All Things Condo: Carole Richelieu

Differences Between AOAO and Unit Owner Policies Why boards, owners need to understand exactly who covers what when damage occurs

Editor’s note: This is the second of a two-part series about condominium associations and insurance issues.

Most condominium association and individual unit policies designate the condominium association coverage as primary for building damage losses over individual unit owner policies. When damage loss occurs at a covered building, the condominium association insurance will take precedence for the loss over all other individual condominium unit owner policies covering the same type of loss and building property, subject to the association policy’s deductible, limits and exclusions.

The condominium association policy usually covers common areas of the association and “as built” building damage of individual units. Some condominium association policies may cover improved building property of individual units, so unit owners need to verify the extent of the condominium association building coverage with their association representatives.

Examples of “as built” building property may include the original carpet flooring or particle board cabinets of a unit when it was first constructed. Examples of improved or upgraded building property would be an individual unit owner changing the “as built” carpet flooring to ceramic tile or replacement of the original particle board cabinets with solid wood cabinets.

The condominium association policy will likely only indemnify for the original building construction material and labor costs following a covered loss. The individual unit owner policy can provide coverage for both “as built” building damage and upgraded building material costs, including additional labor charges that may be required for the upgraded material installation above the costs to install the “as built” original building construction and design.

Condominium association policies in Hawaii are often referred to as “master policies” by associations, property managers, insurers and insurance agents. Personal property of unit owners or occupants are not covered under the master policy. Most master policies will not cover building upgrades or improvements within a unit and likely will not cover additional living expenses, such as lodging or increased meal expenses, or loss of rents that may result from a covered building property loss. Coverage for personal property, additional living expenses or loss of rents of individual unit owners or occupants

may be covered under individual unit owner or renters’ policies.

Insurance deductible assessments

Most master policies carry large deductibles applicable to building property claims. The individual unit owner policies will likely have building coverage provisions or separate lines of coverage that can cover the master policy deductible, where a portion or the full amount of the master policy deductible is assessed to an individual unit owner, all unit owners or unit owners receiving building damage insurance benefits for a covered loss.

These deductible assessments are usually levied on condominium unit owners once master policy claims are filed and processed. Assessments are often made after the condominium association receives building damage in-

surance benefits under the master policy claim and disburses these benefits.

It is important that individual unit owners subject to building damage loss or facing potential insurance assessments notify their carriers as soon as possible for processing of building property benefits that may not be covered under the master policy, and handling of pending deductible assessment claims.

Hawaii Revised Statutes, Section 514B-143, addresses insurance regulations applicable to condominium associations, and recourse the condominium associations have in procuring condominium unit insurance for non-complying owners, assessment of premiums and application of master policy deductibles following an insurance covered loss.

Assuming that a condominium unit owner does not choose to self-insure or is required by the condominium governing documents to procure insurance covering his or her own unit, the unit owner should consider obtaining sufficient amounts of insurance to cover the master policy deductible and the costs for replacement of the improved or upgraded building property, should the building property sustain a loss covered under insurance.

The condominium association governing documents may specifically require that an individual unit owner obtain at least enough building coverage or specific loss assessment coverage to cover the full amount of the master policy deductible.

What to do if you have a loss that may be covered by condominium insurance?

The condominium association has statutory and fiduciary duties to association members to procure insurance

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to address building property damage that may result from covered losses and certain perils.

Following a loss, the condominium association should take steps to mitigate further damage to covered building property and notify the condominium association insurer immediately of the loss and administer the insurance claim as required under the condominium statutes, association governing documents and provisions of the master policy.

It is often assumed that a loss must originate from a common element or operations of the association, and that there must be damage to common elements in order to invoke coverage under the master policy. Master policies, however, will cover building damage as defined under the policies due to direct physical loss or named perils regardless of the loss origin, subject to applicable exclusions.

Establishing liability on the condominium association or individual unit owners is not necessary to invoke building damage coverage under the master policy. The cause of loss and resulting damage need only to meet the insuring agreements of the master policy in order to extend the master policy building coverage.

Individual owners of condominium units subject to a building property loss should take immediate steps to mitigate damages to their own unit, contact and inform the appropriate representatives of the condominium association of the loss as soon as possible, and immediately notify their own condominium unit insurance carrier of the loss for claim processing. Condominium unit owner insurers are expected to coordinate handling of their claims with the condoSee AOAO on page 38