It’s not a secret that Michigan condominium associations have experienced increased insurance premiums recently. According to the Community Association Institute,
- 91% of community associations have had their insurance premiums increase.
- 17% had their insurance premiums increase 100% or more.
- 23% changed to surplus lines carriers because of a lack of traditional carriers.
- 20% were unable to obtain insurance from one or more carriers.
There are certainly factors outside of a condominium association’s control: natural disasters across the country, increasing labor and material costs, stricter underwriting requirements, and insurance carriers leaving the condominium market. Fortunately, condominium associations have a relatively simple tool to reduce insurance premiums: an amendment to the master deed and bylaws. This article discusses the insurance framework under the Michigan Condominium Act, the difference between the two most common insurance policies, and how an amendment to the condominium documents can reduce a condominium association’s insurance premiums.
What Insurance is a Michigan Condominium Association Required to Carry?
This may come as a shock, but the Michigan Condominium Act contains minimal substantive insurance requirements for condominium associations. Under Section 56(c) of the Michigan Condominium Act, MCL 559.156(c), a condominium association’s bylaws may contain a provision:
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.
While the Condominium Act allows a condo association’s bylaws to contain provisions regarding insurance, the Administrative Rules for the Condominium Act, Admin R. 559.508, requires a condominium association to carry certain insurance:
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.
Notably, neither the Condominium Act nor the Administrative Rules addresses the extent or amount of insurance that a condominium association is required to carry. Instead, that determination is left to an individual association’s master deed and bylaws.
Types of Insurance Coverage: All In, Single Entity, and Bare Walls
A condominium association’s bylaws will identify the extent of the association’s insurance responsibilities with respect to the common elements, units, and improvements. There are typically three levels of coverage that are available to a condominium association:
- All In Coverage. An “All In” insurance policy provides the broadest coverage.. Under an All In policy, the condominium association is responsible for insuring the common elements, the interior of the unit, and all fixtures within the unit. This includes any improvements or upgrades that a co-owner has made to the unit. Co-owners only need to obtain insurance for their personal property and personal liability.
- Single Entity or Walls In. A “Single Entity” insurance policy, sometimes called “Walls In,” is similar to an All In policy because it requires the condominium association to insure the common elements, interior of the unit, and fixtures within the unit. But unlike an All In policy, a Single Entity policy does not provide coverage for improvements or upgrades made by a co-owner to the unit. Each co-owner is responsible for obtaining insurance on any improvements or upgrades to the unit, their personal property, and personal liability. A condominium association’s bylaws will likely require a Single Entity policy when the Association is responsible for the common elements and “standard items” or “standard improvements.”
- Bare Walls. A “Bare Walls” insurance policy provides the least amount of coverage for the condominium association because it only requires the condominium association to insure the common elements up to the exterior of the unit up to the drywall (i.e., up to the bare wall). Each co-owner is responsible for obtaining insurance on everything within their unit, including appliances, cabinets, floor coverings, wall coverings, and improvements or upgrades.
Premiums typically decrease significantly down this list because the community association’s obligations decrease. For example, an All In policy requires the condominium association to insure nearly everything within the condominium, while a Bare Walls policy requires the association to insure only the building’s structure up to the drywall.
Amending the Condominium Documents to Decrease Insurance Premiums
Switching insurance coverage is not as easy as just calling the insurance. The condominium documents will typically identify the items that the association is responsible for insuring, as well as the co-owners’ insurance responsibilities. The condominium documents need to be enforced as they are written. Therefore, in order to change the level of insurance coverage, the condominium association must first amend its condominium documents.
Under Section 90 of the Michigan Condominium Act, MCL 559.190, an amendment to the condominium documents must be approved by at least two-thirds (2/3) of all co-owners entitled to vote. Note that this is two-thirds of all co-owners, not just the co-owners who attend the meeting or vote on the amendment. An amendment that would decrease the condominium association’s insurance coverage implicitly means that the co-owners would be required to obtain insurance on some of the items that the association formerly insured. In other words, this type of amendment would shift insurance responsibilities from the condominium association to the co-owners. This amendment, therefore, requires a vote of the mortgagees that hold a recorded first mortgage on a unit under Section 90a of the Michigan Condominium Act, MCL 559.190a(9)(d). Accordingly, an amendment that lowers the condominium association’s insurance policy would need to be approved by (1) two-thirds (2/3) of all co-owners, and (2) two-thirds (2/3) of the mortgagees.
During the amendment process, the condominium association should also review the maintenance, repair, and replacement responsibilities in the master deed and bylaws. A typical Bare Walls insurance provision in the bylaws will require the condominium association and co-owners to insure the common elements that each is respectively responsible for under the master deed. The repair and replacement responsibilities in the bylaws should also be reviewed. Taking this holistic approach to the amendment process should ensure that all three responsibilities align: the association is responsible for routine maintenance and repair of a common element, the association is responsible for insuring the common element, and the association is responsible for repairing the common element in the event of an insurable loss (and vice versa for the co-owners).
Key Takeaways for Condo Boards
The condominium insurance market is unlikely to soften in the near term, and Michigan condominium associations that treat their governing documents as a static formality will continue to pay for insurance structures that were drafted decades ago under very different market conditions. The Michigan Condominium Act and Administrative Rules leave the allocation of insurance responsibility between the association and the co-owners largely to the condominium documents. As a result, a condominium association that desires to lower its insurance premiums should consult with the attorneys at Hirzel Law to discuss an amendment project to change the association’s insurance requirement and align maintenance, repair, and replacement responsibilities.
