All In

The name gives it away. Also known as All Inclusive, All In means everything that relates to real property is the responsibility of the association. That means all four types of real property—common elements, limited common elements, unit property, and unit improvements and betterments—are the association’s responsibility and should be insured by the association.

Example:

“(a) Property Insured. The Association shall maintain a Master Property Policy (“Master Policy”) insuring the Common Elements (including the Limited Common Elements) and the Units of the Condominium, excluding land. The Master Policy shall cover (i) perils, as broadly as reasonably available, under coverage currently known as ‘special form’ or ‘special causes of loss’ and include earthquake, (ii) insure the covered property, including personal property owned by the Association, for the full insurable replacement cost based on periodic appraisals, and (iii) cover the entire Unit, including all attached fixtures, systems, and finishes in the Unit at the time of a loss, regardless of when installed, but shall not cover the Unit Owner’s personal property in the Unit or elsewhere in the Condominium.”

Note that the only property excluded from the association’s responsibility is the owner’s personal property. I also like the phrase “regardless of when installed.” Again, this extends to common elements, limited common elements, unit property, and unit improvements and betterments. All four types of property are covered. This is an All In situation.

Bare Walls

Bare Walls indicates limited property coverage. But how bare is bare?

Bare Walls could mean the association is responsible only up to the studs and the roof joists and the floor joists, or it could go as far as saying the association is responsible up to the unfinished perimeter walls—no interior walls, but the outsides of the unit that are part of the outside structure.

That means the association is responsible up to the unfinished drywall, but the unit owner is responsible for the paint. Ridiculous, yes, but I’ve seen it. Bare Walls could mean from just the joists up to and including unfinished drywall, unfinished and taped drywall, or even unfinished and untaped drywall. Two to six inches can make a huge difference in value.

Since there is no one definition of “bare,” problems can and will occur. Don’t assume just because you have a Bare Walls situation that you know exactly what that means. You need a legal opinion.

Example: 

“All property insurance policies shall comply with the following: (1) Property insurance obtained by the Master Association shall be special form including earthquake, with vandalism and malicious mischief endorsements, insuring the Center Improvements, including the common areas of each Condominium Unit and the structural elements of the Condominium Units (but excluding improvements made to the interior of Condominium Units or Sub-Units which are not Common Elements or Limited Common Elements, and excluding fixtures, furniture, furnishings of a Unit or Sub-Unit and other personal property of the Owner of a Unit or Sub-Unit), together will all service machinery, equipment and facilities contained within the Property. Such insurance shall cover…”

The phrase in here that might create confusion is “including the common areas,” which has two possible meanings. It could mean it includes unit property, but it doesn’t say that. Or, it could refer to areas shared in common by multiple owners, like common walls or something along those lines.

This appears to be Bare Walls because of the next statement regarding the exclusion of elements not classified as common elements or limited common elements, but there could be differences of opinion, and those differences are reasonable.

That’s why I chose this example. Don’t assume. Get a legal opinion.

Original Specifications

Original Specifications, also known as single entity coverage, is in between Bare Walls and All In, though it’s closer to the All In side.

Essentially, Original Specifications means the association is responsible for all real property existing within the building when it was originally constructed or when it was originally planned and designed, but not for improvements and betterments made by the unit owner as defined in whatever document you are using—the governing documents of the condo or the relative statute.

In Original Specifications, the only thing the association is not responsible for is unit improvements and betterments.

Example: 

“Insurance on the Property (exclusive of the additions and improvements made by the Unit Owners to their respective Units and exclusive of the Real Estate, excavations, foundations and footings, and subject to other standard exceptions contained in such insurance policy), the Units and the Common Elements, against loss or damage by fire and against loss or damage by risk now or hereafter embraced by standard extended coverage.”

Although the term “limited common element” isn’t used in this section, to some extent, it is understood because the requirement includes coverage for the units. You can’t just skip over and say, “We don’t have any coverage for limited common elements.” You’re covering common elements all way down to the units.

It’s also understood that you’ll have limited common elements, but it might also be likely that earlier in this particular contract, it defined “common elements” to include limited common elements. If it didn’t, there are some state statutes that actually include limited common elements within the definition of “common elements.” Just because you don’t see the term doesn’t mean it’s not covering it.

You have to look on both sides of it. We’re going to cover the unit and the common elements, but we’re not going to cover limited common elements? That doesn’t make any sense at all.

Who Owns What?

Let’s piece all this together. To understand the unit owner’s responsibility, we first must know what the association covers.

If we have All In associational responsibility, the association is responsible for common elements, limited common elements, unit property, and unit improvements and betterments—basically all real property. The unit owner is only responsible for their own personal property within the unit.

Under Bare Walls association responsibility, the association is essentially only responsible for common elements and limited common elements. The unit owner is then responsible for unit property, unit improvements and betterments, and all their own personal property.

But be warned: There is no universal definition of “unit property.” That’s a function of the definition of unit boundaries. Read the governing documents, the covenants, conditions & restrictions, or even the state statute [see sidebar] to find out what the unit owner is responsible for insuring. Where does the unit owner’s responsibility end?

Don’t depend on your own skills. Some unit boundaries are clear; some aren’t. Don’t be too proud to get a second opinion from a legal professional.

In the last level of associational responsibility, Original Specifications, association is responsible for common elements, limited common elements, and unit property. The unit owner is responsible for unit improvements and betterments, as well as their personal property within the unit.

Now, this can be dicey at claims time, because the association is going to pay to put back certain things. For example, the association will pay to put back the laminate countertop. But if the unit owner wants granite, the unit owner has to pay the difference between the cost of the covered laminate and the cost of the granite which is not covered.

Overall, if the association is no longer responsible, the unit owner is and vice versa. When the unit owner is not responsible, the association becomes responsible, either by the association’s governing documents or the state statutes.

But even if the association is responsible, what happens if the association has a large deductible or a loss that isn’t covered, and they assess the unit owner? Most unit owner forms have assessment coverage. It may not be enough, depending on who is responsible for what and what led to the assessment.

The unit owner’s policy may need to be endorsed to increase the assessment coverage limit. The ISO endorsement for Supplemental Loss Assessment Coverage is HO 04 35.

Note that ISO form 10/00 edition and prior forms did not allow you to increase the assessment coverage for deductibles, to cover an association deductible. The current form allows you to do it, but is your carrier using the current form? If it’s a proprietary form, do they allow the increase of the assessment to cover the cost of a deductible? Don’t just assume.

Above all, don’t be lulled into a false sense of security. Just because the association is supposed to be responsible for it does not mean they will always fulfill their duties.

Chris Boggs is executive director of the Big “I” Virtual University and an IA contributor.

For an in-depth exploration of the four real property definitions, properly extending real property coverage to the unit owner, managing valuation methods and liability, and more, purchase the Risk & Reality report, a full webinar transcript, at the Big "I" Virtual University.