policy in such
situation is technically not permitted under ISO rules and it also leaves the owners with a
policy that is not appropriate for the risk.
Advantage.
The advantage of this approach for the individual owners is that they are in full control of
their own insurance coverages, and don’t have to rely on others (the association) to
protect their sizeable investment. The homeowners policy should be written in an
amount that is equal to the current replacement cost of the individual home.
Disadvantage.
One disadvantage of this approach is that if an owner in an association failed to purchase
a policy, it could jeopardize the “curb appeal” of the association in the event of a major
loss. For example, suppose that one of the ten owners in a townhouse complex failed to
procure a homeowners policy and that unit sustained a major fire loss. With no insurance
in place, repairs may not be able to be made, leaving the other nine residents to live in a
building which may best be described as an “eyesore.” Such lack of insurance could
also generate a significant loss assessment to the other owners if the association bylaws
allowed for such.
Additional Insured Issues.
Often the association will request (or require) that the individual owners add the
association as an additional insured on the homeowners policy. The HO 04 41 –
Additional Insured endorsement is available for such situations. The endorsement
provides premises liability coverage to the association under the homeowners policy,
stipulates that any claims paid under Coverage A or Coverage B will include the
association’s name on a claim check, and provides the association with notice of
cancellation or non-renewal. While the endorsement is well-suited for the situation, many
(if not most) insurers refuse to add it to the homeowners policy. Such refusal may leave
the individual between the proverbial “rock and a hard” place, with the inability to satisfy
a homeowners’ association board of directors. As an alternative to the Additional Insured
Endorsement, the HO 04 10 – Additional Interest – Residence Premises endorsement is
available. This endorsement provides only notice of cancellation or non-renewal to the
party named and does not provide any coverage for the person or entity named. Yet
another alternative to placate the association would be to issue a Certificate of Property
Insurance under the individual owner’s policy, showing the association as certificate
holder. Like the HO 04 10, this method provides no coverage for the association.
Loss Assessment Coverage.
For the reasons cited earlier, loss assessment coverage should be increased under the
homeowners policies.
Master Policy and Individual Policies:Overview. It’s becoming more common for an association to have bylaws stating that the association will cover a portion of the building items and also mandating that individual owners will be responsible for certain building items. In such case, the potential for significant coverage problems is great unless care is taken to properly structure the policies. A Possible Scenario. For the sake of discussion, assume that the ten-unit building (or even the ten individual free-standing buildings) has a current replacement cost of $200,000 per unit, for a total insured value of $2 million. Further, assume that the homeowners’ association bylaws dictate that the association is responsible for insuring a portion of the building items, totaling $120,000 per unit, leaving $80,000 per unit of building items to be insured by the individual owners. The bylaws state that items such as carpet, interior paint, wallpaper, appliances, cabinets, bath tubs, showers, interior doors, sliding glass doors, and interior non-load bearing walls are the insurance responsibility of the individual owners. Master Policy. In this “dual policy” concept, the association must purchase a master property policy, typically the CP 00 10, which was referenced earlier. As the policy comes “off the shelf,” all building items are covered, even those which the bylaws state must be insured by the individual owners. If the value of those interior building items ($80,000 per unit on ten units) is stripped out, that would leave $1.2 million of building items which the association may feel should be the amount of coverage on the master policy. If the CP 00 10 is issued at the $1.2 million of coverage, the association will face a coinsurance penalty at claim time, since the policy will not provide sufficient coverage under a typical 80 percent coinsurance clause. The fact that the bylaws indicate that the individual owners must insure the building items does not affect that fact that these items are still covered property under the CP 00 10. In order to avoid such coinsurance problem, the master policy needs to be endorsed with the ISO CP 14 20 – Additional Property Not Covered endorsement. When this endorsement is attached, a description of the property not covered (paint, carpet, cabinets, etc.) must be listed in order to avoid the coinsurance problem. Individual Owner’s Policy. From the perspective of the individual owners, this “dual policy” concept breeds the same potential for coverage gaps as the master policy. The owners must still purchase some type of policy, with the typical choices being the HO-3, HO-4, or HO-6 policies. (The HO-2, HO-5, and HO-8 are also options.) The HO-4 policy is clearly inadequate since no building coverage is included. The HO-6 policy might be an alternative, but technically under ISO rules, the risk would not qualify unless it is a condominium or cooperative unit. FAIA has polled various personal lines underwriters, asking “Would you write the HO-6 policy on a fee-simple townhouse or fee-simple stand alone house?” No affirmative answers were given by any underwriter; the reason stated being, “It’s not a condominium unit, so it has to go on the HO-3.” (In fact, one underwriting manager reported that his carrier was actually sued by a client when the company took the position
that they would not provide the HO-6 policy on a fee-simple townhouse.) That leaves the
HO-3 (or HO-2, HO-5, or HO-8) as the only viable alternative. Assuming that the HO-3
provided Coverage A in the amount of the $80,000 in our example, the same
underinsurance/coinsurance problem cited earlier remains at the time of loss. In order for
the HO-3 policy to provide replacement cost loss settlement for building items, the
amount of insurance must be at least 80 percent of the replacement cost of the entire
structure. Failure to insure to at least 80 percent of value results in the policyholder being
paid the actual cash value, or the amount that would be owed after applying any
coinsurance penalty, whichever is greater. Unlike the commercial property program
where an endorsement is available to remedy this situation, the homeowners program
offers no such endorsement, leaving a possible shortfall come claim time.
