1977, May, Pg. 782. Condominium Insurance: Old Problems, New Concerns.

• Author: by R. James Nicholson

6 Colo.Law. 782

Colorado Lawyer

1977.

1977, May, Pg. 782.

Condominium Insurance: Old Problems, New Concerns

782Vol. 6, No. 5, Pg. 782Condominium Insurance: Old Problems, New Concernsby R. James Nicholson[Please see hardcopy for image]R. James Nicholson, Denver, is a partner in the firm of Calkins, Kramer, Grimshaw & Harring.783In recent years, the condominium has burgeoned as a popular form of real property ownership. Because, by nature, a condominium project involves varying property interests which must be adequately insured to meet both the mutual and sometimes competing concerns of unit owners, mortgagees, and the association of unit owners, the most effective means of insuring the condominium has become a confounding and controversial issue which has not yet been satisfactorily resolved.

This article will attempt to identify many of the major concerns caused by the peculiar nature of condominium ownership. The article will note the insurance companies' attempts to use their standard homeowners policies, with modifications, to meet the insurance needs of a condominium project; it will note the absence of statutory directives in Colorado; and, finally, it will propose possible solutions to each problem. The solutions will, of course, vary depending on the particular problem, some being within the province of the legislature, and others within that of either the insurance companies or the homeowners associations through the by-laws and declarations.

The Condominium ConceptA "condominium" has been defined as:[T]he property interest of a unit owner in a multi-unit dwelling, each of whose unit owners enjoys exclusive ownership of his individual unit with a fee simple title thereto, while retaining an undivided interest as a tenant in common in the common areas and facilities of the building and grounds used by all residents of the condominium.(fn1) The Colorado Condominium Ownership Act is in accord, defining the "condominium unit" as "an individual air space unit together with the interest in the common elements appurtenant to such unit."(fn2) Basically, the two elements essential to the condominium form of ownership are (1) individual ownership in fee simple of a private unit, and (2) an undivided interest as a tenant in common of certain public or common areas or elements which serve all units.

784Typically, the condominium declaration is a recorded instrument "which defines the character, duration, rights, obligations, and limitations of condominium ownership,"(fn3) and serves to distinguish condominium owners' separate privileges and responsibilities from the common privileges and responsibilities shared by all owners.(fn4) The declaration frequently provides for a management body to handle the condominium project's common affairs, including procuring and maintaining liability and fire and hazard insurance on certain areas and requests coverage for officers, members of the board of directors, and individual unit owners.

Interested PartiesCondominium unit owners, mortgagees, and the association of unit owners will all be concerned with the adequacy of the insurance coverage.(fn5) Since, thus far, insurance companies have not adequately structured their insurance policies to meet the unique needs of the condominium, the various interests of these parties often result in competing interests, overlapping policies, gaps in coverage, and a general feeling of insecurity.(fn6)

Possible Variations in Insurance CoverageVarious solutions have been offered to the problem of condominium insurance, including coordinated unit owner's policies, nonintegrated policies where each unit owner is free to obtain his own coverage, or an association master policy.(fn7) The consensus of opinion seems to be that since the condominium unit is an integral part of a larger structure, it is unreasonable to think that unit owners can adequately insure their own interests individually. Indeed,[s]ince a condominium unit is an integral part of a larger building, every unit in that structure must be properly insured before the owner of each unit can feel safe about his particular interest. In a condominium, insurance is a community problem, and most coverages require community control.(fn8)

Financing the Condominium InsuranceThe necessary funds to cover the insurance premiums can and should be provided for in the condominium declaration and by-laws. These instruments should authorize the board of directors of the association to obtain both casualty and liability insurance and to pay for such insurance out of the annual assessments of the association. It is essential that the by-laws empower the board to levy both annual and special assessments which members of the association are obligated to pay. Such assessments should be secured by a continuing lien upon the unit owner's property against which the assessment is made, and the board should be authorized to either bring an action to recover the amount due or foreclose the lien.

Insurable InterestsGenerally, "one has an 'insurable interest' in property by the existence of which he receives benefit or by the destruction of which he suffers loss, regardless of whether he has title to the property. While the party need not have title to the property he must have a demonstrable loss"(fn9) in order to recover under the terms of an insurance policy.

The requirement that one must have an insurable interest in given property before one is able to obtain insurance thereon raises the issue of whether an association of unit owners or its management body has an insurable interest in the project's common areas and facilities.(fn10) In most instances, the association does not own any part of the real property, but instead is merely a "management

785786device of the unit owners."(fn11) Therefore, "[o]ne is led to wonder whether lack of insurable interest might not be pleaded in a proper case."(fn12)

To avoid a claim of lack of insurable interest, insurance can be written in the name of the association's board of directors "as trustee for each of the [unit] owners."(fn13) The association is then only a nominal party who represents all of the varying interests and receives the insurance proceeds.(fn14)

State legislatures can, also, offer a solution to this problem by statutorily granting the association an insurable interest. For example, the Idaho statute concerning condominium insurance specifically states that the management body "shall have the authority and an insurable interest to insure the property."(fn15)

CASUALTY INSURANCE---SPECIFIC PROBLEMS

Co-insuranceCasualty insurance policies frequently include a co-insurance percentage applicable to the policy. The effect of such a provision is that if the property is not insured to, for example, 90 percent of its value at all times, "the company will not be liable for a greater portion of any loss than the ratio between the limit of liability and the actual cash value of the premises when the loss occurs."(fn16)

To illustrate this point, assume that the value of the property insured has appreciated to $100,000, and the amount of insurance carried is $45,000. If the property suffers a casualty in the amount of $40,000, with a 90 percent co-insurance provision, the insured will recover only $20,000, since only one-half of the required $90,000 of insurance was carried. Without the co-insurance clause, the insured would have recovered the full $40,000.(fn17)

A co-insurance clause, conceivably, could seriously impair the condominium's recovery in the event of a casualty. If, for example, unit owners install costly improvements and additions within their units, the master policy's dollar coverage may not equal the required percentage and the association may subsequently become a co-insurer with the insurance company.

The only effective solution to this problem is to remove the co-insurance percentage from the insurance policy even though, as a result, insurance premiums will increase.

787"No Other Insurance" ClauseAn insurance policy may contain provisions considering the existence of other insurance covering the same premises. Such provisions may take the form of (1) a clause requiring that the insured obtain the insurer's permission before purchasing additional coverage,(fn18) or (2) a clause to the effect that "[o]ther insurance may be prohibited or the amount of insurance may be limited" by a provision in the policy.(fn19)

In a condominium setting, problems may arise if, for example, an individual unit owner purchases additional coverage. What effect does this have on a master policy which contains a "no other insurance"...