Understanding condo insurance

By Dean Lerner

Dean Lerner is an executive vice president with Sudler Property Management and the account supervisor for Malibu East.

Homeowner’s insurance for the condominium unit owner is important to understand, but insurance coverage and insurance terms can be confusing, with many gray areas. This article will attempt to help you understand the basics of what you need to insure, what the Association insures, and how the various policies act under most typical losses.

There are two insurances to distinguish and understand: the homeowner’s and the Association’s. Along with understanding your own homeowner insurance policies is the need to have a basic knowledge of your condominium association’s insurance policies, your individual ownership insurable responsibilities, and how your policy and the Association’s policies interact.

A common misconception among condominium unit owners and renters is that the Association’s insurance policies cover the building and common areas, as well as the units – for losses to personal property contained inside the units. This is NOT the case; the Association’s insurance policies do not cover the units.

The Association’s master insurance policy exclusively covers the building’s common components (facades, roof, elevators, etc., and areas (Receiving Room, offices, lobby, etc.), and exclude the personal property inside the units (cabinets, individual plumbing, electrical and HVAC, floor finishes, doors, ceramics, furniture, etc.), bicycle rooms and storage lockers.

Insurance is the transfer of risk (of a loss) from yourself to someone else (an insurance company). The terms under which you are paid for a loss are detailed in an insurance policy. Regardless of anything you are told by an insurance agent, the only coverage you have is what is written in your insurance policy. The policy is the “bible of your coverage” and is what your insurance company will look to and stand behind when you file a claim. Understanding your policy’s contents – including all rights, responsibilities, inclusions and exclusions – is critical. Having an understanding of homeowner coverage and planning for what you need, and want, to cover before a loss occurs is an absolute.

Homeowner property insurance, commonly referred to as an HO-6 policy, is a policy that pays you cash and/or covers other expenses for the loss of your own property. If the unit is burglarized, damaged by flood or fire regardless of whether the disaster is caused by others, or a guest injures themself inside the unit, the owner’s condominium insurance policy responds to protect you as the unit owner against damage to property you own personally and/or your personal liability. Your “property” does not end with items such as your couch, rugs, TVs, computers, betterments and improvements, hard covering flooring, carpet, windows and window systems*, clothes and appliances, but also must include items you keep stored outside of your condominium such as a bicycle or the contents of a storage locker. HO‑6 policies also provide insurance coverage for the structural parts of the building that you own. Items such as jewelry, cash and artwork require a separate policy specific to those items as they are generally excluded from coverage under a general property policy due to their possible high values.

*Windows and window systems – Your Declaration, Bylaws, and Rules and Regulations dictate ownership of the windows and window components/systems in your home. This includes the glass/glazing, frames, casements, sills, etc. At Malibu East the windows are the property of the unit owner.

In addition, personal property coverage responsibilities include the construction components that exclusively serve your condo, regardless if they are hidden in walls, floors or ceilings:

  • Electrical wiring and switches
  • Plumbing pipes
  • Heating and condensing pipes and connections
  • Your insurable property responsibilities may also include:
  • HVAC system
  • Water heater
  • Entry doors and windows
  • Balconies

Proof of property insurance is typically a requirement of mortgage companies.

Remember that the common areas, such as the land, building facades, roof and lobby, are examples of what is covered under the Association’s master insurance policy.

Condominium owners need to take into consideration what coverage might be required for their individual unit based on what is specifically outlined in the insurance section of the Association’s Bylaws. The intent of the Sudler master property policy is to “dovetail” with the Association’s Bylaws to provide coverage for the common property that is deemed to be the responsibility of the Association to insure.

Owner’s responsibility: Real and personal property

  • All components of a unit that is built, erected, installed, put in place for the sole usage of the occupants of the unit.
  • Decorating items such as paint, wallpaper, paneling, marble, mirrors, window treatments and fixtures (i.e., items that are considered permanently installed).
  • Flooring, trim, built-in appliances, cabinets and similar items.
  • All improvements and betterments made by the unit owner and/or previous unit owners.
  • Your insurance agent can assist you with determining an appropriate value limit of insurance based on your individual needs.

Owner/renter’s separate responsibility: Personal property or unaffixed contents

  • Household contents (furnishings, clothing, dishes, appliances, etc.).
  • Storage locker contents and bikes, including those stored in the Bicycle Room.
  • Personal property in vehicles.
  • Jewelry, art or other valuables to which certain coverage limitations may apply.
  • You should list high-end antiques, collectibles and jewelry separately on the policy; limitations apply on payouts for these types of items when lumped in as general personal property. Supply the insurance carrier with any needed appraisals as proof of value for high-dollar items.
  • Your insurance agent can assist you with determining an appropriate limit of insurance based on your individual needs.
  • It is recommended that you maintain an inventory of all of your personal possessions in the event of a claim. Pictures and receipts are very helpful. Keep your inventory physically off site and/or electronically in the “cloud” in the event of a loss inside your home. Keep handy the serial numbers of all electronics such as mobile phones, tablets and laptops.

Owner/renter’s separate responsibility: Loss of use; additional living expense

In the event there is a covered loss and you cannot live in your residence, this coverage pays the additional expenses to reside elsewhere until the repairs have been made in the unit.

Owner’s liability policy

A liability policy serves a dual role. Liability coverage protects you and pays for someone who is injured inside your home, or someone you hire and is injured in your unit, or a person associated with you who damages condominium property while in the common areas. Secondly, a liability policy pays for damage to other residents and the Association resulting from an event/loss originating from your home. Liability includes both bodily injury and property damage to third parties, including other unit owners and the Association. Many people are under the impression that they must be negligent in causing a loss to be responsible for damage to someone else’s property. This is not true. A loss originating from your home that causes damage to someone else’s property, including the Association’s, is your responsibility to pay for.

