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