August 2009

It's time for an insurance checkup so you can determine whether your association's policy provides the right coverage and whether you can save money. Here are some tips.

1. Deal with an expert. "Make sure the insurance agent you're dealing with is experienced in condo or homeowners association insurance," recommends Robert Galvin, a partner at Davis, Malm & D'Agostine PC in Boston who specializes in representing condos and co-ops. "It's different from other types of insurance."

2. Know your documents. "Read carefully the requirements of your own governing documents," advises Galvin. "Occasionally, I find an association that didn't follow the requirements of its own documents. For example, one high-rise condo in a city near Boston didn't even have a condo association policy. It had an apartment building policy."

That said, it may be smart to consider easing your association's insurance requirements. "Some associations have coverage that's more expansive than the law requires, and that's based on their governing documents," explains Matthew A. Drewes, a partner at Thomsen & Nybeck PA in Edina, Minn., who represents associations. "You might want to amend your documents to provide for less inclusive coverage. For example, some have an all-in policy, which covers the cost to replace everything inside a building. That could be converted to bare-walls coverage, which covers only the cost of replacing the structure to the bare walls. If you're being cost-conscious in terms of premiums, that's a way you could save money. In addition, if you require owners to carry HO6 policies, which are policies specifically geared for condo owners, it makes sense to reduce the association's coverage to bare walls."

3. Review the insured value of your property. "Verify that you're not paying for coverage based on the value of the land," says Drewes. "The land itself is subject to fewer, if any, perils than the building itself. Also, there may be a situation where based on the economy, the game has changed as far as the cost to replace your structure. You may be able to reduce the amount of coverage based on declining property values or construction costs. But make sure the association isn't underinsured. Contact a construction professional or an insurance agent to get an opinion on the appropriate insured value."

4. Check for a co-insurance clause. An issue that's related to ensuring that you're not over- or underinsured is a co-insurance clause. If you insure your structure for less than the amount your insurance company considers full coverage, it may impose a co-insurance penalty when you file a claim.

Here's how that would work. If it turns out that it will cost $1 million to replace your building and you're insured for only $900,000, the insurer may determine that it will cover only 90 percent of your claim. "If there's a co-insurance clause in your policy," explains Drewes, "the carrier can say that because you failed to fully insure your property, it will reduce its payout by the same percentage you underinsured the property. In a $1 million claim, the insurer would pay out only $900,000. The lesson is to be sure you don't get so aggressive in reducing the insured value of your property that you shortchange yourself in the event of a substantial claim—or see if you can have the co-insurance clause removed."

5. Evaluate your deductible. "Look at your deductible to see if there's room to increase it, within reason," suggests Drewes. "Increasing it to $5,000 or $10,000 could have a substantial effect on premium savings. Depending on the size of the association, especially now, it's not uncommon to see a deductible of $10,000. And when you think of the purpose of insuring the association, submitting a claim for something less than $5,000 or even $10,000 seems like an injudicious use of your insurance and will cost you in higher premiums."

At the same time, review your governing documents to ensure they explain who's responsible for the amount of the association's deductible if there's a claim. "The governing documents should state who pays in the event of a loss," says Galvin. "Some say that if an owner has damage that extends into the common elements, the owner pays. But if there's some accident that's no one's fault, such as a fire caused by lightning that couldn't be prevented, who pays? Some condos provide that the association will pick up the deductible. The theory is that since it's the association's policy and the association is saving money by having a high deductible, the cost of funding the deductible should be a common expense. In other associations, documents say that if the damage is to the common area, the association pays, but if it's to an owner's unit, the owner pays. I think the first way is better, but it's a matter of preference."

If you're in a condo association and the association decides to pass on the cost of a deductible to unit owners, Drewes suggests your association consider requiring that owners have HO6 policies and that those policies provide coverage that would include the cost of any deductible on the master policy.