J & N REALTY, INC.

Condo Insurance Program  

My daughters, Taylor and Emma, asked me to help them assemble a jigsaw puzzle they dumped on the floor hours earlier.  We reached the final piece and could not find it anywhere.  We scoured the playroom searching for the one component needed to complete the picture, giving up after 20 minutes.  I found the missing piece the next day and finished the job - it was a picture of a fish. 

Completing the condominium insurance picture necessitates the same "jigsaw puzzle" tenacity.  A lot of pieces must be snapped together to assure a proper insurance picture; any missing information can leave an incomplete picture and gaping hole in either the association's or unit owner's coverage. 

Agents designing coverage for the unit owner require the same information as the association's agent or broker.  Regardless of the client's status as an association or individual unit owner, the puzzle cannot be completed until the agent can connect the answers to two questions: 
1. Who is responsible for what property?
2. What is the value of the insured property? 

Who Insures What? 

Three definitions of associational responsibility delineate which entity insures what property.  Each definition is viewed from the association's perspective - what the association is responsible to insure.  Property not insured by the association must be protected by the unit owner's insurance policy. 

"Original specifications," "all-in" and "bare walls" are the three classifications of associational responsibility.  To fully understand the provisions of these classifications requires the defining of the four categories of condominium real property.  Condominium real property can be categorized as a common element, a limited common element, "unit" property or a unit improvement or betterment. 

Condominium Real Property Definitions 

Common elements are owned by and benefit all members of the association.  This includes land, parking lots and each building's structural foundations and load-bearing walls.  Also included are clubhouses, pool houses, pools, fences, gates, playground equipment, tennis courts, and other property owned and allocated to all unit owners.  Not all property categorized as a common element is insurable in standard property policies, but most can be scheduled. 

Limited common elements are beneficial to more than one but less than all unit owners.  This can include common hallways and corridors accessing several units, walls and columns containing electrical wiring or sprinkler piping serving or protecting multiple units or a plenum enclosure providing heating and cooling to multiple units.  Doorsteps, stoops, decks, porches, balconies, patios, exterior doors and windows or other fixtures designed to serve a single unit but located outside the unit's boundaries are often categorized as limited common elements because the appearance and safety of these fixtures directly affect multiple unit owners although connected to just one unit. 

" Unit" property is defined by the association's declarations or statute.  Unit property is limited to and benefits none but the unit owner.  This can include the inside of the exterior walls, interior partition walls, counter tops, cabinetry, plumbing fixtures, appliances and any other real property confined to the unit.  The definition of "unit" property can vary by state and association with no universal definition. 

Unit improvements and betterments could be included in the definition of "unit" property, as such, upgrades benefit none but the unit owner.  However, differences in the three associational responsibility classifications require improvements and betterments be classed separately.  Examples of improvements and betterments include the unit owner replacing linoleum tile with hardwood floors, upgrading the countertop to granite or any other activity that increases the value of the real property within an individual unit. 

Associational Responsibility 

Original specification requirements, also known as "single entity coverage," make the association responsible for all common elements, limited common elements, and unit property.  Unit improvements and betterments are not included in original specification loss settlements and are not insured by the association.  Connecting the pieces: 
• The association insures the common elements, limited common elements and unit property;
• Unit owners insure unit improvements and betterments and personal property within the unit. 

A majority of states has adopted original specification statutes as recommended by the Uniform Common Interest Act (as written or with jurisdictional modifications) to statutorily govern the insurance requirements of condominium associations. 

" All in" (a.k.a. "all inclusive") statutes differ from original specifications in one major respect: in addition to insuring common elements, limited common elements and unit property, it is also charged with insuring unit improvements and betterments.  Snapping the parts together:
• Associations subject to "all in" provisions are required to insure common elements, limited common elements, unit property and unit improvements and betterments;
• Unit owners are only tasked with insuring personal property within the unit. 

Approximately half of the remaining states not dedicated to "original specification" requirements utilize some form of "all inclusive" wording.  Few states apply Condominium Act terminology that could be exclusively interpreted as "all in." 

" Bare walls" statutes were the standard before the Uniform Condominium Act of 1980.  These codified or associational requirements limit the association's insurance responsibility to only the common elements and limited common elements.  To complete the puzzle: 
• The association insures the common elements and the limited common elements;
• Unit owners are charged with insuring unit property, any unit improvements and betterments and personal property within the unit. 

At issue in bare wall situations is the definition of "unit.”  "Unit" does not have a universal or even uniform definition.  Unit boundaries, the beginning of the area the 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. 

Dividing responsibility for insuring real property may not be the most advantageous for the association or the unit owner; however, there are several states and associations that apply some form of bare walls wording. 

NFIP - A Special Case 

Two standard flood insurance policies (SFIP's) connect together in condominium forms of ownership: the Residential Condominium Building Association Policy (RCBAP) provides coverage for the association and the Dwelling Form is purchased by the individual unit owner.  These forms apply as per NFIP standards regardless of any statutory or associational declaration regarding insurance responsibility. 

The RCBAP policy form specifically states that coverage is provided for all real property to include real property that is part of the unit.  FEMA guidelines further state under rule IV.  COVERAGE: A. Property Covered: The entire building is covered under one policy, including both the common as well as individually owned building elements within the units, improvements within the units, and contents owned in common.  Contents owned by individual unit owners should be insured under an individual unit owner's Dwelling Form. 

Flood insurance policies do not comply with statute or associational guidelines.  When insuring a condominium association or unit owner, agents must be aware of the differences mandated by the NFIP.  Insurance property values will differ between the property policy and the flood policy if the association applies any provision other than "all in." 

Fannie Mae (FNMA) 

For decades, the Federal National Mortgage Association, known affectionately as Fannie Mae, has held sway over condominium associational decisions regarding insurance requirements.  Historically, to qualify to be part of a Fannie Mae package, an association had to provide coverage under the single-entity (original specifications) guidelines. 

Announcement 07-18 released November 15, 2007, changed these requirements.  With this announcement, Fannie Mae relaxed its previous condominium association guidelines now allowing associations applying the "bare walls" concept to qualify for the program as follows: If the project's legal documents allow for the individual unit owners to obtain their own hazard insurance policy and allow for a blanket insurance policy to cover the project's common elements, we will accept two policies to satisfy our insurance requirements.  A lender must verify that both the project and individual unit are covered by the required hazard insurance policies before it delivers a mortgage or cooperative share loan secured by a unit in a condominium, cooperative, or PUD project. 

How this change is going to affect the future of state law and association declarations is not known.  Many associations adopted original specification requirements solely to access Fannie Mae funding; without this requirement, associations may be more apt to return to the bare walls concept that was the norm for many years prior to the Uniform Condominium Act. 

Default Setting 

Bylaws and declarations are the governing documents of all condominium or unit owner regimes.  These documents supersede statute as per the statute itself.  Division of ownership and insurable interest is dictated by these documents.  Statutory wording is only the "default setting" if the bylaws or declarations are silent on the issue.