The Master Policy Deductible v. Personal Condominium Insurance ... Who Does What to Whom 2015?
By Irene Morrill, CPCU, CIC, ARM, CRM, LIA, CRIS, CPIW
Condominium Master Policy deductibles … can they be deadly for personal lines clients who live in condominium units? Yes! First … in a condominium arrangement who insures what??
That can be an EXCELLENT question! We all know that when one buys into a condominium situation – shared ownership – one receives two different ownership interests. First, if one buys a condominium unit, it belongs solely to that individual. That person acquires individual ownership. Everything in that unit that he/she can touch, he/she owns!
One also receives “common/collective” ownership in the non-individual or common areas such as land, roof of building, common walls, common beams, swimming pools, etc. In Massachusetts, as in most other states, the Association is required to purchase insurance on common areas but not the individually-owned areas.
Insuring the Individual Unit
How does the individual unit get insured? That depends. It depends on the condominium project bylaws or the insuring agreement of the commercial condominium policy, or both. Sometimes the bylaws only require the Association to insure commonly owned area, and the individual unit-owner must insure ALL of his/her individual unit. The individual unit-owner accomplishes this through the purchase of large amounts of Coverage A – Dwelling value under the HO-6 Unit-owner policy. This can be expensive for the unit-owner, but insurance coverage can be easily obtained.
In other situations the Association agrees to “take on” the responsibility of insuring individually-owned unit-building items through a discussion in the condominium documents or bylaws. The Association may insure ALL building items in the individual units or just some of the individually owned unit-building items. One must read the bylaws carefully to determine what, if any, insurance responsibility is left for the unit-owner.
The ISO CP 00 17 Condominium Association Policy as well as the BP 17 07 Massachusetts Changes – Condominium Association Coverage endorsement added to the BOP definition of building adds the following to the “normal” building definition:
(6) Any of the following types of property contained within a unit, regardless of ownership, if your Condominium
Association Agreement requires you to insure it:
- Fixtures, improvements and alterations that are a part of the building or structure; and
- Appliances, such as those used for refrigerating, ventilating, cooking, dishwashing, laundering, security or housekeeping.
So, if the bylaws tell the association to cover the individually-owned building items, then the commercial policy WILL do it.
Does the Association OWN the items in the individual unit? NO, NO, NO!!! But, through the bylaws, a contract, an insurable interest is granted to the Association allowing the Association’s commercial policy to apply to individually0owned unit-owner building values.
Some companies have their own filing which just automatically covers the building whether individ-ually-owned or not without referring to the bylaws.
Let’s suppose ... The Association, through its bylaws, has chosen to accept responsibility for insuring the individually-owned building items or the company filing just does it anyway ...
The Association buys a condominium master policy to cover the building items whether common or individually-owned, hopefully on a Special Form basis. Suppose the Association purchases a $500 deductible for the Master policy, and there is a loss fully contained in one unit ... who pays the deductible?
This is a point that the unit-owner should address when purchasing his/her unit. Or, you should have them look into this issue when you sell them their personal lines Unit-Owner Policy covering their contents and liability exposures. If the Association chooses to pay the deductible, great; but I wouldn’t count on it. The Association probably makes the unit-owner responsible for the deductible when a loss occurs in individually-owned area. A $500 out-of-pocket expense for the unit-owner shouldn’t be too much of a hardship!
However, the commercial policy deductibles are often $5,000, $10,000 or $25,000. If there is a LARGE master policy deductible, and the loss happens entirely in your client’s unit, such as a kitchen fire, who pays THAT deductible amount?
Again, your client should check into this issue with the Association. Quite often, the Association bylaws state the Association will provide insurance for unit-owner building items, but will NOT cover the deductible. Generally, a loss that is contained in a specific unit is NOT assessed to other fellow unit-owners. The individual unit-owner suffering the loss is expected to pay for the deductible.
How Do We Cover the Deductible in this Situation?
And the answer is … it depends.
