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Tips for Condominium Owners

Insuring a condominium unit is more complicated than insuring a single-family home, because condo ownership involves laws and contracts that affect the way insurance should be provided. If you own a condominium, here are some tips you can use to be sure your investment is protected.

There is no way to arrange insurance on a condo unit without referring to the laws and contracts affecting condominium ownership.

  • The Texas Uniform Condominium Act includes an entire section regarding insurance on all condominiums no matter when they were built or formed.
  • The Condominium declaration (including amendments) creates insurance obligations for both the condominium association and unit owner. Sometimes, additional information regarding insurance can be found in the condominium bylaws and rules.

Your insurance agent can help with these complicated issues, but ultimately it is your responsibility to purchase the right kind and amount of insurance. Seek information and advice from your attorney and condominium manager regarding insurance requirements for your condo unit. Don’t expect your insurance agent to interpret the laws and contracts or provide the final word on the appropriate types and amounts of insurance.

Amounts of Insurance

You face no more important decision than how much insurance is needed on the real property portion of your unit. The consequences of under-insurance could be disastrous for your family in the event of a major loss such as fire, hurricane or tornado.

The real property portion of the unit may or may not be covered on the association master property insurance policy, so you need to decide how much coverage you will purchase on your own unit-owners policy.

There are three possible ways condo real property can be insured on an association master policy: Bare Walls, Original Specifications, and All-Inclusive. Review your condo declaration, bylaws and master policy, read supplemental material provided by condo managers, and talk to the managers and others to gain some insight into which of those three concepts is used to insure real property inside the units on the master policy.

Condominium insurance experts recommend that the default amount you should purchase on your own condo policy – or at least a good starting place – is the full replacement value of your unit, no matter which method is used to insure the real property on the master policy. The experts make this recommendation for the following reasons:

  • The association master policy is controlled by someone else – generally a group of well-meaning and unpaid volunteers who may not be familiar with the intricacies of a commercial insurance program.
  • The master policy could be canceled or not renewed without sufficient notice to the unit owners and lenders.
  • The amount of insurance on the master policy may not be sufficient to cover a total loss. Or, it may be insufficient to cover a partial loss if an under-insurance penalty is applied.
  • The master policy may exclude some type of major loss that is covered by your unit- owner’s policy.
  • The master policy may contain a large deductible. If a loss involves only one or a few units, the amount of damage may not exceed the deductible.
  • The insurance company could be insolvent and unable to meet its financial obligation to pay a claim.
  • The insurance company may have grounds to deny a claim due to violation of a policy condition.
  • The condominium declaration may hold unit owners responsible for damage to the condominium unit caused by the negligence or willful misconduct of the owner, an occupant of the owner’s unit, or the owner or occupant’s family, guests, employees, agents or invitees, even when such damage is covered on the master policy.

There is no question that carrying the full replacement value on your unit-owner’s policy may duplicate coverage provided on the association master policy. But duplication of coverage is far superior to the alternative: not enough coverage.

How can you determine the replacement value of your unit? Consider a number of factors, including:

  • Unit purchase price. The original purchase price of a recently-purchased condominium includes land, common elements and amenities, as well as the value of the unit itself, so this amount by itself may not be an accurate measure of the replacement value of the unit.
  • Mortgage amount. Since the original mortgage amount may be simply a function of the unit purchase price, this is as unlikely as the purchase price to be an accurate measure for the appropriate amount of insurance.
  • Replacement cost per square foot. A contractor or architect who specializes in condominiums or apartments – especially the original contractor who built your condominium project or the original architect who designed the condominium – may be able to provide an accurate estimate of the unit replacement value.
  • Appraised value. An experience professional property appraiser should be able to accurately determine the replacement value of the real property excluding the common elements.

Once you determine the full replacement value of the unit, then you can decide whether to insure that amount or something less, based on your tolerance for risk or how much you can afford.

As an alternative to purchasing an amount of insurance that represents the full replacement value, consider purchasing an amount not less than 25 percent of the full replacement value or the amount of the association deductible, whichever is more. This is an arbitrary percentage, but it is more reasonable than selecting a smaller amount such as $5,000. Coverage on condo real property is relatively inexpensive on a unit-owners policy, especially when considering the consequences of not having enough insurance.

Personal Property. Everything that’s not tied down to the real estate in your condominium unit is considered personal property and must be insured separately from the unit real property discussed above.

Important Options to Consider

The typical unit-owners policy contains significant exclusions and limitations. Some of these can be eliminated or modified at the unit owner’s option. Be sure to ask your insurance agent about these and other options that may be available.

Special Causes of Loss Forms. The “standard” unit-owner’s form doesn’t provide the same broad coverage provided on a “standard” homeowners policy purchased by owners of single-family residences. Optional “special” forms expand the types of losses that are covered on the unit-owners policy.

Loss Assessment Coverage. The Texas condominium law and your condominium declaration allow a unit owner to be assessed for financial losses incurred by the condominium association. Most standard unit-owners policies automatically provide additional coverage for such assessments, but sometimes only up to an amount as small as $1,000. Most insurance companies offer higher amounts for a small additional premium. Consider purchasing the maximum amount that is available on your policy.

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