Introduction
Condominium insurance for units and common elements within the condominium requires the coordination of two different types of insurance. The first type of insurance is the master condominium policy purchased by the condominium association, which is also known as a “CGL” or commercial general liability policy. The second type of insurance is the unit insurance policy purchased by the individual unit co-owner which is most often the “HO-6” or Homeowners Policy Unit Owners Form 6. The extent of the property covered by the master condominium insurance policy and the unit insurance policy is determined by the condominium bylaws and in consultation with the insurance agents for the condominium association and unit co-owner.
The Condominium CGL Insurance Policy
The premium for the master condominium insurance policy is paid by the condominium association. All of the co-owners within a condominium contribute towards the costs of the master condominium insurance policy as part of their annual assessments as a cost of administration. The master condominium insurance policy is responsible for providing coverage for property damage and general liability for the association. In general, the property covered by the master condominium insurance policy is going to include, in all cases, the general common elements of the condominium and, in many cases, the limited common elements. Examples of general common elements would include common hallways, common stairways, elevators, walkways, the clubhouse and pool (if any), and in many cases the siding, building components, and roofing of the condominium buildings. Examples of limited common elements often include decks, patios, porches, windows, doors, and, in some cases, driveways and individual unit walkways.
The HO-6 Policy for Condominium Units
The premium for the co-owner’s unit insurance policy is paid by the individual unit co-owner that owns the unit being insured. The co-owner’s insurance policy is responsible for providing coverage that applies to the real property interest and the personal property of the individual co-owner and provides personal liability coverage for that co-owner. The two most common forms of insurance for a Co-owner Policy are: (1) the Homeowners Policy Unit Owners Form 3 (“HO-3”); and the Homeowners Policy Unit Owners Form 6 (“HO-6”).
An HO-3 Policy is the most common type of homeowners insurance. It usually includes “open peril” coverage for the homeowner’s dwelling and “named peril” coverage for the owner’s personal property. Significantly, an HO-3 policy protects the physical structure of the owner’s home. The HO-3 Policy provides for open peril coverage in large part because when an HO-3 Policy is purchased there is often no master condominium insurance policy to coordinate with and the risk of loss rests entirely with the homeowner. While an HO-3 Policy is the most common type of homeowner’s insurance, it is not the most common type of insurance for co-owners within condominiums, and it is typically only used to cover single-family homes in community associations.
The most common type of owner’s policy applicable to condominiums is the HO-6 Policy because condominiums and other community associations will often have a master condominium insurance policy in place which already insures the building structure and other common elements rendering the dwelling coverage provided by an HO-3 Policy as largely unnecessary. The HO-6 Policy will cover the co-owner’s unit but not the entire building nor the common areas of the condominium maintained by the condominium association. The HO-6 Policy will provide personal liability coverage and covers condominium units on a “named peril” basis and not on an “open peril” basis. The HO-6 Policy form is similar to the HO-3 but provides less property coverage as it is designed to coordinate coverage with the master condominium insurance policy covering the building structure and common elements that are maintained by the condominium association.
At the same time, however, the extent of the coverages applicable to a particular policy, whether it be a Master Policy, HO-3 Policy, or HO-6 Policy are not always the same and can be modified. In addition, the scope of coverage purchased under any policy is going to be guided by the insurance requirements of the condominium bylaws. Therefore, in a condominium setting it is important to understand the requirements of the bylaws and the type of insurance being provided under both types of policies to effectively coordinate the master condominium insurance policy and the unit co-owner’s policy, especially since the HO-6 Policy is provided on a “named peril” basis and not an “open peril” basis.
How should the CGL and HO-6 Insurance Policies in a Condominium be Coordinated?
In some instances, failing to effectively coordinate coverage could result in a situation where a loss is believed to have been covered, but is not. For example, coverage under a master condominium insurance policy can be limited to the structure of the buildings and the community accessible common areas, or it can include all structures, all common elements, and also include all improvements and betterments within a condominium unit such as counters, floors and cabinetry. Master Policies can range from a “Bare Walls Policy” (often covering only up to the drywall of a particular unit); to a “Builder’s Spec Policy” (covering the surfaces, walls, items, and fixtures originally built during construction); to an “All-In Policy”, which would provide more expansive coverage for unit interiors, subject to exceptions. If the association only purchases a “Bare Walls Policy” or a “Builder’s Spec Policy” but the co-owner’s HO-6 Policy does not insure improvements and betterments within the unit, then in the event of a loss requiring restoration of the unit, the co-owner may find that the renovations they made to improve the unit since it was first built are not covered under either the master condominium insurance policy or their own HO-6 Policy.
