Insuring a ‘Box of Air’

Question

"Next week we close on a unit we are purchasing at the Silver Lining Condos and we need to get insurance in place. Can you give us a quote?"

Answer

Undoubtedly most agents have received this call, or one like it, in the last 12 months; and if a quote was given, coverage limits were probably wrong. The correct answer to the "can you give us a quote" question is, "Yes, we can, but not until we know for sure what you are required to cover in YOUR policy."

A quick "quote" on a condominium unit is almost impossible.

Early in my career, and maybe yours as well, I heard insurance "experts" proclaim the purchase of a condominium unit is the same as buying a "box of air." Thus, they reasoned, the Coverage A amount automatically granted by the HO-6 (Unit Owners Broad Form) was sufficient – and many of us believed this lie then, and many still do today.

Although the unit owner doesn't own the entire structure, they may have responsibility for insuring some "real property" elements that are part of the building. And the only way to know what property the unit owner is required to insure is to read the condo association's ruling documents such as the covenants, conditions and restrictions (CCRs).

Four real property definitions apply to condominium property:

Common elements: Property owned by and/or benefiting all members of the association;
Limited common elements: Property elements beneficial to more than one but less than all unit owners;
Unit property: Property elements that benefit none but the unit owner; and
Unit improvements and betterments: Alterations or changes to the real property defined as unit property that increases the value of that property within an individual unit.

To develop the correct Coverage a limit and produce a proper quote, the agent must know which types of property the unit owner is required to insure. The most basic way to say this, if the association isn't responsible for certain type of property, the unit owner is.

Deciding who is responsible for what property is a functions of the association's governing documents. These documents delineate the association's responsibility, and, by default, the unit owners' responsibilities. Associational responsibility is defined in one of three ways:

"All in" or "all inclusive": When the association has "all in" responsibility, all four types of real property are the responsibility of and insured by the association. The only property insured by the unit owner is personal property. When the association has "all in" responsibility, the "automatic" Coverage A limit extended to the unit owner is likely sufficient;
"Bare walls": The opposite end of the spectrum. Associations using "bare walls" wording are responsible for insuring only the common elements and limited common elements. The unit owner is responsible for unit property and any unit improvements and betterments. Obviously the HO-6's "automatic" Coverage A limit is not sufficient if the association's property policy responds on a bare walls basis.
"Original specifications": This could be considered the middle ground between "all in" and "bare walls." When the CCRs dictate associational responsibility on an "original specifications" basis, the association is responsible for the common elements, limited common elements, and "original" unit property (what the builder put in at the time of construction). The unit owner is responsible for unit improvements and betterments (such as upgraded counter tops, flooring or fixtures) or any additions to the unit (such as an enclosed porch). The "automatic" Coverage A limit is likely insufficient when the unit owner is required to insure upgrades and additions.

It's More Than a 'Box of Air'

Unless there is NO doubt the unit owner has little or no real property responsibility, DO NOT think of a condominium unit as a "box of air." The automatic Coverage A limit is not enough in most circumstances.

Regardless the client, the association or the unit owner, careful review of the association's controlling documents is required. In short – DON'T ASSUME who is responsible for insuring what property.

There is a LOT more to the condo discussion. But hopefully this offers some useful direction.

(As a side note, and I never thought I would have to write this, the only section of the HO-6 that responds to real property losses suffered by the unit owner is Coverage A. Evidently some agents and adjusters think the Loss Assessment coverage responds to these claims. WRONG!)

First published: January 6, 2017