The Increasing Complexity of Condominium Property Insurance

The Increasing Complexity of Condominium Property Insurance

In this Analysis, Douglas Scott MacGregor* discusses the evolving requirements and problems involved in providing property insurance in condominium projects. He explains the complex nature of condominium ownership and analyzes pertinent statutory requirements. He assesses the practical import of the growing requirement that condominium governing associations provide property insurance for both common property and individual units. Mr. MacGregor writes:


A. State Condominium Acts Require Associations to Obtain Real Property Insurance

     The Condominium Acts of the great majority of states address the duty of a condominium association to obtain real property insurance. The most comprehensive insurance statutes are usually found in the states that have enacted one of the two uniform acts. The law in non-uniform act states varies widely. A few of them say little or nothing about insurance at all and others contain requirements even more thorough than those of the uniform acts. The statutory real property insurance requirements of all 50 states are set forth below broken down into three categories: states that have adopted the Uniform Condominium Act; states that have adopted the Uniform Common Interest Ownership Act; and, Non-Uniform Act States.

B. Uniform Condominium Act States

     The Uniform Law Commission of the National Conference of Commissioners on Uniform State Laws ("NCCUSL") first completed the Uniform Condominium Act ("UCA") in 1977 and then amended and approved it in 1980. A prefatory note by the Commissioners says the Act contains comprehensive provisions that were designed to "unify and modernize the law of condominiums." It was adopted by 16 states: Alabama, Arizona, Kentucky, Maine, Minnesota, Missouri, Nebraska, New Mexico, North Carolina, Pennsylvania, Rhode Island, Tennessee, Texas, Virginia, West Virginia, and Washington. Two of those states - Minnesota and West Virginia - subsequently adopted the broader Uniform Common Interest Ownership Act.

The basic property insurance provision of the UCA reads:

"Commencing not later than the time of the first conveyance of a unit to a person other than a declarant, the association shall maintain, to the extent reasonably available... property insurance on the common elements insuring against all risks of direct physical loss commonly insured against or, in the case of a conversion building, against fire and extended coverage perils. The total amount of insurance after application of any deductibles shall be not less than 80 percent of the actual cash value of the insured property at the time the insurance is purchased and at each renewal date, exclusive of land, excavations, foundations and other items normally excluded from property policies ...."

     That language presents nothing surprising, however, the UCA also provides that in a building containing units having "horizontal boundaries" described in the declaration, the property insurance, "to the extent reasonably available" must "include the units, but need not include improvements and betterments installed by unit owners." A commentary to the Uniform Act says that language "... represents a significant departure from the present law in virtually all states by requiring that the association obtain and maintain property insurance on both the common elements and the units within buildings with 'stacked' units." The comment goes on to say that given the great interdependence of unit owners where there are stacked units, requiring property insurance for the entire building is preferable and will simplify claims procedures, especially when both common elements and portions of a unit have been destroyed. It also notes that when common elements and units are insured separately, insurers may dispute the coverage provided by the policies.

     Nine UCA states - Alabama, Maine, Missouri, Nebraska, North Carolina, New Mexico, Rhode Island, Tennessee, and Texas- track the language of the uniform legislation and require association coverage for stacked units. One, Pennsylvania, is broader, requiring the association to maintain, to the extent reasonably available, property insurance "on the common elements and units exclusive of improvements and betterments." Louisiana and Maryland, although they have not adopted the UCA, have enacted statutes on association insurance that are nearly identical to that of Pennsylvania. Apparently, then, Pennsylvania, Louisiana and Maryland, require the association to insure units regardless of whether they have "horizontal boundaries described in the declaration." Washington is similar. It requires the association to maintain, to the extent reasonably available, property insurance on the condominium, "which may, but need not, include equipment, improvements, and betterments in a unit." Washington - and the UCA - define "condominium as "... real estate, portions of which are designated for separate ownership and the remainder of which is designated for common ownership ...." It appears then that Washington also requires the association to insure units regardless of whether there are horizontal boundaries. Pennsylvania and Washington may have been concerned about the confusion that could occur where some units in a development have horizontal boundaries and others do not. In that case, notes a comment to the UCA, the Act requires association insurance for the units with horizontal boundaries, but not for the other units.

     Virginia, Arizona, and Kentucky depart significantly from the UCA. The Virginia statute says the "... condominium instruments may require the unit owners' association ... to obtain ... [a] master casualty policy affording fire and extended coverage in an amount consonant with the full replacement value of the structures within the condominium, or of such structures that in whole or in part comprise portions of the common elements." That language would appear to allow the association to insure units, but leaves it to the individual condominium declaration to determine what will be required. Arizona, says that the association property insurance, "if determined by the board, includes the units or any portion of those units," thus granting discretion to condominium governing boards to decide the extent of coverage. Kentucky simply omits any reference to insuring individual units.

(footnotes omitted)

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* Douglas Scott MacGregor has been an update author for the Appleman on Insurance Law treatise for over 10 years and has authored more than 15 books, mostly on real property issues. He earned his law degree from the University of Florida, Levin College of Law and a Masters in Social Work from the University of South Florida.


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