Loss Assessment.
The same analysis applies as discussed earlier…increase the coverage.
Flood Insurance
Overview.
Many of the same issues concerning property insurance also apply for flood insurance.
Of key importance, however, are the issues of limits of coverage available under the
National Flood Insurance Program (NFIP) and the definition of a “single building.”
Note that a homeowners’ association is not eligible to purchase the Residential
Condominium Building Association Policy (RCBAP). The RCBAP can only be written
on a condominium association. This is a critical point, since the limits of coverage
available under the RCBAP and the limits available under the dwelling form are
dramatically different.
Limits Available.
The current limits of coverage available under NFIP for residential risks (such as is found
in a homeowners’ association) are $250,000 for building coverage and $100,000 for
contents coverage. These maximum limits apply per building and have not changed in
almost 20 years. Limits above the NFIP maximums are often available from private
insurers and should be recommended by agency staff.
Under the RCBAP, the maximum available is $250,000 multiplied by the number of
units. For example, a 10-unit condominium building could purchase the RCBAP with a
maximum building limit of $2.5 million.
Single Building.
As stated, the maximum limits apply per building. NFIP defines a single building as
follows:
B. Single BuildingTo qualify as a single building structure and be subject to the single building
limits of coverage, a building must be separated from other buildings by
intervening clear space or solid, vertical, loadbearing division walls.
A building separated into divisions by solid, vertical, load-bearing walls from
its lowest level to its highest ceiling may have each division insured as a
separate building. A solid load-bearing interior wall cannot have any
openings and must not provide access from one building or room into
another (partial walls). However, if access is available through a doorway or
opening, then the structure must be insured as one building unless the
building is self contained; it is a separately titled building contiguous to the
ground; it has a separate legal description; and it is regarded as a separate
property for other real estate purposes, meaning that it has most of its own
utilities and may be deeded, conveyed, and taxed separately.
Following Hurricane Katrina, there were numerous errors and omissions lawsuits brought
against insurance agencies involving flood insurance and the single building concept. In
not understanding the single building definition, agencies wrote one $250,000 policy on
townhome complexes with multiple individual owners, as opposed to writing one policy
per owner. In one specific case, there was a homeowners’ association composed of eight
buildings with eight separate units per building, each unit being separated by loadbearing,
vertical, division walls. The agency wrote only eight policies, failing to realize that there
were in fact 64 separate “single buildings” as defined by the NFIP manual.
Who Buys The Policy?
The NFIP Flood Insurance Manual is silent about the issue of whether the policy/policies
are written in the name of the association or the individuals. The NFIP Mandatory
Purchase of Flood Insurance Guidelines publication (September, 2007 edition date)
states the following, starting on page 50:
4. Homeowners’ Associations
Individually titled town homes and single family buildings, whose owners
belong to a non-condominium homeowners’ association, can be insured by
the individual owners under the Dwelling Form and not by the homeowners’
association. The homeowners’ association may purchase coverage for a
building it may own, such as a clubhouse, under the General Property Form.
Several individuals with positions of authority at FEMA have stated that a homeowners’
association (HOA) can not buy a policy in their sole name unless the building is owned
solely by the HOA. A clubhouse would be an example of such situation. Where units in
an HOA are individually owned, the named insured must be the individual. The HOA
can also be added “ATIMA” (As Their Interests May Appear) on the declarations page as
a named insured.
