For condo association insurance - in the event of a loss of covered property, the payment of the policyholder will be valued based on:

• Guaranteed Replacement Cost - replacement cost with no limit and does not state a specific property limit
• Replacement Cost - payment for the loss is based on the actual replacement and may be limited to stated value
• Actual Cash Value - loss payments are based on the cost of new product, less depreciation and usage

Because it can be more efficient or economical, your condo association may insure all the building and common elements under a single package policy, commonly called an condo association insurance policy or condo association master insurance policy. The three typical ways to provide coverage, all through a condo association insurance policy:

1. Insures the basic condo association building(s) (walls, roof, floors, elevators) but leaves the condo owner the responsibility of insuring condo unit's appliances, carpeting, cabinets, wall coverings, and other items in your condo unit, and in some instances the interior walls.
2. Insures both the basic building(s) and the items within your condo unit other than personal property.
3. Insures both basic condo assocaition building(s) and includes unit owner fixtures and improvements.

When the condo association insures the structure, a condo insurance policy is normally written to cover the condo unit owner for.

• Items not covered by the condo association insurance  policy that may be your condo insurance responsibility.
• The value of building additions or alterations made by you, at your expense.
• Value added (If you've put in a better quality carpet than was originally there, for example, this coverage would make up the difference in case of loss).
• Damage to your condo unit not compensated because of the condo association policy deductible.

Condo Association building coverage is one of the more complex parts of insuring a condo association.

In other instances, the condo association does not insure the structure. In this situation, a condo insurance policy would be written for the condo unit owner, just as it would be for an insured person with a conventional home.

Remember, however, that conditions in condo association bylaws and other governing regulations may vary widely. Be certain that your condo insurance policy covers any potential gaps in the condo association insurance policy.

What is a condo association master insurance policy?

Q: I currently serve on the board of my condominium association and am running to serve for another year. With the new statutes passed last year, for the first time I have been asked to sign a certification form stating that I have read and understand the statutes and declaration of condominium for my community. Also, our condo association attorney informs us that there are new provisions in the Condominium Act that appear to require new duties for association directors. The condo board president tells me that I should not be worried because the condo association carries directors and officers liability insurance. My question is, how much directors and officers liability insurance is enough, and what happens if somebody makes a claim against the directors in excess of the directors and officers liability policy limit? I enjoy serving on the condominium board, but I certainly do not want to put any of my personal assets at risk. N.N. (via e-mail)

A: You are correct that many new provisions were added to the Florida Condominium Act in 2008. It is not clear yet what the legal effect of the changes regarding a director's liability will be. As you probably know since you have served on the condo board previously, directors have always had a fiduciary duty to be reasonably well informed and to investigate and make a good faith evaluation of issues before voting. Directors have also always been required to keep reasonably apprised of association activities. Therefore, from one point of view, nothing has changed with the new statutes except that previously existing fiduciary duties have been expressly codified in the Condominium Act.

The new provisions in the Condominium Act concerning a director's duty of care are basically the same duties that have been found in the Florida corporate statutes for many years. Only time and perhaps some appellate court decisions will tell whether the new certification requirement for condo board directors, or the inclusion of director and officer liability standards in the Condominium Act, change existing condo law.

The answer to your first question is that the condo board should consult with the condo association insurance broker/agent as to the appropriate amount of directors and officers insurance coverage (usually referred to as theD&O policy). A million dollars coverage is probably the bare bones minimum. It is my understanding that coverage of three million, or even five million, can be obtained for a modestly higher premium. Obviously, the size of your association and the nature of your operation has some bearing on risk and the best balance between coverage and cost control.

In answer to your second question, the Florida statutes permit the bylaws of the association to contain comprehensive indemnification provisions which could become extremely important should insurance coverage not be adequate to cover a claim against you arising from board service. You may want to ask the board to check with the association's counsel to ensure that your bylaws contain thorough indemnification provisions. If a claim against a director exceeds the amount of insurance coverage, indemnification means that the entire community essentially acts as your insurer. However, there will likely be no insurance coverage and no right to indemnification in the event criminal action, fraudulent acts, or if willful or reckless misconduct or self-dealing is established.

The condominium association insurance or HOA insurance sector is particularly vulnerable to insurance premium hikes. Unit owner assessments, the market value of a condo, and other variables are impacted not just by hurricane activity itself, but by the financial aftermath of increasing condominium association insurance premiums. As rates continue to fall, a pessimist would note that we are just one large storm away from a similar reaction by the insurance industry.  2004 & 2005 combined to equal over $100 billion in insurable losses and now rates are quickly approaching 2004 levels. For now, condominium association insurance premiums are falling as unit owners of condominium associations hope for a continued slide in premiums, which is expected as we enter 2008.

If the condo building is not covered for an amount that will adequately replace the building in the event of a total loss, there can be major problems, even if the condo building is not completely destroyed.

By not insuring for the amount the condo building is valued at, you can trigger a condo association policy's co-insurance clause. Co-insurance states that if the insured condo association has not properly valued the replacement cost of the building, the insurance company can reduce a claim settlement to reflect the proportional amount that you insured, and then reduce it further by whatever the penalty is in the contract. An example of how this works is if the actual replacement cost of the building is $1,000 and you only insure it for $800, you have now only insured to 80 percent of the building's value. You now have a $300 loss. They will say that you underinsured by 20 percent, so if there is a 150 percent co-insurance penalty, you will be penalized 30 percent on your claim settlement. They will pay you only $210. Now subtract your deductible and that will be the check that you receive.

On the other side, if the building is overvalued, you may be paying money for condo association insurance coverage that is not necessary, which will end up wasting the condo association's money.

How is a lay condo board supposed to come up with a proper valuation for the cost of rebuilding? Our solution to this problem is to provide the board with a Marshall and Swift replacement cost worksheet so that you can feel comfortable with value used to protect your condo association assets

More about condo association insurance and HOA insurance

It is common to see that the association manager has been left off the D&O coverage in a condo association insurance or HOA insurance policy. On most condo association insurance policies, this is not fixed by a typical additional insured endorsement as it is with general liability coverage. They normally charge extra premium and ask additional questions about the association manager to allow for the D&O coverage. This is important coverage because an error of communication can create a situation where this type of suit can happen.

An example of this is when the board has put condo rules in place where late pays will not be tolerated. If you have been late two months in a row, they will begin legal proceedings against the owner. If, for example, the first month the owner pays late by a few days and the next month he is accidentally left on the list of delinquent owners, the board will file suit against the owner. The owner will counter-sue for defamation of character. Without the condo association manager being named to the D&O coverage, there will be no condo association insurance or HOA insurance coverage for the claim.