Whether you’re just getting started in life or retiring and looking to downsize, a condominium is a great way to go.
You don’t have to worry about the yard, yet it’s your own property so
you can paint the walls chartreuse and install grow lights for your
man-eating plants if it makes you happy.
Because there’s a unit owner, but the common areas and larger
building itself are under the control of the association, there are some
unique insurance issues you need to be aware of.
Puerto Rico developed the first condominiums in 1948 with the passage
of the Horizontal Property Act. Before that time, all owners in a
condominium were obligated under each individual mortgage in the
complex.
If one owner defaulted on his loan, then the mortgagee could
foreclose on the entire condominium complex. Under horizontal property
laws, individual ownership is split into horizontal planes that limit
the unit owner’s interest to the inside of the unit. (Previously,
ownership was seen as all the space from the center of the earth to
somewhere in the air.)
This makes condominium ownership desirable, but confusing: If the
insured owns only the unit, what about the hallways, outer walls, roof,
foundation, plumbing, pipes and electrical? What about common areas?
This is where condominiums get complex.
Before buying, here are six things you need to know
1. Definition of common areas
Common areas are the stairs, hallways, swimming pool, clubhouses and
walkways, with each unit owner’s interest measured by the proportionate
value the unit bears to the total value of all units.
Limited common areas are areas shared between some, but not all
units, for example, a shared patio area between units or a balcony. The
common areas are managed by the condominium association.
Although all unit owners belong to the association, a group of owners
manage its affairs as a board of directors while a property management
company generally takes care of the daily operations of the condo
community.
2. Property coverage
Unit owners need their own individual property insurance policy, designed specifically for condominiums.
It is in some ways a cross between a homeowners’ and a tenant policy.
Like a tenant policy, there is no responsibility for the outside
structure. The unit owner doesn’t have to worry about replacing the roof
or siding; the association takes care of that.
What is the concern of the owner is the unit itself. A tenant’s
policy covers the tenant’s personal property and any additions and
alterations the tenant may add.
For condominiums it’s a little more complicated. The following are considered part of the dwelling:
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- Alterations, including the addition of wall-to-wall carpet or hardwood floors.
- Appliances, such as stoves, refrigerators, furnaces and hot water heaters.
- Fixtures, such as sinks, toilets, tubs and other built-in features.
- Improvements that are part of the building within the “residence premises.”
Also included are items of real property that pertain exclusively to
the “residence premises” — driveways or gardens, for example. Property
that is the responsibility of the insured under the association
agreement is covered, as are structures owned solely by the insured at
the “residence premises,” such as a garage, storage unit, patio or
balcony.
3. Required coverage — ‘walls in’ or ‘walls out’
The condominium policy provides broad coverage and avoids gaps by
providing coverage that the insured is required to have per the
association agreement.
The terms “walls out” or “walls in” are often used in relation to
condominiums as a way to designate what the unit owner is responsible
for. Does the unit owner have to provide coverage for pipes and wiring
between the walls, which is “walls out” or only for carpeting, painting,
washers and dryers that are inside the unit, which is “walls in”?
It becomes more complicated with limited common elements, such as a
patio or balcony shared by only two or three units. Individual owners
may be responsible for their unit and part of the limited common element
that serves the unit. It’s determined by the state regulations and the
association agreement. These two must be matched against the unit
owners’ policy so ensure that there are no gaps in coverage.
4. Unit owners’ forms
As various states consider the unit to be comprised of different
elements, the intersection between the unit-owners insurance and the
association insurance can be confusing, but the ISO HO 00 06 Unit Owners
form addresses that directly.
Coverage A, in a dwelling policy is the dwelling itself. In the condo
policy, coverage A includes the alterations, appliances, fixtures, and
improvements that are part of the building contained within the
premises. It also includes real property pertaining to the residence,
property that is the insured’s responsibility under an agreement of
property owners, and structures owned solely by the insured other than
the premises but located at the premises, such as a garage.
This phrasing allows the policy form to be used in most
circumstances, because the form adapts to the agreement between the unit
owner and the association. If the insured is required to insure the
pipes and wiring for the unit, that is covered. If the insured is only
responsible for the drywall and appliances within the unit, that is
covered as well.
Remember that insured modifications are covered also. If the insured
grows world-class orchids or raises rare fish, the addition of grow
lights, humidifiers, or fish tanks and related equipment is covered.
5. Loss assessment
An additional coverage is loss assessment. The policy covers amounts
the association would charge the unit owner for damage to property owned
by all members collectively. The loss must be by a peril insured
against, other than earthquake or shock waves before, during or after a
volcanic eruption.
The limit is $1,000 regardless of the number of assessments per loss.
This limit can be increased by adding endorsement HO 04 35 Loss
Assessment Coverage. Although a homeowner may be part of an association
that has a neighborhood pool or clubhouse, the insured alone is
responsible for the siding and roof on the house. A condominium owner
may be assessed for more than just a pool. The roof, siding, and
maintenance of the grounds are common property for the condominium
owner, who may be assessed for repairs to any of those.
Assessments that are the result of actions of a governmental body are
not covered. Examples of such assessments include a change in building
codes or a code violation local government assesses against the
association, which the association then passes on to the unit owners.
6. State regulations
Each state has various regulations regarding condominiums. They define:
- A unit.
- A common element or limited common element.
- The responsibility of the unit owner.
- The responsibility of the association.
- Which insurance is primary for what types of losses.
Potential buyers and their agents should review these statutes before
buying as they clarify what the duties and insurance requirements are
for owners and the association.
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