Condominiums can present difficult coverage issues

Rough Notes, Mar 1998 by Utschig, LeRoy

This article will deal with exposures faced by virtually every condominium association and condominium unit owner. The exposures are common types of losses and are readily insurable. However, my experience is that many condominium loss exposures are not insured because an insurance agent does not identify the loss exposures and order the proper coverage. Most of the losses mentioned in this article are actual claims. None of them was insured. All of them could have been insured losses. The names used in the loss illustration scenarios are not real.

The first situation arose on a rather moderate January evening in Wisconsin. Bright moonlight on new fallen snow made everywhere you look seem like something out of a fantasy winter wonderland. There were no winds and the temperature would dip to only 10 degrees below zero! About 1:30 a.m., a fire call came into the Brookfield, Wisconsin fire department. As they had reciprocity agreements with neighboring communities, the Elm Grove and New Berlin fire departments would also respond. In less than five minutes, the Brookfield fire department arrived at Sunnyslope Condominiums, Inc. (SCI). Not much later, the Elm Grove and New Berlin fire departments also arrived at the scene.

The firefighters were very concerned. They knew that either they would put the fire under control very quickly or the entire building might burn to the ground. In the sub-zero weather, they knew that fire hose lines would freeze shut in seconds rendering them useless. And, without a good supply of water, they would be unable to control the fire if the fire got beyond one unit. The first fire fighters to arrive at the burning unit were carrying large fire extinguishers that would not freeze. More extinguishers were brought in by the other fire departments. Thorough training and a little bit of luck worked for them. They were able to extinguish the fire before it had time to spread beyond just the one unit of the condominium.

Sunnyslope Condominiums, Inc., reported the loss to its insurer. Damage had been sustained to the interior walls of the condominium, bathroom fixtures, kitchen built-in appliances, carpeting, ceiling and electrical wiring throughout the condo unit. As part of the adjusting procedures, the adjuster read the condominium agreements and bylaws. This legal document, that was signed by every condominium unit owner who purchased a condo, spelled out in great detail the items that were common property and those items that were owned by each individual unit owner. The insurance policy for Sunnyslope Condominiums, Inc., would pay SCI for those damaged items that were owned by the condominium association. Items not covered by Sunnyslope Condominiums' association insurance policy would need to be repaired by the individual condominium unit owner(s).

After reading SCI's condominium agreements, the adjuster told the association that the insurer would pay for damage to the exterior walls and the electrical wiring in the exterior walls and ceiling of the condo. Because of the association's legal contracts with the unit owners, the insurer would not be paying for anything damaged in the interior of the unit. It would not be paying for the damaged interior walls, wall-to-wall carpeting, built-in appliances, or any of the plumbing fixtures.

An adjuster for the unit owner where the fire had occurred was looking over the extent of the damage when the condominium association's president arrived to tell the unit owner that he would need to have his own insurance company pay for damage to all of the items attached to the walls, ceiling and floor. As long as it was inside the unpainted surface of the exterior walls, the unit owner was responsible for repairing it.

After checking the unit owner's policy, the adjuster realized that the unit owner's cost for repairs to the "building items" was insured. Having looked at the loss during her first visit to the condo unit, she estimated the loss at about $15,000. The policy limit for those items was $1,000. When the unit owner was told he had a $1,000 limit on a $15,000 loss, he was not happy. He immediately called his agent to find out why he did not have a higher limit. The agent's response was, "A thousand dollars is the limit I sell to all of my condo unit owners. I think that is all of the limit that a unit owner can buy."

The condo owner immediately called another insurance agent and asked if he could get a higher limit on the building items on a condo unit owner's contract. The agent told him that higher limits were available. In addition, he was told that the unit owners policy could be endorsed to provide coverage for "special perils" (all-risk) on the building items.

Even people in the insurance industry are not always clear about where the condominium association's responsibility ends and the unit owner's begins. An attendee at a seminar I was conducting commented that she had just finished decorating her new condominium. All of the seminar attendees gasped when she said that she had put $70,000 worth of "building-type items" into her condominium units. Prior to our discussing it in the seminar, she presumed that the condominium association's policy was covering those items that she had installed. What she learned caused her to comment that she would need to read her condominium declarations and bylaws.