3 examples of your Condominium Association being under insured
By Rick Cline | January 12, 2017
Do you understand that your condominium or townhome association may not have sufficient coverage? Here are some tips to help your community avoid a costly gap at the time of a loss.
Example 1: The Coverage Gap
Imagine an agent proposes $18 million in coverage when your association actually needs $24 million to fully rebuild. That creates a 75% insurance-to-value ratio. Most insurers require that stated values fall between 90% and 100% of actual replacement cost before they will extend full coverage on a claim.
If a major loss occurs and the insurer determines that your property was underinsured, they can deny extended coverage claims altogether. The association is then left to cover the gap out of reserves or through a special assessment to unit owners — a situation no board wants to face.
Example 2: Depreciation Penalties on Claims
Consider a $50,000 hail damage claim. If the property is not insured at proper replacement values, the insurer may apply depreciation penalties and pay out only $30,000. The remaining $20,000 becomes the association’s responsibility.
This shortfall occurs because the policy’s coinsurance clause penalizes the insured when the coverage amount is below the required percentage of replacement cost. The result is a reduced claim payment that can leave the association scrambling to fund necessary repairs.
Example 3: Deductible Calculations Under Blanket Policies
Under a blanket insurance policy, deductible calculations can work against an underinsured association. Without a Statement of Values on file, the insurer uses the property value “at the time of loss” to determine the deductible amount.
If the actual replacement value is significantly higher than what is insured, the deductible applied can be proportionally larger — further reducing the net claim payment. Having an accurate and up-to-date Statement of Values is critical to ensuring fair deductible calculations.
What Can Your Association Do?
If your condominium or townhome association suspects it may be underinsured, there are several steps you can take:
- Conduct an assessment: Order a professional property appraisal or replacement cost assessment to determine the true value of your buildings and common areas.
- Adjust reserves: Ensure your reserve fund accounts for potential insurance shortfalls and can cover deductibles and gaps in coverage.
- Review your agent’s work: If your agent has consistently underinsured the property, consider whether legal action may be warranted to recover losses.
- Order inspections immediately: Do not wait until renewal time. Get an inspection done now to ensure your coverage levels are accurate and adequate.
Proper insurance coverage protects your community’s investment and prevents costly surprises when disaster strikes. Take action today to close any coverage gaps.