Malibu East requires that you carry and provide proof of liability insurance in a minimum amount of $500,000.

Proof of this coverage is provided through a certificate of insurance. Liability insurance may also be a requirement of your mortgage company. Section 12(3)(h) of the Illinois Condominium Property Act speaks to mandatory unit owner coverage: “The board may, under the declaration and bylaws or by rule, require condominium unit owners to obtain insurance covering their personal liability and compensatory (but not consequential) damages to another unit caused by the negligence of the owner or his or her guests, residents, or invitees, or regardless of any negligence originating from the unit. The personal liability of a unit owner or association member must include the deductible of the owner whose unit was damaged, any damage not covered by insurance required by this subsection, as well as the decorating, painting, wall and floor coverings, trim, appliances, equipment and other furnishings.”

Subrogation and waiver of subrogation – Subrogation is a process whereby one insurance policy demands a “refund” from another insurance policy for a loss caused by an individual. For example, if you have a loss caused by your neighbor and you report the loss to your insurance policy and they pay for your loss, they then (usually) subrogate to the policy/owner who caused the loss (for reimbursement to them for what they paid you for your loss). In Illinois there is a mandatory waiver of subrogation between insurers. Section 12(3)(e) of the Condo Act speaks to “Waiver of subrogation.”

Additional coverages to consider

  • Backup of sewer or drains – This type of loss may not always be included in the policy and can be added to the policy for an additional premium.
  • Loss assessment – Most condominium policies provide a specified limit for covered losses that all unit owners might be assessed based on the Association’s property deductible (which is $10,000 for most covered perils) pursuant to Illinois law. This limit can typically be increased for an additional premium.
  • Earthquake coverage.
  • Replacement cost contents coverage (in lieu of actual cash or depreciated value).
  • Replacement cost for inside wall coverage (in lieu of actual cash or depreciated value).
  • Additional coverage enhancements may be available, which will vary by insurance company.

Who pays for what?

Example 1 – loss resulting from an owner’s property/issue (e.g., dishwasher breaks, toilet leaks, water supply lines both in apartments and inside the walls of a unit, hot water tanks, shower leaks, fire in a unit and resulting water and smoke damage): While each event’s circumstances must be looked at, losses such as those detailed above will generally become the total responsibility of the owner of the unit where the event originated. This includes paying for the investigation, cleanup from the loss, and the remediation and repairs to common areas and inside each affected unit.

Damage to Association property: Cleanup of affected areas in a loss, repairs to common elements and other associated costs are the responsibility of the unit owner up to the Association’s deductible value. The Association’s property policy deductible is $10,000, excluding water losses. The water loss deductible is $25,000. The owner who is responsible for the loss to the Association’s property may be charged the applicable deductible of the Association. Section 12(3)(c) of the Illinois Condominium Property Act gives the Association’s Board of Directors the authority to charge the owner the Association’s deductible. You should understand whether your policy will cover you for this charge and under what circumstances this coverage may be denied. Even if you do not have insurance coverage for this deductible, you may be charged and responsible for payment to the Association for its out-of-pocket cost/deductible.

Example 2 – loss originating from the Association’s property: This type of loss may come from a number of issues, including water coming from the outside of the building and into a unit, a break or backup in a common-area pipe, fire, smoke or other type of loss. In a loss originating from a common area, the Association is responsible for the cleanup of the affected areas and repair/replacement of affected drywall in the affected units. However, the Association’s policies do not cover personal items, betterments and improvements such as hard surface floors, loss of use of the home, etc. (these should be covered by your homeowner’s policy).

Logic would say that if you are the “victim” of a loss, you should have no inconvenience and no out-of-pocket expenses, including the need to file a claim with your own insurance policy. In reality you may have to, at a minimum, notify your insurance agent of a potential loss at the time you are aware of it, and, in reality, may have to file a claim. As a rule of thumb, insurance companies like collecting premiums and strongly resist paying claims, usually looking for another policy to pick up the loss/claim and take responsibility for the loss. You may feel like the victim of a loss even if the loss is generated from your property (e.g., your dishwasher water supply line breaks or your toilet waste line breaks), but items such as these are your responsibility as an owner.

Questions to ask your insurance agent

  • Fully explain my content coverage to me. How does this policy work? Are there any exclusions? Do I have enough coverage in the event there is a total loss in my home?
  • In the event of a total loss in my home, is there enough coverage to remove everything from my home, pay for a place for me to live, reconstruct my home (including walls, appliances, pipes, wiring/electrical, HVAC, floors, ceilings, wallpaper, mirrors, etc.) and repurchase the unaffixed content (rugs, appliances, furniture, clothing, jewelry, artwork, etc.)?
  • What exclusions are there on each of my policies? Fully explain each circumstance where these exclusions would apply.
  • Am I covered if the Association charges me the master insurance policy deductible (currently $10,000 for non-water losses and $25,000 for water losses) because I am involved in the loss to the Association? Are there any circumstances in which I would not be covered for this chargeback?
  • What happens to me, my contents and my home in the event there is a fire in my home? What will happen to my clothes, furniture, walls, appliances, artwork, jewelry, flooring, etc.? Where will I live while my home is uninhabitable? What coverage do I have if someone is injured as a result of a fire in or originating from my home? What coverage do I have if there is fire in my building, but not inside my home, and I have smoke and/or water damage as a result?

You should not buy insurance based strictly on the annual premium. For your protection, understand your needs and requirements for insurance, and buy the best insurance coverage you can to match your needs. Remember your insurance agent will not be held responsible if you are missing coverage or are underinsured.

The earlier and more thoroughly you plan, the better the odds that your insurance policies will act as you expect them to when you need them.

For definitions of insurance terms used in this article, click here