I always believed that, since the unit-owner owns his/her unit, he/she has a right to INSURE his/her unit. After all, if I own a one family home, I have a right to insure it.
Under the ISO HO-6 (HO:91; HO-2000; HO-2011) Coverage A is defined as:
COVERAGE A – Dwelling
- The alterations, appliances, fixtures and improvements which are part of the building contained within the “residence premises”
- Items of real property which pertain exclusively to the “residence premises;”
- Property which is your insurance responsibility under a corporation or association of property owners agreement; or
- Structures owned solely by you, other than the “residence premises,” at the location of the “residence premises.”
Obviously, the unit-owner CAN insure his/her building items.
However, in the ISO HO-91 and HO-2000 editions it appears that the Other Insurance Provision of the HO-6 is being used to NEGATE the individual’s right to insure his/her own property. The Other Insurance Provision has always stated that if the Association and the unit-owner insure the same property, then the Association master policy will be primary and the HO-6 will be excess. The following is the ISO HO-91 Other Insurance language in the HO-6 is:
- Other Insurance. If a loss covered by this policy is also covered by other insurance, except insurance in the name of a corporation or association of property owners, we will pay only the proportion of the loss that the limit of liability that applies under this policy bears to the total amount of insurance covering the loss.
The ISO HO-2000 Other Insurance language in the HO-6 is:
F. Other Insurance and Service Agreement ….
2. If, at the time of loss, there is other insurance or a service agreement in the name of a corporation or association of property owners covering the same property covered by this policy, this insurance will be excess over the amount recoverable under such other insurance or service agreement.
The language under the ISO HO-91 and HO-2000 are essentially the same.
How can BOTH the commercial policy and the personal policy cover the same loss? Bylaws provide the association with an insurable interest in the individually-owned items. The deed of ownership and the Coverage A Dwelling definition allow the unit-owner to cover his/her own property.
If the bylaws tell the association to cover the building items in the individually-owned units, then the commercial policy will be primary, and the HO-6 will be excess.
The ISO CP 00 17 and the BOP BP 17 07 both state:
A unit-owner may have other insurance covering the same property as this insurance. This insurance is intended to be primary and not to contribute with such other insurance.
The HO-6 under the HO-91 and HO-2000 both state that they are “excess”.
WHAT Does “Excess” Mean?
I always “assumed” that “excess” meant the master policy would respond first and what it didn’t pay, for whatever reason, would be covered under the individual’s Coverage A Dwelling in his/her HO-6.
Unfortunately, ISO has chosen not to interpret their policy in this way, although for years many other insurance professionals or company adjusters have. ISO and some carriers have stated that the unit-owner is only covered for the amount of the loss that EXCEEDS the amount RECOVERED by the association under its policy. This is the language in the HO-2000 filing memorandum:
The unit-owner is only covered for the amount of loss that exceeds the amount RECOVERED BY the association under it’s policy. If the association doesn’t recover because of a high deductible or other reasons, the unit-owner does not recover.
This interpretation assumes that Coverage A can ONLY be available for the “high-end”- after every last dime of the master policy has paid out. ISO’s assertion is that the HO-6 should NOT “fill in” the master policy deductible. This is a DANGEROUS interpretation for your clients.
If the master policy bylaws do NOT insure certain individually-owned building items for the unit-owner, then Coverage A will be the PRIMARY and the ONLY coverage responding to their building loss. If the Association bylaws cover some or all of the unit-owner building items, then Coverage A will NOT respond to the master policy deductible applicable to damage to these items. This interpretation is ESPECIALLY dangerous in the light of increasing Master Policy deductibles!!!!!!
What should you do???? How can this loss under the Master Policy deductible be covered?
If I were you, I would ASK my HO-91 HO-6 carriers HOW they interpret the Other Insurance Provision. Many of them do interpret that the HO-6 Coverage A can respond to a loss below the Master Policy deductible in the above situation when BOTH policies could respond to the loss.