In addition, improperly coordinating coverages under the master condominium insurance policy and the HO-6 Policy can have a negative impact on the administration of the condominium. For example, underwriting guidelines for condominium loans guaranteed by the Federal Home Loans Mortgage Corporation (“Freddie Mac”) require that the master condominium insurance policy insure the building and structures in the condominium as well as the fixtures, machinery, equipment, and supplies maintained for the service of the condominium. However, if required by the condominium documents, the master condominium insurance policy must also insure the fixtures, improvements, alterations and equipment within the individual condominium units, regardless of ownership. If the master condominium insurance policy does not cover the interior of the unit or the improvements to the unit, then the owner must have an HO-6 Policy and the HO-6 Policy must be sufficient to repair the unit to at least its condition prior to an occurrence resulting in a claim. If the master condominium insurance policy coverage is inconsistent with the condominium association’s responsibilities under the condominium bylaws, then the association’s insurance may not meet Freddie Mac underwriting guidelines and, as a consequence, co-owners may have difficulty selling their units since the pool of individuals qualified to borrow sufficient funds would be significantly reduced.
Finally, ensuring that adequate coverage exists can result in instances of overlapping coverage. Overlapping insurance coverage occurs when two or more insurance policies duplicate coverage for a certain hazard in whole or in part. While there are several circumstances in which there may be overlapping coverage, in the condominium setting the most common situation occurs when both a co-owner and the condominium association purchase separate insurance policies which cover the same property within the condominium and each policy would apply to the same loss.
There are at least two potential negative outcomes that can result in overlapping coverage. First, both the condominium association and the co-owner are paying a separate premium for the same risk. Depending on the size of the condominium, the increase in premium associated with insuring the same risk twice, even if only a small percentage of the overall premium, would result in a collective overpayment for a single risk. This overpayment will never be recovered because a double-recovery for the same loss will never be allowed. Second, in instances of overlapping coverage, insurance companies may dispute which insurer should be primarily responsible for covering the loss and which insurer should be secondary. If both insurers take the position that their insured is not primarily responsible for the loss, then without any sense of irony, even in an instance where an insured believes they are “double-covered” they may end up with an insurance dispute as both insurers might deny the claim.
Do you Need to Amend the Insurance Provisions of your Condominium Bylaws?
In order to address the above issues, it is important that a condo association periodically review the insurance requirements under its bylaws and assess both its own master condominium insurance policy and the types of HO-6 (or HO-3) policies that are being purchased by co-owners. These provisions should be updated to provide clarity as to which party is responsible for providing coverage and, in cases of overlapping coverage, which insurer is primary and which is secondary. Issues to consider include:
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- Do the master deed and condominium clearly identify which parties are responsible for repair and replacement of damaged items within the condominium?
- Do the condominium bylaws clearly describe the insurance required to be a part of the master condominium insurance policy?
- Do the condominium bylaws clearly describe the co-owner’s obligations regarding the insurance of their unit?
- Does the master condominium insurance policy address improvements and betterments?
- Do the condominium bylaws contain a provision addressing overlapping coverage?
Being fully informed as to the scope of coverages required by the condominium bylaws and updating them as needed is critical to effectively coordinating the condominium association’s insurance responsibilities and those of the co-owners. By way of example, our office typically recommends that the insurance responsibilities of the co-owner and condominium association align with the repair and replacement responsibilities of each, and that it be mandatory for each co-owner to procure insurance for their unit. In addition, we recommend that the insurance provisions of the bylaws include a description of the circumstances when each type of insurance is primary and when it is secondary. These are some steps that can be taken to potentially avoid some of the issues described above.
Summary
Ultimately, determining the types of insurance coverage best suited to a particular community association requires a review of both the condominium’s governing documents and thoughtful discussion with an experienced insurance agent. In some instances, the condominium bylaws will fully address the issues set forth above, and in such circumstances determining the best type of insurance may be limited to consultation with an insurance agent. In other instances, however, the condominium bylaws will not address the above issues and may not provide the clarity needed to effectively and efficiently coordinate the insurance procured by the condominium association under the master condominium insurance policy with the insurance procured by the individual co-owner under the co-owner’s HO-6 (or HO-3) policy. Condominium bylaws which do not clearly define the parties’ obligations regarding insurance should be reviewed for potential amendment in order to avoid these issues.
Matthew W. Heron is a Member at Hirzel Law, PLC where he concentrates his practice in real estate, community association law, condominium law, real estate litigation, and zoning and land use. Mr. Heron also has extensive experience in a variety of litigation matters, including insurance coverage, non-compete agreements, automotive supplier disputes, and breach of contract. He routinely appears in both federal and state courts throughout Michigan and has argued before the Michigan Court of Appeals and the Court of Appeals for the Sixth Circuit. He can be reached at (248) 986-2290.
