Individual condominium unit owners typically only have ownership of the space within their units. The common areas and other parts of the building are collectively owned by a condo owners association within which each unit owner has an interest. This separation of ownership interests creates a need for the association to maintain property and liability insurance in addition to each unit owner’s individual insurance policy.
Whose Insures What?
The bylaws or conditions, covenants and restrictions (CC&R) of the association will define what property is owned by the association and is the obligation of the association to insure against damage or loss. Common areas such as parking lots, walkways and landscaping are almost always the responsibility of the association. Less standardized is where in the physical structure of the building the association’s insurance ends and the individual owner’s obligations begins. The interior wall of the unit is usually the dividing line with some association policies covering only up to the studs and beams, while others will extend into the unit to cover the finished interior walls.
Based on the bylaws, the association policy needs to insure the value of real and personal property for which it is obligated. The board of directors of the association determines the replacement value of the insurable property and procures a policy in an amount sufficient to cover the potential loss. In the event of a loss, insurance proceeds will be paid to the association to complete the repairs. Any deductible is also an obligation of the association which either maintains a reserve fund for such expenses or declares a special assessment in which each unit owner must contribute a share of the uncovered loss.
General Liability Insurance
The association is also responsible for procuring liability insurance for bodily injury or property damage to third parties while on the premises it maintains and operates. The liability insurance limits should be in an amount sufficient to cover any foreseeable loss. Because the association is not an individual, it is insured on a commercial general liability (CGL) insurance policy form instead of a personal liability policy which would cover individual owners for liability within their units.
Workers Compensation Insurance
Larger condominiums may employ a property manager and/or maintenance staff. As an employer, the association is obligated to maintain workers compensation insurance in compliance with the state’s statutorily prescribed requirements. To avoid the workers’ compensation requirement, some associations may choose to contract with a company that specializes in property management.
Directors and Officers Liability
Individual unit owners are elected to serve on the board of directors of the association and make decisions in the best interest of all owners. However, disagreements between owners are inevitable and the association should maintain directors and officers (D&O) liability insurance to protect the individuals from any claims arising out of their actions as board members.
Due to the specialized nature of the risks being insured, it is not uncommon for insurers to develop a package of insurance policies encompassing all of the above coverages. The package approach helps to eliminate gaps in coverage versus assembling the different policies from different insurers and may also provide a discount over individually procured policies.