Author: Chris Boggs

In January 2017, the Virtual University hosted a webinar, Cracking the Condominium Conundrum, and answered several condo related questions through our Ask An Expert service. But condos are complicated so we're answering three questions/concerns with this article.

Insuring Unit Improvements and Betterments

Unit owners are often responsible for insuring any improvements and betterments they make to real property. Examples of these improvements and betterments might include removing the initially installed carpet and replacing it with hardwood; or replacing the laminate countertops with granite. And of course you can't have granite countertops unless cherry wood cabinets are installed as replacements for the builder-grade cabinets.

When the association provides coverage on an "original specification" basis, the additional costs to replace these improvements are the responsibility of the unit owner. The association is responsible to pay the costs to put back carpet floors, laminate countertops, and builder-grade cabinets. If the unit owner wants the upgrades back, and doesn't want to pay the costs out-of-pocket again, the additional costs must be insured by the unit owner. Basically, the cost to reinstall the upgrades is the responsibility of the unit owner.

One question we addressed a while back was, "Regarding the improvements made by the owner, does this apply to improvements by the current owner or does it also include those made by a prior owner?"

As stated, "original specifications" responsibility requires the association to be responsible for only what was originally planned or installed. Regardless of who or when the "upgrade" was made, the association is not responsible for materials over and above those originally specified. The best way to handle it (although not necessarily the easiest) is to insure at the new cost today of the upgraded materials.

Naming the Unit Owner's Mortgage Holder as an Additional Insured or Mortgagee on the Association's Policy

Should a unit owner's mortgagee be added to the association's master policy? The short answer is a resounding, NO! This is a request that should not be made (or entertained) for several reasons:

1. The unit owner's mortgagee has no insurable interest in the associational property;
   
2. They did not loan money on the association's property (so they can't be a mortgagee);
   
3. Imagine the administrative nightmare for the association's agent and carrier. Every time someone new moves in, a change is made. Every time a mortgage is sold, a change must be made. Obviously this is of no concern to the mortgagee, but no insurance carrier would or should allow this;
   
4. In law, the association is the insurance trustee on behalf of all the property owners. Association documents and/or statutes address how policy proceeds are to be distributed. There is no provision for a unit owner's mortgagee being a part of this process;
   
5. Banking laws do not require they be added; and
   
6. FEMA won't allow it on the Residential Condominium Association Policy (RCBAP). 
   

The Mortgagee Requiring Coverage "A" to Equal the Full Loan Amount

Mortgagees requiring a unit owner to provide Coverage A limits equal to the full loan amount likely don't have much experience with condominium ownership. Unlike a dwelling, the unit owner is a co-owner with the association and as such, the responsibility of the unit owner isn't the entire structure or even an amount equal to the loan. In fact, even if the unit owner is responsible for all unit property, the total insurable value is probably a fraction of the loan amount.

Condominium unit owners are buying location, view, convenience, or some other feature offered by the condominium. The market value of these "features" generally greatly exceeds the value of the real property for which they are responsible.

Two key problems arise when the unit owner is required to over-insure the property to meet mortgagee requirements:

1. It is probably a violation of statute. Many states do not allow the willful over-insurance of property; and
   
2. The policy will never pay the face amount.
   

Coverage A limits should be sufficient to cover the value of real property for which the unit owner is responsible, not necessarily the amount of the loan. But in reality, that's between the unit owner and the mortgagee. Agents must follow the law and not willfully over insure.

Condominium Conclusion

The VU has a variety of articles, white papers, and webinars (both live and on-demand) about condominiums, and we invite you to review what we have available. Hopefully the combination of these materials allows you to find the answer you need regarding condominium coverage. If not, we invite Big 'I' members to use our Ask An Expert service.

Last Updated: December 3, 2021
First Published: February 3, 2017