If your HO-91 carriers agree with the ISO interpretation of the mechanics of the Other Insurance Provision, then Coverage A will NOT respond when damage to the individual unit occurs below the Master policy deductible. I would DEMAND an answer -- yes or no. “No answer” is a “no” answer. You must have a guarantee that the Coverage A purchased will be available to the unit-owner when the bylaws told the association to cover the individually-owned items, but a master policy deductible applies. If you do NOT get an answer in the “affirmative”, then I would tell the company that you will be replacing ALL the HO-6 policies with an HO-91 carrier that provides this coverage guarantee, or an HO-2000 carrier that provides an endorsement, or an HO-2011 carrier – to be discussed in a minute. And, I would REMIND them that this INCLUDES the auto policies and the personal umbrella policies and whatever else the client has with this company. You NEED a “guarantee” that Coverage A will respond to a loss below the master policy deductible. It is NOT impossible for the HO-91 carrier to provide this guarantee.
Under the HO-2000, ISO “addressed” this situation by creating an endorsement to “fix” the Other Insurance Provision. If the provision was “broke”, it’s a pity the HO-2000 HO-6 couldn’t have been WRITTEN to fix it! The endorsement that ISO created to fix this situation is HO 17 34 Unit-Owners Modified Other Insurance Condition. I’ve had a couple of lawyers read this endorsement and they wonder what the point of the endorsement is other than a premium generating mechanism. But, nevertheless, this endorsement supposedly fixes the gap.
The endorsement states:
SECTION I – CONDITIONS
Other Insurance and Service Agreement Paragraph 2.
- is deleted and replaced by the following:
- If, at the time of loss, there is other insurance or a service agreement, in the name of a corporation or association of property owners covering the same property covered by this policy, we will pay only for the amount of the loss in excess of the amount due from that other insurance or service agreement, whether they can collect on it or not.
All other provisions of this policy apply.
The endorsement adds a few words and a “wicked” premium. The premium for this endorsement is 25% of the condominium BASE premium. The condominium base premium is “based” on contents. The more CONTENTS your clients purchase, the more this endorsement costs. The endorsement has NOTHING to do with contents. It is ALL about having Coverage A available for when BOTH the master policy and the HO-6 could cover the same unit-owner building loss, but the master policy took a WICKED HIGH deductible.
Two unit-owners could be insured with the SAME Company and each buys $25,000 Coverage A to meet the master policy deductible. (The bylaws directed the association to cover the individually-owned building values, but there is a $25,000 deductible). One unit-owner buys $20,000 Coverage C and the other buys $100,000 Coverage C. Each purchases $25,000 Coverage A. The unit-owner with the $100,000 contents will pay a LOT MORE for this endorsement than the unit-owner with the $20,000 Coverage C … how STUPID is THIS! WHO DREAMED THIS UP???
What should you do?
If the company is an HO-2000 carrier, you MUST have the HO 17 34 Unit-Owners Modified Other Insurance Condition endorsement OR a guarantee that the company will allow Coverage A to respond to a master policy deductible when BOTH policies respond to a unit-owner building loss.
I hear some voluntary carriers are providing it “free” … that is AWESOME … and as it should be! But, whether it is free or not, it is a necessary evil according to ISO.
ISO HO-2011 edition fixes the problem.
The revised Other Insurance condition in the ISO HO-2011 reads as follows:
G. Other Insurance and Service Agreement
- Subject to Paragraph G.1., if, at the time of loss, there is other insurance or a service agreement in the name of a corporation or association of property owners covering the same property covered by this policy, this insurance is:
- Excess over the amount due under such other insurance or service agreement, whether the corporation or association of property owners has collected that amount or not; and
- Primary with respect to any amount of the loss covered by this policy and not due under such other insurance or service agreement because of the application of a deductible.
The HO 17 34 is withdrawn from use as it is no longer necessary. Unfortunately, few companies utilize this filing.
Switching gears … How is the master policy deductible paid when the loss happens to COMMON property?
