It has been said that insurance is the only product that both the seller and buyer hope is never used. That certainly rings true when it comes to community Associations’ insurance policies, but it does not diminish the need for Associations to protect themselves and their unit owners from an ever-widening array of damages they could suffer. Wis. Stat. § 703.17 requires Condominium Associations to obtain insurance against potential hazards, but only discusses scope by saying that the Association must acquire insurance “for not less than full replacement value of the property insured against.” Wis. Stat. § 703.02(14) then states that “Property” means unimproved land, land together with improvements on it, or improvements without the underlying land. Property may consist of noncontiguous parcels or improvements. Most people knowledgeable in condominium law construe this to mean all of the real property in the Condominium Association. To avoid potential allegations of insufficient coverage, and to ensure that the Association can stay financially afloat in the wake of significant damage, Associations should acquire policies that insure the entirety of the Association’s real property (immovable property), including its common elements, limited common elements, and units – anything that remained if the buildings were turned upside down – and should ensure that those policies do not exclude or except damage caused by any likely cause.
As for-profit businesses, insurance companies attempt to sell the highest quantity, and highest price, insurance that they can, and write their policies advantageously so they can pay out to their insureds as little as possible. One of the main ways insurance companies avoid paying out on their policies is by creating exceptions or exclusions in their policies, stating that they will pay if something is damaged, unless or except it is damaged in a certain way. There is no one-size-fits-all list of causes an Association should make sure it is covered against. For example, an Association in the Midwest does not need to have an insurance policy that covers volcano eruption damages. However, a Midwestern Association should have a policy protecting it against hail damage, or damage resulting from frozen pipes – coverage that an Association in south Texas would likely not be concerned about.
While geography and size factors play a role in the types of coverage an Association should have, there are four areas where insurance companies write distinctions into their policies to prevent payout that Associations should be on alert for: the type of property involved, the cause of damage, the reason behind potential Association liability, and the type of damages it may suffer.
The first category is the easiest to be on alert for – the type of property involved. Just as a homeowner would ensure that their homeowner’s insurance listed the right address and stated it covered the entire plot constituting the homeowner’s land, an Association should ensure that its insurance policy contains an accurate listing of the Association’s property, and covers all of the buildings and improvements within the Association, including common elements, limited common elements, and the units.
Second, the Association should look at any distinctions in its policy related to the cause of damage. Associations should have insurance to cover damage resulting from any possible weather or natural phenomenon (including lightning, flooding, excessive wind, etc.), and damage caused by any individual/individuals. An Association should review its policy to avoid a scenario in which it finds itself without coverage because it did not realize its policy covered damage by a negligent individual (such as someone who loses control of their car and crashes it into the Association’s building), while it did not cover damage by a criminal act without a police report filed immediately thereafter (such as vandalism to the Association’s buildings where it chose not to notify law enforcement).
In addition to insuring against damage to an Association’s property, an Association should purchase insurance to protect itself from alleged misconduct. In addition to the well-known directors & officers (D&O) liability insurance policy all Associations should have, Associations should have policies that cover workers compensation claims (even if it does not have its own employees) and fidelity (crime) insurance. Critically, the Association’s policies should contain a “defend and indemnify” clause in which the insurance company agrees to pay the costs involved with litigating a dispute about the insured, and will indemnify the Association for claims made against them covered under its policies. Associations should also ensure that their policies cover not only the cost of property that could be damaged or destroyed, but any incidental damages it may incur such as loss of assessments or fees in the wake of a natural disaster that destroys the Association’s parking structure resulting in its unit owners not making its regular payments for the same.
Finally, Associations should ensure that their condominium documents do not reduce the coverage that they would otherwise be purchasing. Most insurance policies now stipulate that they will provide coverage to the extent required by the condominium documents, knowing that most condominium documents require far less coverage than what is arguably mandated by the statute. Accordingly most Associations can increase their insurance coverage by simply amending their documents (usually the Declaration) to provide that the Association will cover all of the real property of the Association, including any improvements.
While every Association should hope it never has to use its insurance policies, it should ensure that if it does need to use them, it has maximized the available coverage.
