Introduction
For many people, purchasing a home is the largest investment they will make in their lifetime. While owning real estate should be considered an investment, it should also be viewed as a risk. Aside from the risk that the property will decrease in value, every homeowner should consider the risk that the property could be destroyed, as well as the risk of facing liability to others for injuries or damages.
In Michigan, there is no legal requirement for a property owner to maintain homeowners insurance. However, as a practical matter, almost every homeowner will carry insurance on their property. If you finance the purchase of your home through a mortgage, or use your home as collateral, the bank or mortgage lender will almost always require you to maintain sufficient insurance coverage on the property. Lenders require you to carry insurance because they will look to your property as collateral to repay the debt if you fail to make your mortgage payments, and, if your property is destroyed with no insurance, the lender’s investment could be entirely lost.
Similarly, if you are purchasing a unit in a condominium, your condominium association will most likely require you to carry insurance. Under Michigan law, every condominium association is required to carry insurance over the condominium, however most condominium bylaws also require the “co-owners” to carry a separate insurance policy for their “units” and personal property located within their units.
Condominium Insurance in Michigan
Michigan Administrative Rule 559.508 addresses a condominium association’s requirement to carry insurance over the condominium and provides in full as follows:
The bylaws shall provide that the association of co-owners shall carry insurance for fire and extended coverage, vandalism and malicious mischief, and, if applicable, liability and workers’ disability compensation, pertinent to the ownership, use, and maintenance of the premises and that all premiums for insurance carried by the association shall be an expense of administration. The association may carry other insurance coverage, including cross-coverage for damages done by 1 co-owner to another.
MCL 559.156 of the Michigan Condominium Act provides in pertinent part:
The bylaws may contain provisions:
…
(c) For insuring the co-owners against risks affecting the condominium project, without prejudice to the right of each co-owner to insure his condominium unit or condominium units on his own account and for his own benefit.
As outlined above, the insurance requirements for a condominium are largely dictated by the project’s master deed and condominium bylaws. Depending on the type of condominium being insured, the association and co-owners will likely have different needs and requirements for insurance, both in terms of policy limits and coverage. For starters, every condominium association should have insurance coverage for the common elements and any other items which the Association is obligated to maintain, repair, or replace under the governing documents. In addition, every condominium association should maintain liability insurance to protect the association in the event damages or injuries occur to another person or property, including the co-owners. The association should also carry director and officer (D&O) liability insurance in the event a director or officer is named in a lawsuit, but this topic requires its own discussion and will not be addressed in greater detail in this article.
Traditional Condominiums
For traditional condominiums where the association has responsibility for maintenance, repair, and replacement of many necessary common elements, such as shared water and electrical systems, adjoining walls, roofs and structural components, the association should carry insurance for all of the common elements to insure against “fire and extended coverage, vandalism and malicious mischief.” Since the association is typically responsible for carrying insurance for the exterior of all buildings and the shared common elements, the necessity of insurance coverage for co-owners in these types of condominiums is limited to the interior of their unit, as well as any improvements or upgrades within the unit and any personal property within the unit.
Co-owner insurance responsibility in traditional condominiums is usually required by the condominium bylaws in the form of an “HO-6” policy, which is also referred to as a condominium co-owner’s insurance policy. These types of policies cover the interior of a condominium “unit” which is defined by MCL 559.104(3) of the Michigan Condominium Act as: “that portion of the condominium project designed and intended for separate ownership and use …” Condominium “units” are often defined by the project’s master deed as “the enclosed space constituting a single complete residential unit designed and intended for separate ownership and use in the condominium.”
Under most condominium documents, co-owners are responsible for maintaining insurance for:
- Improvements and upgrades which were added to the standard specifications of the unit when it was initially constructed, such as hardwood flooring, granite countertops, and custom cabinetry, including alterations, appliances, and fixtures;
- Personal property located within the unit or elsewhere on the condominium project; and
- All risk liability for injury to property and persons occurring in the unit to the limits prescribed by the board of directors.
A co-owner should typically carry insurance in an amount equal to the maximum insurable replacement value of said improvements and personal property as these items will almost never be covered by the condominium association’s insurance policy. The failure to carry this insurance could be severe as many condominium documents include a provision that states: “a co-owner’s failure to fully insure his contents shall be a risk which he solely carries.”
In traditional condominiums, the premiums paid by the association for insurance is significantly higher than premiums paid by co-owners since virtually all of the exterior and structural components of the buildings are the responsibility of the association. These costs go up even more if there are recreational facilities such as fitness centers and swimming pools located on the condominium premises. In contrast, the cost to each individual co-owner for their “HO-6” policy is typically relatively low.
Site Condominiums
In site condominiums, each “unit” is typically an individual lot or parcel of land together with any improvements constructed on the lot, which is typically one single-family free standing home. In site condominiums, the common elements are usually limited to roads, private parks, entryways, and utility systems up to the point of connection with each residential dwelling. Similar to homeowners associations managing platted subdivisions, the cost of insurance for condominium associations in site condos is much cheaper because there are often no buildings being insured.