One Write Your Own (WYO) flood carrier reported that after the 2005 storm season,
there were many problems associated with situations where NFIP policies were written inthe name of the association. Coverage was often found to be inadequate, and the single
policy written for the association was “reformed” to provide coverage (albeit insufficient)
for the individual owners. An example will illustrate:
The HOA is composed of six separate individually-owned units, each
meeting the single building definition. Only one NFIP policy, in the
amount of $250,000 for building coverage, is written and the named
insured is the HOA. The replacement cost of the entire structure is $1.8
million. A major flood loss takes place and the HOA opts for policy
reformation. (If they don’t, the policy is null and void.) The one policy is
cancelled and six separate policies are issued, each with only
approximately $41,000 of building coverage. ($250,000 divided by the six
owners.) Each owner has 30-days to pay the premium notice for the
limited coverage to apply. Of course coverage is inadequate, the policy
will not provide replacement cost loss settlement coverage for the building
(only ACV) and there will be no contents coverage available. Had this
been written correctly, six policies at limits of $250,000 building and
$100,000 contents would have been available. In effect, this example
illustrates a $1.25 million gap in coverage.
Preferred Risk Policy Eligibility.
Subject to normal eligibility guidelines (Such as the risk being in zone B, C, or X; no
more than two prior losses, etc.) a townhouse or rowhouse qualifies for the PRP.
Remember, the maximum building of $250,000 applies per single building.
Summary
Providing property and flood insurance coverages for homeowners’ associations can be
challenging. It’s imperative that a proper determination be made as to the legal
organization of the association. Then a proper insurance package can be structured for
both the association and the individual owners.
-----
Copyright FAIA, 5/2/08, David ThompsonLeasing A Company Car To Yourself
(Editor’s note: This article was written by Mike Edwards, CPCU, AAI of Edwards
and Associates in Atlanta, Georgia and is used with permission.)
Saving money on expenses has always been something of a national pastime.
These days, it often borders on an obsession. Often, prudent measures taken to
make responsible purchasing decisions pay off. However, many efforts to cut
costs could only be described as “penny wise and pound foolish.”
Nowhere is this more true than in insurance. Most insurance agents “could write
a book” about some of the choices consumers often make about their insurance
protection. A prime example is the small commercial insured that has his
company purchase an auto, which he then leases to himself (for a nominal fee).
The trend in auto leasing has skyrocketed in recent years. Some industry reports
show that about half of all luxury autos are leased, while around twenty percent
of autos in general are leased. In addition to getting a “new” vehicle every couple
of years, leasing does provide some financial and tax savings for companies.
Under traditional circumstances, a company (Smithco) leases an auto from a
new car dealer. Smithco adds the leased auto to their Business Auto policy, and
the lessor (Ford Credit, for example), is shown as an Additional Insured Lessor in
the Business Auto policy of the Smithco (the lessee).
On the other hand, in an effort to save even more money, Jack Smith (owner of
Smithco) might have Smithco purchase the auto, then lease it to himself. In
addition to the normal financial benefits of leasing, Jack also seeks to save even
more money by adding the leased auto to his Personal Auto policy, adding
Smithco as an Additional Insured Lessor, and avoid Smithco from having to
insure the auto. In fact, in many cases such as this, Smithco will not have a
Business Auto policy at all, and will only have Hired and Nonowned Auto
coverage under a CGL or BOP.
Does this arrangement provide even more financial savings for Smithco, or is it a
recipe for disaster? The answer lies in the coverage provided to Smithco as
Additional Insured Lessor under Jack’s Personal Auto policy. In the following
discussion, Smithco is the lessor, and Jack Smith is the lessee. Here is the
pertinent excerpt from the Additional Insured – Lessor (PP 03 19):
1. We will pay damages for which the lessor becomes legally responsible only
if the damages arise out of acts or omissions of:
(a) you or any "family member", or
(b) any other person except the lessor or any employee or agent of the
lessor using "your leased auto
1Two problems exist for Smithco as lessor. First, Smithco is covered only to the
extent that they are made liable by someone else (See above: We will pay
damages for which the lessor becomes legally responsible only if the damages
arise out of acts or omissions of… [others as described in (a) or (b)]. [Emphasis
added.]
The gap for Smithco is any potential liability they incur due to their own actions,
rather than the vicarious liability from others.
For example, following an at-fault accident with the leased auto, a plaintiff might
allege that Smithco failed to properly maintain the brakes, tire inflation, or other
maintenance responsibilities as owner. In fact, with a small, closely held
company such as Smithco, it’s quite likely that all the maintenance expenses are
paid by Smithco, and not Jack. In this case, Smithco could plausibly be sued for
failure to properly maintain the car in a safe condition, and thus their legal liability
is not vicarious but direct. Smithco would not be covered by the lessor
endorsement under Jack’s PAP for its own negligence.
