There are few things trickier and more complicated in the operation of a community association than that of insurance. What types of policies must the association have? What is the scope of coverage? How does the “master policy” work with the individual homeowner’s policy (“HO6”)? There are many components and questions. Perhaps the most seldom understood, and sometimes hotly debated, topic on insurance is when and why the association must file a claim on the master policy.
In scenarios of massive losses like a hail storm, tornado or fire – or in cases where damage is limited to common areas such as a condo building hallway or a party room – it is pretty clear that the master policy should kick in and cover damages. But what about when a townhome wasn’t properly winterized and pipes freeze? Or what about the resident on the top floor of the condo building that let the bathtub overflow, flooding the units below, and causing tens of thousands of dollars of damage? Many Boards don’t understand why the association’s master policy would cover such losses where there is perceived negligence and/or the damage is inside of a unit, and therefore “not the associations responsibility.” It’s a natural reaction.
While the scope of coverage from association to association will vary, it is pretty common that the governing documents are going to require the master policy covers “the replacement costs of the building AND units.” In fact, if the association falls under the Minnesota Common Interest Ownership Act (“MCIOA” or 515B), state statute requires that the master policy covers the “total amount of not less than full insurable replacement cost of the insured property.” It goes on to say “in the case of a common interest community that contains units, or structures within units, sharing or having continuous walls, siding or roofs, the insurance maintained under subsections (a) (1) shall include those units, or structures within those units, and the common elements.”
What does this language mean? It means coverage is extended far beyond what many might expect the master policy to cover. Unless the association’s documents say otherwise, the policy might not cover finishing items such as carpeting, wall paper, or paint; but the subflooring, sheetrock, ceiling, framing, insulation is, in fact, insured by the master policy. Should there be a loss (such as those frozen pipes that burst in a townhome or the units affected in that condo building bathtub overflow) AND THAT LOSS EXCEEDS THE MASTER POLICY DEDUCTIBLE, there IS coverage for that loss.
You may be asking; “Why should the association’s policy cover it?” There is a very simple answer. By state statute, the master insurance policy is PRIMARY. 515B states “(4) if at the time of loss under the policy there is other insurance in the name of a unit owner covering the same property covered by the policy, the association’s policy is primary insurance.” You can read the entire statute on insurance here – https://www.revisor.mn.gov/statutes/cite/515B.3-113
The association does not get to decide what is and isn’t “coverable.” Additionally, the association doesn’t get to decide and assign “negligence.” If there is a loss and damages exceed the master policy’s deductible, a claim should be filed and coverage should be awarded per the governing documents. Insurance agents know the game. If there is a loss, the homeowner’s HO6 agent/policy is going to ask the question – how much damage? If more than the deductible, they know the master policy has to kick in and the HO6 will cover the owner’s personal property, non-covered items such as finish work like carpet, wallpaper and structural coverage up to the deductible.
What the association does get to decide is how the deductible should be handled. It can be absorbed as a common expense, or, more advisably, can be assessed against the owner(s) responsible or those that are benefiting. However, that’s an entirely different newsletter article.
At the end of the day, the role of a master policy to the association, and the fiduciary duty of the Board to the members of the association, is to protect property values. Master insurance policies, state statutes and governing documents put in place comprehensive insurance requirements to ensure that property losses are handled and property conditions restored – thereby maintaining property values.