Author: Chris Boggs
In January 2017, the Virtual University focused on condominiums. We held a webinar on January 18, we posted several articles in the VUpoint newsletter, and we answered several Ask An Expert questions. But, we aren't necessarily ready to move on just yet.
Three questions/concerns must be addressed before we can retire the subject – for a little while.
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 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 don'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.
During the webinar we received this question, "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 who/when the "upgrade" was made, the association is not responsible for materials over and above what those originally specified. The best way to handle it (not necessarily the easiest) is to insure at the cost new today of the upgraded materials.
Naming Unit Owner's Mortgage Holder on the as an Additional Insured or Mortgagee on the Association's Policy
Surprisingly, no one asked about this all-to-common request. Maybe everyone knows the answer already. If so, forgive the rehashing of well-tread ground.
Should a unit owner's mortgagee be added to the association's master policy? The short answer is a resounding, NO! This is not even a request that should be made (or entertained) for several reasons:
- The unit owner's mortgagee has no insurable interest in the associational property;
- They did not loan money on the association's property (so they can't be a mortgagee);
- 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;
- 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;
- Banking laws do not require they be added; and
- 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, 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:
- It is probably a violation of statute. Many states do not allow the willful over-insurance of property; and
- 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.
We have covered a lot of ground regarding condominiums in our webinar and articles. Hopefully the combination of these materials allows you to find the answer you need. If not, we invite you to use our Ask An Expert service to find the answer to your questions.
First Published: February 3, 2017