In addition, if Jack has a bad driving record, it is possible that Smithco might also
be sued for failing to use due diligence in letting someone with several drunk
driving convictions drive its vehicle. While Smithco might argue that they were
made liable by someone else (Jack, the driver), plaintiffs sometimes are
successful in alleging that a separate tort was committed by Smithco itself (vs.
vicariously) for allowing unsafe drivers to operate its cars. Under the lessor
endorsement in Jack’s PAP, Smithco has no coverage for its own negligence.
In a traditional lease (where Smithco had leased an auto from Ford Credit), the
lessor is at arm’s length from the lessee in terms of being responsible for
determining the driving record of the lessee’s operators. However, the insulation
Ford Credit enjoys from the arm’s length transaction might not be true where
Smithco leases the car to Jack Smith, and is found liable for its own failure to
screen and restrict permissive drivers.
The second problem for Smithco in the lessor’s endorsement under Jack’s PAP
is the coverage gap that Smithco has in the limitation as to the source of their
vicarious liability, as found in 1. (b):
1. We will pay damages for which the lessor becomes legally responsible
only if the damages arise out of acts or omissions of:
(b)“any other person except the lessor or any employee or agent of the
lessor using "your leased auto.” [Emphasis added.]
In other words, if Jack lets one of Smithco’s employees drive the leased auto,
and the employee has an at-fault accident, Smithco is not covered under the
lessor endorsement in Jack’s PAP, since the driver is an employee of the lessor
(Smithco).
2In a misguided attempt to save money, Smithco likely has only Hired and
Nonowned Auto coverage under a BOP, CGL, or BAP with symbols 8 & 9 only.
This won’t help Smithco here, since they own the auto.
Another potential problem Smithco might face is a limits gap with their other
commercial insurance, especially their umbrella. As discussed above, Smithco is
relying solely on Jack‘s PAP for their exposures related to the auto they lease to
Jack.
Another gap would arise if Smithco decided to purchase another auto. Since
they elected to only have Hired and Nonowned Auto coverage, they would have
no coverage for an owned auto. In addition, the “newly acquired” coverage in
Jack’s PAP would not protect Smithco, as it only applies to autos newly acquired
by “you” – which is the Named Insured and resident spouse.
Probably the most prudent approach for Smithco is to retain coverage for the
auto under their BAP, with Symbol 1 for liability and Symbol 2 for physical
damage.
While leasing a company car to yourself might make financial sense, in some
situations, it can create serious insurance gaps.
3Leasing A Company Car To Yourself
Saving money on expenses has always been something of a national pastime.
These days, it often borders on an obsession. Often, prudent measures taken to
make responsible purchasing decisions pay off. However, many efforts to cut
costs could only be described as “penny wise and pound foolish.”
Nowhere is this more true than in insurance. Most insurance agents “could write
a book” about some of the choices consumers often make about their insurance
protection. A prime example is the small commercial insured that has his
company purchase an auto, which he then leases to himself (for a nominal fee).
The trend in auto leasing has skyrocketed in recent years. Some industry reports
show that about half of all luxury autos are leased, while around twenty percent
of autos in general are leased. In addition to getting a “new” vehicle every couple
of years, leasing does provide some financial and tax savings for companies.
Under traditional circumstances, a company (Smithco) leases an auto from a
new car dealer. Smithco adds the leased auto to their Business Auto policy, and
the lessor (Ford Credit, for example), is shown as an Additional Insured Lessor in
the Business Auto policy of the Smithco (the lessee).
On the other hand, in an effort to save even more money, Jack Smith (owner of
Smithco) might have Smithco purchase the auto, then lease it to himself. In
addition to the normal financial benefits of leasing, Jack also seeks to save even
more money by adding the leased auto to his Personal Auto policy, adding
Smithco as an Additional Insured Lessor, and avoid Smithco from having to
insure the auto. In fact, in many cases such as this, Smithco will not have a
Business Auto policy at all, and will only have Hired and Nonowned Auto
coverage under a CGL or BOP.
Does this arrangement provide even more financial savings for Smithco, or is it a
recipe for disaster? The answer lies in the coverage provided to Smithco as
Additional Insured Lessor under Jack’s Personal Auto policy. In the following
discussion, Smithco is the lessor, and Jack Smith is the lessee. Here is the
pertinent excerpt from the Additional Insured – Lessor (PP 03 19):
1. We will pay damages for which the lessor becomes legally responsible only
if the damages arise out of acts or omissions of:
(a) you or any "family member", or
(b) any other person except the lessor or any employee or agent of the
lessor using "your leased auto
Two problems exist for Smithco as lessor. First, Smithco is covered only to the
extent that they are made liable by someone else (See above: We will pay
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