Insuring residential condominium property is a complicated matter, and appears to be getting ever more so.

At least two factors combine to make condo insurance complicated:

• Property ownership and insurance responsibilities are apportioned according to rules, by-laws, covenants, and other governing instruments that vary among different condominium associations; and
• Deductibles for condominium association master policies are increasing, which effectively creates gaps in coverage that sometimes lead to expedient innovations in policy interpretation.
  

The end result can be a tug-of-war, of sorts, as insurance exposure is shifted from personal lines policies (usually a Form 6) to commercial lines (condominium master policies) and back again.

Covenants

Condominium association rules and covenants affect insurance exposure by determining what type of building property is commonly owned by the association, and thus insured under the master policy, and what is individually owned and insured by the unit-owners, and insured under a unit-owners policy.

Through the soft market for residential insurance in the 1980s and 1990s, there was a general shift from “bare walls” to “single entity” coverage for residential condominium buildings.

Under a bare walls master policy, a condominium association insures only the structure(s) of the condominium building(s), plus the structure, fixtures, and furnishings of collectively owned areas, as well as the personal property of the association.

Under a bare walls approach, individual unit owners are responsible for insuring building property they own and use exclusively, such as sinks, cabinets, and flooring, in addition to their personal property.

Over time, bare walls master policies were supplanted by single entity condominium association policies that cover virtually all building property in a residential condominium structure, including fixtures in individual units.

Over the same period, single entity master policies evolved from providing “original specs” coverage, which insured only original fixtures in condominium units, to “all in” coverage that insures all permanent fixtures, including those added or substituted by residents.

Shifts

Taken together, those trends had the effect of shifting insurance exposure from the personal unit-owners policies
to the commercial master policies.

The exposure is shifting back as condominium associations accept higher deductibles on master policies and assess the cost of deductibles on members.

There are at least three approaches to how master policy insurance deductibles can be assessed on unit-owners, approaches that can be used in combination.

The financial responsibility to pay a deductible can be levied:

• On all unit-owners, no matter where a cause of loss has arisen or who is to blame for it;
• On association members deemed responsible for the loss by negligence; and/or
• On unit-owners where the cause of loss originated (e.g., a kitchen fire) regardless of fault.
  

The manner in which these assessments are paid by unit-owners is driving some innovation in personal lines insurance.

Under certain circumstances, unit-owners may have some coverage for master policy deductible assessments under the loss assessment coverage provided in standard Form 6 policies.

While loss assessment limits can be increased for losses to or arising out of collectively owned property, they typically cannot be raised for purposes of addressing master policy insurance deductibles, perhaps because the latter have been considered commercial lines exposures.

Given the limitations on how much loss assessment coverage can be provided for master policy deductible assessments, some companies have reportedly taken to paying deductible assessments from a unit-owner’s Coverage A building property limit.

To the extent that carriers do this, they are agreeing, in effect, to accept a commercial lines exposure on a personal lines policy.

AAIS action

AAIS has introduced an innovation that clarifies the response of a Form 6 to different loss scenarios.

In 2004, AAIS developed an “Association Deductible” endorsement that provides a separate source of recovery for assessments on an insured levied to cover a master policy deductible. The endorsement was filed in Virginia to meet a state law (subsequently repealed) and made available on an advisory basis in the rest of the country.

The endorsement is currently available for use under the AAIS Homeowners and Mobile-Homeowners programs, and can be used to cover insurance deductible assessments by any type of homeowners association.

Under the endorsement, coverage for an association deductible applies if the deductible arises from a loss by a peril covered in the unit-owners policy to a type of property that would be covered by the policy if owned by the insured. (Hence, the endorsement does not respond, for example, to vehicle-related losses.)

The Association Deductible coverage is being built into the revised AAIS Homeowners forms, now being filed countrywide and scheduled to take effect in mid-2007.

Significantly, the rating information for association deductible coverage is drawn from commercial lines rating information, because the exposure being covered--the master policy deductible--is a commercial lines exposure.

Three limits

The introduction of Association Deductible coverage seeks to clarify condominium insurance issues by establishing three different limits an insured would want to satisfy:

• The Coverage A building property limit. To establish an adequate Cov. A limit, the insured and his or her agent need to know what building property is owned by the insured and/or is his or her responsibility to insure.
• The Loss Assessment limit. This limit would seek to satisfy assessments on the insured for loss to collectively owned property of the association and liability arising out of the use of collectively owned property.
• The Association Deductible limit. This limit would seek to satisfy assessments on an insured to pay all or part of the deductible on a condominium master policy following a loss.

Some personal lines experts argue that unit-owners and agents need to become completely versed in condominium association governing documents to contract for adequate insurance coverage.

While that may be advisable, it is generally not practical, given the relatively small amount of premium at stake.

Under the approach created by AAIS’s addition of Association Deductible coverage, agents and insureds can focus on setting three limits to provide adequate protection to the insured.