One of the most important variables that will affect how much coverage your association needs to buy is the insurance clause of your CC&Rs. The big question is who is responsible for insuring the interior betterments within the units. By interior betterments we are referring to the bathroom fixtures, kitchen cabinetry, built in appliances, floor coverings, and wall coverings. The policy that you purchase must match your association’s CC&Rs exactly or you can end up with major problems.
There are basically three ways to insure an association:
Bare Walls – This means the association is only responsible for insuring to the dry wall. All improvements within the unit are the responsibility of the unit owner to insure.
Full Coverage of Unit Interiors – This means that the association is responsible for insuring all of the improvements
Original Building Standard within the unit – This means that the association is responsible for insuring the interiors to whatever was in the units at the time they were built.
IF YOU DO NOT HAVE COVERAGE THAT IS IN STRICT COMPLIANCE WITH YOUR CC&Rs YOU AND YOUR ASSOCIATION COULD FACE SOME SERIOUS CONSEQUENCES IN THE EVENT OF A CLAIM.
Here’s what could happen:
Scenario 1
Let’s say that your association has purchased a policy to insure to the Bare Walls and you and your agent were not aware that your CC&Rs dictate that your policy cover Full Coverage of Unit Interiors. In this case you would be severely underinsured and will undoubtedly face the daunting task of coming up with all the money needed to repair the damage after an earthquake. So, if the cost of construction is $150 per foot and you only insured it for $90 because you didn’t realize that you needed to insure the interiors, you are underinsured by $60 a foot. When we do the math on a 10,000 sq ft association, which is small, you would come up $600,000 short in the event of a catastrophic earthquake. That’s a pretty nasty special assessment, on top of the special assessment of 10-20% of the total insurable value of the complex to cover the deductible.
Scenario 2
If the association paid for Full Coverage of Unit Interiors but was required by the CC&Rs to insure only to the Bare Walls, you will have purchased more coverage than you actually needed. In addition, because the deductible is based on the total insurable value of the complex you will also have increased your deductible as well. If we use our previous example of 10,000 sq ft, you have over insured the complex by $600,000. That means you will have spent more money on premium (figure about 45% of your premium) in addition to having increased your deductible by $60,000. The sad truth is that you will have effectively purchased less coverage for more money, not an ideal situation by any means. Unfortunately is gets even worse. Many owners, believing the association has purchased coverage to include their interiors, will not purchase their own unit owner policies.
Do you want to be the board member that gives them that little piece of bad news?
This is why it is critical to have a broker that specializes in earthquake insurance and condominium associations. You deserve and should demand this level of knowledge and expertise from your broker. At Elliot Katzovitz Insurance Agency we have made it our specialty and are experts at understanding and meeting the needs of condominium associations. Find out how we are different. All you need to do is click the request a proposal button and you will be on your way.
