Legendary funny man Benny Goodman once said, “I don’t want to tell you how much insurance I carry with the Prudential, but all I can say is: when I go, they go too!” The comedian hits on all-important issue: how much insurance is too much, and how much is not enough?
When it comes to homeowner's insurance it is critical that both residents and boards have adequate policies and there are not gaps in coverage.
As a starting point, it is important that residents ensure their personal property is covered. The co-op or condo's bylaws and proprietary lease will help residents determine what will be covered by the building and what is considered their personal property to insure. Anything not covered in the master policy is the resident's responsibility and this varies building by building. While some co-ops and condos offer all-in coverage in their master policy, the vast majority require unit owners to carry their own individual homeowner's policy as well.
According to insurance industry blog www.InsureOurCondo.com, these insurance policies usually cover things like accidental discharge or overflow of water from your plumbing, fire and lightning, explosions, theft, vandalism and malicious mischief, sudden accidental damage from smoke, and so forth.
After this, residents need to assess their personal property and possessions in order to determine a coverage amount for their unit, says Mari Ann Cole, president of Long Island Coverage Corp., an insurance brokerage in Hauppauge. “Most insurance companies have a cost evaluation that is done over the phone which includes the number of rooms, the number of people residing in the unit, location and the value of the contents,” she says. “For the bare minimum we start with $75,000 in contents but that number can be reached very quickly in today's world.”
“Many residents feel they are covered by the building’s master policy, which to an extent they are however, the master policy is typically in place to insure common area owned by all shareholders or unit owners,” says Rachel Barrett, executive vice president at The Whitmore Group, Ltd., an insurance company in Garden City. “The structural interior of their own apartments along with the contents, are the responsibility of the owner to insure.”
She explains that there are several components to a homeowner's insurance policy: improvements and betterments, personal property, loss assessment coverage, personal liability coverage, replacement cost coverage and deluxe/all in coverage and adds that “the policyholder should estimate the cost to replace all of their personal property or contents in order to establish their coverage limit. The improvements and betterments coverage limit should be estimated by evaluating the cost of any and all improvements made to the apartment, including by prior occupants/owners, the bylaws of their building, the cost of renovations and the quality of workmanship and materials. The cost per square foot for improvements and betterments can range from $50.00 per foot to well over $1,000.00 depending upon the apartment.”
The improvements and betterments section covers any changes or alterations that the residents have made to the unit. This is an important distinction to make because in case of damage, most policies will only replace the value of the property as it was built originally meaning, if the unit came with laminate countertops and you replaced those with marble and did not account for that change in the improvements and betterments, the policy will only replace the value of the laminate. “Not carrying enough improvements and betterments coverage is a mistake that many people make. New York is what we call an original specification state as far as the condo is concerned. And as far as the co-op is concerned, it depends on the proprietary lease whether the co-op or the shareholder is responsible for the improvements and betterments,” says Cole.
For board members, who also likely carry dwelling insurance, it is important they understand what exactly is covered by the association opposed to personal risk. “Boards often assume that any damage to a building will be covered by the association’s insurance policies, including damage caused by construction defects, water infiltration or maintenance failures. In reality, damage caused by any of the foregoing often falls within an exception to the policy coverage,” says Attorney Jeffrey S. Reich of the Manhattan-based law firm of Wolf Haldenstein Adler Freeman & Herz, LLP. “Boards should scrutinize their policies to be sure that they understand what will be and what will not be covered in the event of a loss.”
He explains that once again it is crucial for boards to look to their proprietary lease or bylaws to determine what property or possessions are the unit owners’ versus the building's obligation.
Knowing who is responsible for which area can also mitigate legal action against the board and other residents. “An apartment owner without adequate insurance creates the risk of potential lawsuits against him or her and the co-op or condominium should a leak, fire or other casualty occur,” says Attorney Aaron Shmulewitz, a partner with the law firm of Belkin Burden Wenig & Goldman, LLP in Manhattan. “Typically, such casualties would be covered by insurance and damage repair costs would normally be paid promptly by the insurance carrier. However, if there is no insurance or inadequate insurance coverage, a neighbor that suffers a casualty may have to bear all repair costs themselves,” he notes. He goes on to say that they then would then have to sue the apartment owner, who would have to defend the lawsuit—meaning that he or she would have to incur their own legal fees and pay any damages themselves. Additionally, he says, the damaged neighbor would also likely include the co-op or condominium as a defendant in such a lawsuit, which would likely file a cross-claim against the apartment owner. And this, he adds, would add to the potential claims burden that the apartment owner would have to bear.
Insurance Not Required?
In New York, condominium owners are not required to carry homeowner's coverage and for co-op shareholders it depends on their proprietary lease whether they need to or not, says Cole. This stipulation may raise questions as to whether the board or management can require residents to share their insurance status.
“A board or management team, at a board’s request, may ask shareholders and unit owners for information regarding any coverage that they may have. However, without a proprietary lease provision (with respect to a cooperative) or a bylaw provision (with respect to a condominium), a shareholder or unit owner would not be obligated to maintain personal property or liability insurance coverage or to provide the information requested by the board or management,” explains Reich.
Since unit owners are not legally required to carry insurance unless directed by the board, many boards and property managers may be curious to know how this circumstance will impact the master policy. Cole says that fortunately the master policy will not be impacted whether the individual residents maintain their own policy. “What really impacts that is the percentage of occupancy and percentage of tenancy versus ownership,” she says.
Often a resident may decide to rent or sublease for a period of time which raises additional questions with regard to insurance coverage and who is responsible. In this case, it is still necessary for both the owner and the tenant to carry insurance.
“Apartments that are sublet have different insurance exposures. The owner will have responsibility for the structural interior and any contents they may include in the sublet and the occupant should be required to maintain tenant’s insurance which will insure their own contents and provide personal liability coverage in the event they cause bodily injury and or property damage,” says Barrett.
“The unit owner,” adds Cole, “should protect themselves because now they have become the landlord. The fact of the matter is that if you have a unit owner that maintains a renter, part of their lease should be that the tenant maintains insurance and that they extend their personal liability through their primary insurance or obtain landlord insurance through that exposure. In case of a fire, for example, the condominium or cooperative has the right to subrogate a tenant; they can't subrogate the unit owner. The unit owner is responsible for the interior of the unit, even when there is a tenant.”
Industry experts agree that whether it is required or not, homeowner's insurance is an important investment for residents living in condominiums and cooperatives. It can provide the peace of mind and financial security for both boards and residents in case damage does occur.
W.B. King is a freelance writer and a frequent contributor to The Cooperator. Editorial Assistant Maggie Puniewska contributed to this article.