In contrast, the co-owners in site condominiums will pay much more for their insurance policies than co-owners in traditional condominiums. In a site condominium, the co-owners will typically be responsible for maintaining insurance coverage for the entirety of the structure and all other improvements constructed within the unit (on the lot), any limited common elements appurtenant to the unit, and all personal property.
Even though the condominium association is typically not responsible for maintenance, repair, or replacement of any portion of the dwellings or structures in a site condominium, the association will want to make sure that all co-owners have adequate insurance. In the event of a catastrophe where a unit experiences a total loss, the association will want to make sure insurance coverage exists so that the home is rebuilt expeditiously. Without insurance coverage, the property values of the entire community could suffer as a result of a burned down or collapsed home remaining in the condominium for an extended period of time.
Valuing of Claims
Homeowners insurance is necessary to make sure that you are protected in the event of a catastrophe where the entire home is lost. Without insurance, a homeowner will have to pay out of pocket to rebuild the structure and will still be responsible for making all of the payments due on the mortgage. The same goes for valuable personal property such as furniture, jewelry, electronics, and clothing located within your home. Optional coverage may also be purchased for loss of use of your home if you are required to stay in a rental home or hotel while the necessary repairs are made.
If you suffer a loss and file a claim, you will need to know how the insurance adjustor will value your claim. Insurance policies distinguish between “replacement value” and “repair cost” as a means of determining the value of your claim. A policy that pays the “replacement value” is considered the best form of coverage as it would pay the cost to rebuild or repair your property to its original condition using the same materials. A policy that pays the “repair cost” is similar to a “replacement value” policy, however the property would not need to be rebuilt in the exact same condition. A “repair cost” policy would only pay the cost to rebuild or repair the property in a similar condition. This means that if cheaper materials could be used, the policy will only pay the cheaper price even though your home had more expensive materials.
With respect to personal contents, most insurance policies distinguish between “replacement value” and “actual cash value.” A replacement value policy would pay out the cost to replace a covered item, for example a laptop computer, with the cost to replace the damaged item with an item that is substantially similar based on current market prices. In contrast, an “actual cash value” policy would apply depreciation against the lost item which lowers the amount of the claim significantly. The cost of your premiums are of course dictated, in part, by the amount of coverage you have, the type of coverage you have, and the amount of your deductible.
Liability Protection
Aside from protecting your own property from loss, insurance is necessary to protect you from liability to others. Owners of property could be subject to liability if someone is injured on your property, or if your property causes damage to another person’s property. Some examples of potential liability could be if a visitor slipped and fell on an icy driveway or broken steps, if a child was injured in a swimming pool on the property, or if a tree falls from your property and hits or damages another property. In Michigan, a common source of liability in condominiums, particularly during the cold winters, is frozen and bursting water supply lines which cause water damage to neighboring units. Having insurance coverage is necessary to protect homeowners from having to pay an attorney to defend you if you are named in a lawsuit and from having to pay out of pocket for another person’s damages.
Conclusion
Regardless of the type of condominium you live in, insurance will be required to be maintained by the condominium association. Associations should carefully review their insurance coverage with their insurance agent to determine whether there is sufficient coverage for property damage and liability protection. Without sufficient insurance, the only way for the association to generate revenue to rebuild the damaged property or to defend a lawsuit is to levy assessments against the co-owners or obtain a loan. Being under-insured could also be a source of litigation by a co-owner against the association’s directors personally. Associations should also consider aligning maintenance responsibilities with insurance responsibilities when amending their governing documents in an effort to simplify the claims process and to avoid conflicting provisions.
Co-owners should carefully review their condominium documents to confirm they have the required coverage and should review their insurance policies to make sure personal belongings, upgrades to the unit, and loss of use, if desirable, are covered in the event of a loss. Associations should also review and audit the insurance policies of each co-owner at least once per year to ensure that all co-owners have the required insurance coverage. If your association has a co-owner who is not maintaining insurance, you should review your governing documents to determine if the association can purchase a policy on behalf of the unit and assess the costs against the unit.
Brandan A. Hallaq is an attorney with Hirzel Law, PLC where he dedicates the majority of his practice to representing condominium associations and homeowners associations. He litigates cases involving construction defects, contract disputes, shareholder/member disputes, quiet title actions to determine interests in property, enforcement of restrictive covenants, real estate foreclosure actions, and bankruptcy matters representing creditors. He also has experience preparing documents for business and real estate transactions including purchase agreements, franchise agreements, loan/financing documents and commercial and residential leases and mortgages. In each year from 2018 through 2020, he has been recognized as a Rising Star in the area of real estate law by Super Lawyers Magazine, a designation that is given to no more than 2.5% of the attorneys in the State of Michigan each year. Mr. Hallaq obtained his Juris Doctor degree, cum laude, from Wayne State University Law School where he served as an editor on the Wayne Law Review. He can be reached at (248) 986-2290 or at bhallaq@hirzellaw.com.
