INSURANCE FOR CONDOMINIUM PROJECTS
Condominium projects present a unique situation when it come so insurance on the unit being financed as well as on the project itself. Due to the legal structure of condominiums, all condominium projects must have a master insurance policy with a minimum of $1,000,000 in liability coverage. This is due to the “pass through” of liability to unit owners in case of litigation. Without it, if the project was sued and lost the litigation, the dollar value of the judgment would be passed on 100% to all unit owners as a lien against the unit. This means that until the judgment is paid in full, no units could be sold. This creates a serious marketability issue for the project.
In addition to the liability insurance requirement, all condominium projects with more than 20 units in the project must maintain Fidelity Bond coverage in case of malfeasance by one or more members of the Board of Directors of the Homeowners Association. There is no minimum amount for the Fidelity Bond coverage. However, amounts of less than 5% of the annual HOA dues collected would be looked at very closely to determine if it was sufficient. As a side note, depending on the part of the country, the Fidelity Bond coverage may be referred to as D&O (Directors & Officers Coverage); or sometimes as a “Crime” Policy.
Besides the liability and fidelity coverage, the project must also have a hazard policy in case of destruction of the building(s). There must be enough to cover the replacement cost of the project as determined by the insurance provider. A review of the policy will indicate whether it is “guaranteed” replacement; extended coverage; or 100% replacement cost. Guaranteed replacements means the insurance company will replace the building(s) regardless of costs; extended coverage is a percentage over the replacement cost; and regular replace is exactly as stated: they will cover up to what the insurer indicates as the replacement cost of the building and no more.
In addition to the master policy, the unit owners must also maintain insurance for the interior “improvements and betterments.” Sometimes this will be an “All-In” or inclusive master policy provided by the project. In these cases, the hazard insurance also covers the interiors and betterments of the individual units. It does not cover any personal possession of the unit owners.
Few condominium projects retain an “All-In” policy. What is more typical is the condominium provides a “Walls-Out” policy. That is the policy covers only the exterior and structure of the project. In these cases, the unit owner must maintain an HO6 Insurance Policy which the covers interior improvements and betterments.
As regards flood insurance, this is usually covered under a RCBAP (Residential Condominium Building Association Policy). The coverage will be $250,000 x Number of Units. When condominium projects are in a flood zone, it is advisable for owners to determine their risk level from flooding to see it a gap policy is needed. While not required, there are situations where owners may need extra protection. They will need to consult with their insurance provider to determine options and availability.
There are many other considerations when reviewing insurance for a condominium project. A trusted advisor such as the teams at Condoanalytics is highly recommended. They are knowledgeable regarding all types of condominium project review. Please check with their website at www.condoanalytics.com for more information. They are part of The Commonwealth Group of Companies. Contact us at [email protected] for more information on:
· Contract Underwriting
· Contract Processing
· Quality Control
· Condo and Coop Project Approval
· Compliance
· Fair Lending
· Consulting Services
· Mortgage Technology (Encompass Certified Admins)
· Lock Desk Services
· Contract Loan Closing
· Contract Loan Funding
· Contract Loan Delivery
· Final Doc Services
The Commonwealth Group…Innovative Services for the Mortgage Industry