"Given the great interdependence of the condo unit owners in the stacked condo unit situation, mandating condo association insurance or HOA insurance for the entire building is the preferable approach." This one explanatory sentence from the Uniform Condominium Act of 1980 forever transformed condominium association insurance programs.
Prior to the National Conference of Commissioners on Uniform State Laws' ("National Conference") adoption of this act, condominium associations and HOAs customarily insured only a condo building's common elements and limited common elements; condo unit owners were charged with insuring real property unique to and within the individual condo unit, home or townhouse. Beginning with the Uniform Condominium Act and continuing today in the Uniform Common Interest Act, condominium associations and HOAs are advised by the National Conference to insure all real property regardless of location or classification, whether considered a common element, limited common element or part of the defined "condo unit."
Improved loss adjustment is a motivating force behind the National Conference's mandate. Simplified insurance claim management is realized since one carrier adjusts and settles a real property loss rather than several (each with competing interests). Secondary rationale relates to property values. Given that each condo unit owner depends on all other condo unit owners to maintain property values, leaving to chance the rebuilding of a damaged condo unit is unreasonable.
Unit owner-installed improvements excepted from the National Conference's mandate. Condo Associations and HOAs subscribing to this code are not responsible to replace any upgrades made by unit owners. If, for example, the condo unit owner replaces the originally installed laminate countertops with granite, the condo association or HOA is only responsible for the cost to replace the laminate. Updating to granite originally and following a loss is considered an option and the financial responsibility of the condo unit owner. Condo Associations are not necessarily expected to know about such improvements, thus they are not expected to insure them.
States and condo associations that apply the Uniform Common Interest Act (or similarly worded code) as the default insurance requirement are designated as covering property per "original specifications." Original specification requirements dictate that the condo association is responsible for all real property, regardless of location or classification, but only the kind and quality originally installed by the association developer and/or required in the condo association bylaws.
"Original specifications" is but one of three condominium association insurance coverage or HOA insurance coverage mandates commonly found in statute and condo association bylaws. "All in" and "bare walls" are the two other condo insurance settlement provisions. Each will be explored in the following paragraphs.
Original Specifications
Original specification protection, also known as "single entity insurance coverage," was described above. Restated, the condo association is responsible for all real property; but only the cost necessary to return the condo building and condo units to their original condition using materials of like kind and quality. Condo unit owner upgrades are not included in original specification loss settlements.
Developing replacement cost values may be easiest when single entity condo insurance requirements are applied as valuation programs and original specification requirements overlap in their result and mandate. Property valuation programs calculate the cost of rebuilding the structure utilizing modern materials of like kind and quality; and original specification insurance requirements limit associational responsibility to the cost of replacing original construction materials with modern materials of like kind and quality.
A majority of states has adopted the mandates of the Uniform Common Interest Act, as written or with jurisdictional modifications, to statutorily govern the insurance requirements of condominium associations. However, this wording has been challenged in a recent Maryland court case.
Maryland statute read as though it was cut-and-pasted directly from the Act, yet the Maryland Court of Appeals recently ruled in direct contradiction to its own statute. The ruling will have unknown and maybe adverse affects in all states employing original specifications statutes.
All In
"All in" (a.k.a. "all inclusive") statutes and condo bylaws are similar to single entity requirements. Condo Associations are responsible for insuring common elements, limited common elements and all real property that makes up a "unit."
All inclusive statutes differ from original specifications in one major respect: the condo association or homeowners association is not only responsible for all real property, but it is also charged with insuring condo unit owner-installed upgrades. Statutes and condo association bylaws mandating coverage on an all inclusive basis increase a condo association's standard of care. Condo Associations subject to this HOA insurance settlement mandate are forced to closely monitor building and unit values (including value increases created solely by a unit owner) to avoid inadequate condo insurance and a possible coinsurance penalty.
Few states apply Condominium Act terminology that could be exclusively interpreted as "all in."
Bare Walls
"Bare walls" is the last of the three commonly encountered condo association insurance requirements and HOA insurance requirements. Bare wall settlement provisions were the standard before the Uniform Condominium Act of 1980.
States applying this code limit the condo association's insurance responsibility to the building's common elements and limited common elements. Unit owners are responsible for insuring all real property defined to be a part of the "unit."
At issue is the definition of "condo unit or HOA unit." "Condo Unit" does not have a universal definition among states, nor is the term uniformly established in association bylaws. Condo unit boundaries, the beginning of the area the condo association is NOT responsible for insuring, can be everything from the studs; or the unfinished walls (meaning the paint is insured by the unit owner); or the sub-floor and underside of the ceiling; or any other variation. Problems with such diverse boundary definitions are compounded by the potential confusion surrounding interior partition walls that may contain limited common elements.
Claims management in a bare walls situation can be a long and possibly litigious process. First, valuing a bare walls property can be difficult for both the condo association's insurance carrier and the unit owner's condo insurance carrier or HOA insurance carrier. Second, deciding who is responsible to rebuild or replace which real property must be debated. Then all involved condo association insurance and HOA insurance carriers must agree to a builder and coordination of payments (involving multiple deductibles).
Conflict continues if the condo unit owner does not have condo insurance coverage, or enough condo insurance coverage, to rebuild what is defined as the "condo unit." Contractors will not just leave the condo unit unfinished. Interior walls often contain limited common elements (such as electrical, HVAC, possibly fire protection, water lines and other such equipment) that cannot be left exposed. Condo Assessments, liens, foreclosures and/or court action may follow.
Condo associations generally try to avoid condo insurance coverage conflicts by requiring the condo unit owner to purchase and maintain condo insurance coverage on the defined "condo unit." Some condo association bylaws go so far as to require the condo unit owner to place condo insurance coverage with the same condo association insurance carrier providing the condo association's coverage
While such required condo insurance coverage is a good solution to potential problems created by bare walls condo insurance provisions, two questions arise:
1. Who deciphers the definition of a "condo unit" allowing the condo unit owner, the condo association and the respective condo insurance and condo association insurance carriers to know who is responsible to insure what? and
2. Who calculates the amount of insurance coverage needed?
Attorneys, appraisers, agents and other professionals may be required to answer these questions and design the correct programs (one for the condo association and a separated one for each condo unit owner). A lot of professional expertise is required to avoid condo insurance disputes.
Dividing responsibility for insuring real property may not be the most advantageous for the condo association or the condo unit owner; however, there are several states that still apply some form of bare walls wording in their statute.
Conclusion
As previously stated, statutes are condo association insurance default settings. Condo Association bylaws and condo declarations are the governing condo documents of all condo associations. These condo documents supersede statute as per the statute itself. Division of condo association ownership and condo insurance interests is dictated by these condo documents allowing condo associations to adopt their own condo rules regarding condo insurance coverage and condo insurance requirements. Condo Associations can chose among original specifications, all in or bare walls as they desire.
Insuring condo associations and individual condo unit owners within a condo association is not "cookie-cutter" insurance. Statutory, bylaw and valuation requirements must be factored into any condo association insurance program involving common ownership of real property.