Suppose a fire burns the clubhouse and there is a $10,000 deductible on the Master Policy, how does the Association get the $10,000? Hopefully, there is a “slush fund” to cover deductibles, but I suspect in many associations that is NOT the case. What does the Association management do? They assess the unit-owners since each unit-owner has a share of the clubhouse and other common areas and a corresponding share of expenses.
Can the unit-owner insure his/her assessment responsibility?
Yes … and no. The unit-owner can insure his/her share of assessments due to “insurance related situations.” Loss Assessment is an additional coverage provided under the HO-6. HO-91 language reads:
- Loss Assessment. We will pay up to $1000 for your share of loss assessment charged during the policy period against you by a corporation or association of property owners, when the assessment is made as a result of direct loss to the property, owned by all members collectively, caused by a Peril Insured Against under COVERAGE A – DWELLING, other than earthquake or land shock waves or tremors before, during or after a volcanic eruption.
This coverage applies only to loss assessments charged against you as owner or tenant of the “residence premises.” We do not cover loss assessments charged against you or a corporation or association of property owners by any governmental body.
The HO-2000 will RESTRICT Loss Assessment coverage response to assessments for damage to commonly-owned property that would also be covered under the HO-6. Other than that, the coverage is the same as the HO-91.
- Loss Assessment
- We will pay up to $1,000 for your share of loss assessment charged during the policy period against you, as owner or tenant of the “residence premises” by a corporation or association of property owners. The assessment must be made as a result of direct loss to property, owned by all members collectively, of the type that would be covered by this policy if owned by you, caused by a Peril Insured Against under Coverage A, other than:
If a loss that would be a covered peril under the unit-owners HO-6 damages COMMON property, then the loss assessment additional coverage will pay the unit-owners assessment responsibility up to $1,000. The unit-owner can increase this assessment coverage up to $50,000 (or higher if carrier specific filing) through HO 04 35 Loss Assessment Endorsement for about $25 or so.
What if the Association has a Percentage Windstorm Deductible and there is MAJOR windstorm damage to common property??????
Suppose your client purchased HO 04 35 Loss Assessment coverage in the amount of $50,000, and his/her assessment share of this Master Policy windstorm deductible is $10,000, will the HO 04 35 respond for the whole $10,000? NO, NO, NO!!!
The endorsement should always be sold and it can be very helpful in other property assessment situations as well as many liability assessment situations but it is NOT helpful in “deductible” assessment situations. The insured will ONLY receive $1,000 towards this assessment from his/her HO-6 unit-owner policy. The rest of the assessment will come “out of pocket.”
The HO 04 35 under both the HO-91 as well as the HO-2000 program has a restriction for assessments that are due SOLELY to master policy deductibles.
SPECIAL LIMIT – We will not pay more than $1,000 of your assessment per unit that results from a deductible in the policy of insurance purchased by a corporation or association of property owners.
Make sure that you address this restriction with your client when selling this endorsement. However, this endorsement can still be vitally important to a client in many other situations. Suppose the master policy suffers a co-insurance penalty and that activates an assessment? Then the complete assessment up to the limit purchased on the HO 04 35 could be paid. Or, the master policy special form excludes a loss in common area that IS/could be covered under the HO-6 modified with the HO 17 32 Special Form, the complete assessment could be paid up to the limit on the HO 04 35.
HO-2011 again … fixes the problem!
The HO 04 35 Supplemental Loss Assessment coverage ELIMINATES this “special limit” provision – yahoo! The fact that the assessment is SOLELY due to a master policy deductible will no longer be a problem. Rarely is a “limitation in coverage” especially good for the client, so it is great to see it GONE. However, most insurance carriers are not using the ISO HO-2011 edition.
So, back to the original issue … Who pays the Master Policy deductible????
It depends … on WHAT property is damaged. It depends on ISO HO edition date and/or company interpretation of ISO policy language.
Buying a one family house has FEWER insurance headaches than buying into a condominium situation!
As usual, if I can be of service to you, please call me, Irene Morrill, Vice President of Technical Affairs at 800.870.7091 or … BETTER YET …. email me at firstname.lastname@example.org.