Insurance…the least exciting topic on any board’s agenda.  But before your eyes glaze over, consider that at this unsettled time, the adequately insured condominium that is committed to the best practices regarding Covid-19 containment – will weather the coming flood of insurance claims more readily than most.

Many condominiums in Massachusetts are suffering – or about to suffer – less financial stability than in years past. Common area fees and assessments are getting harder to collect as long-term high unemployment is projected, the end or reduction of individual federal relief aid looms, and in Massachusetts, there exists a continued moratorium on certain evictions and foreclosures.  These factors are all converging to make it harder to collect the monthly fees and fines that allow a condominium to pay its own bills and be effectively managed.

And for those condominiums containing ground floor retail space – often restaurants –sudden retail closures have been especially damaging to income streams.  Condominium boards do have the discretion to levy special assessments to curtail cash flow problems, but attempting to collect further assessments when a portion of unit owners are struggling to pay monthly fees, especially if tenants’ retail opportunities dry up, is not a winning solution.

Insurance coverage is a necessary bulwark against the unanticipated, and the time to assess the adequacy of your condominium and unit owner insurance coverage is now.

Which Policy (if any) Covers the Problem?

Individual unit owners, and sometimes trustees and property managers, often fail to understand that a gap in coverage can exist between a condominium’s insurance and the individual unit owner’s insurance.  That gap, of course, can become a chasm if an individual unit owner has no insurance coverage.

The Master Policy

The condominium’s insurance policy, commonly referred to as the “master” policy, usually covers buildings, infrastructure, common areas and community property.  Beyond making sure the essentials are covered, an important consideration is the amount of the deductible.  If the deductible is set too low, it invites more claims, and damage that would otherwise be paid out of an assessment on the units (or one specific unit if found to be responsible for the damage) is paid under the master policy.  All unit owners ultimately bear the costs of damages for insured claims.

An initial reaction to low deductible in the master insurance policy might be: “So what?  If insurance covers damage, that’s what insurance is for.”  But remember, all unit owners bear the costs of insured claims.  A condominium’s cost of insurance is calculated by the assessment of risk – the submission of many small claims will surely increase that cost.  Oftentimes that increase is much more than the cost of assessments for damages – and direct assessments or out-of-pocket costs can encourage unit owners to be more realistic about the true cost or necessity of repairs. Trustees should also consider carve-outs for water damage, the most common type of condominium insurance claim.

Covid-19 and Master Policy Claims

Insurers are expecting an influx of Covid-19 claims, but the claimant must prove that he/she caught the virus the stated location at the condominium and that the condominium failed to take adequate measures to prevent the spread of Covid.   Whether the master policy will provide coverage against Covid claims against condominiums is, however, a great unknown and insurers have broadened exclusions for pandemics as a result of the Ebola and SARS scares. We anticipate that even if Covid claims are excluded from coverage, master insurance policies may likely provide defense coverage, including providing the association with paid defense counsel, against these claims.

Notwithstanding the unknowns of Covid coverage issues, associations should take several actions in order to reduce their risk of exposure – literally and figuratively.   The best protection, from both the insurer’s perspective and the condominium’s, is to take seriously best practices to reduce the risk transmission of the virus throughout your condominium.  Condominium rules should be based on CDC guidelines and should include mask wearing and social distancing in common areas, regular cleaning of high-touch areas, strict protocols for contractors working in the building (particularly common areas) and receipt of liability and indemnification waivers from those contractors.  Condominiums should develop protocols and a comprehensive approach to these complex issues – balancing unit owner rights with the community’s needs in these fraught times.

Individual Unit Policy – HO-6

Insurance coverage for individual units, called HO-6 insurance, covers damage within the condominium units and is most analogous to homeowner’s insurance.  HO-6 insurance, under the content section, should cover the walls, ceilings, and floors, as well as respective finishes like paint, tile, hardwood floors or carpeting. The unit’s electrical fixtures, cabinets, doors, windows, and appliances should also be covered by a HO-6 policy. A HO 6 policy, under the contents section, also insures a unit owner’s personal possessions, such as computers and other high value electronics, clothing and jewelry, furniture, and household goods like pots and pans.  Condominium unit owners should reassess their insurance needs after making any major alterations or improvements to their units, as these changes may affect the level of coverage needed.

How Can Trustees Prompt Unit Owners to Be Adequately Insured?

Trustees and Property Managers should, at this time, remind unit owners – through mailers, electronic notices, community boards or other condominium-wide communications – that HO-6 policies provide security for condominiums and for unit owners.

First line efforts – Amend Your Declaration to Limit Liability and Require Insurance

The best way to ensure that unit owners uniformly have adequate insurance is for condominium boards to amend their declarations of trust to require that unit owners must obtain HO-6 insurance and to increase the amount of deductible before the master insurance policy may apply. While the super-majority unit owner vote requirement may seem difficult for some condominiums to pass such amendment, you would be surprised by the number and makeup of condominiums which have successfully so amended their declarations.

For example, Goldman & Pease worked with one large condominium to amend its declaration to require HO-6 insurance for all and to require that claims otherwise covered under the master policy that fall under a $10,000 threshold are the unit owner’s responsibility.  These two amendments have effectively worked in concert to direct smaller claims away from the master policy and have kept insurance coverage costs down for all unit owners.

A recent appellate decision of Waldstein v. Highview demonstrates that courts will respect condominium documents that limit master policy coverage and require H0-6 insurance.  The Waldstein Court ruled that a condominium was not obliged to cover the cost of a failed concrete slab that resulted in a burst sewer pipe, which caused significant damage to the unit.  The court held that the condominium’s master deed stating that the concrete slab was part of the unit acted to limit the types of damage covered and requiring unit owners to maintain their own insurance coverage, was determinative in the condominium’s favor.

Second line efforts – Nudge Owners to Obtain HO-6 Insurance

 Trustees should prioritize helping everyone get HO-6 coverage by making it as easy as possible. Strongly and repeatedly “nudge” unit owners in the right direction.  Suggestions of “carrots” and “sticks” a board can use:

• Explain the purpose of general coverage and the scope of most individual unit owner policies;
• Work with your master policy insurer to offer reasonably priced HO-6 policies at a discount if enough unit owners sign up;
• Emphasize the affordability of such insurance;
• Periodically remind owners of the consequences of no coverage and “gaps” in coverage;
• Disseminate price estimates and insurance contact information;
• Raise deductible limits on master policy claims; and
• Notify condo units of deductibles when they are raised so they can adjust individual policies accordingly

Conclusion

In this time of financial uncertainty, condominium boards must place renewed energies and emphasis on having the condominium and the unit owners maintain adequate insurance, and to adopt best Covid-19 practices to reduce the risk of illness in your building.  These efforts will help maintain financial security now, and reduce the risk of insurance claims and litigation regarding that illness later – a sound investment of time and effort for all.