Condo Media January 2013
‘Don’t’ Fall into the Gap:
Insurance Coverage Missteps
According to my research, in 1981 the GAP had an advertising slogan and jingle for customers to “fall into the GAP.” For condominiums, both the organization of unit owners and the unit owners themselves, that is precisely the opposite of what you want to happen with respect to insurance, that is, you don’t want to fall into the gap.
In Massachusetts, the starting point for the analysis of insurance, as with most condominium issues, is M.G.L. c. 183A. Interestingly, the only requirement of insurance mandated by 183A is found in §10(h) whereby the organization of unit owners in condominiums of more than 10 units must secure and maintain at its own cost and expense blanket fidelity insurance coverage insuring against the dishonest acts of any person, trustee, manager, managing agent or employee or the organization of unit owners who is responsible for handling organizational funds in an amount equal to at least one-fourth of the annual assessments, excluding special assessments. Such fidelity insurance policy per its definition of employee must specifically include the manager or managing agent or provide for same by an endorsement to the fidelity policy. Such fidelity insurance must name the organization of unit owners as the insured and include a provision requiring 10 days written notice to the organization or manager in the event of cancellation or substantial modification. In addition, the manager or managing agent must maintain, at its sole cost and expense its own fidelity insurance with substantially the same form of coverage.
However, §10(b)(3) provides that the organization of unit owners shall have among its powers the ability to obtain insurance on the common areas and facilities. This insurance shall be without prejudice to the right of each unit owner to ensure his/her own unit for his/her own benefit.
Insurance and Condominium Documents
In virtually all governing documents of condominiums there is a provision whereby the organization of unit owners is required to obtain and maintain to the extent available, a master policy of insurance covering all of the common area and elements. In addition to the master policy that covers all of the common area and elements, condominiums may also be required under their bylaws to obtain and maintain coverage that might arise as a consequence of personal injury or non-property losses that may be sustained in the common areas of the condominium. This coverage is issued on what is denoted as a comprehensive general liability or CGL policy. Other insurance policies the organization of unit owners typically obtain is what is commonly termed directors’ and officers’ (D&O) coverage, which generally insures the trustees/managers for breaches of fiduciary duty or mismanagement of the condominium.
Other policies the organization of unit owners should consider are policies that insure the mechanical apparatus of a condominium from failure, such as a boiler or septic system, flood insurance and earthquake insurance, which coverages may not be included in the condominium’s master or CGL policies.
In summary, a condominium needs to carry several kinds of insurance. The specific coverages of each of these policies will be dictated by the provisions of the condominium’s bylaws and advice from the condominium’s insurance professional and/or attorney as to what the optimum type and amount of coverage a condominium should have given the particular circumstances of that condominium. In this regard, when procuring insurance coverage for the condominium, it is imperative that the insurance professional and lawyer be provided a copy of the governing documents of the condominium so that he/she can analyze the insurance needs of the condominium and obtain the appropriate coverage for the circumstances of that condominium and as required by the bylaws.
The coordination of these coverages is essential to avoid falling into the gap. When there is an event or an incident causing property damage, personal injury, mismanagement or dishonesty, an unacceptable situation could arise if there is a “gap” in coverage. Gaps in coverage can occur by virtue of the definition of who is insured, what constitutes a claim occurrence or wrongful act, how deductibles are applied, whether the limit of liability is per occurrence or claim or has an aggregate amount and whether it is reduced by defense costs in defending a claim. Other factors that could lead to a “gap” include whether the policy has an inception date or prior acts exclusion, which would limit coverage to a specific time period and other terms, exclusions or endorsements used in insurance policies that could limit the application or the extent of coverage of a particular policy. In this regard, it is extremely important to know whether the insurance policy is written on an “occurrence” or “claims made” basis.
Occurrence coverage provides that the policy in effect when the occurrence or incident giving rise to the claim happened will be the policy to respond once the claim for coverage is made. In other words, the claim can be made after the expiration of the policy and coverage will still be invoked. Whereas claims made coverage provides that the policy that is in effect when the claim is made will be the policy that will respond to such claim. In other words, to invoke the coverage of a claims made policy, the claim must be made during the effective period of the policy. Therefore, it is extremely important to know the definition of claim under a claims made policy and to report the claim to the insurance company when a claim is made so as to invoke the coverage of the policy before it expires. If a claim is not made during the effective period of the policy, once the policy expires, the coverage of that policy cannot be invoked. Even if there is continuous coverage, a gap can occur if the successor policy is issued by a different insurance company and/or if the successor policy has a prior acts exclusion or an inception date definition that would preclude coverage for acts that have occurred prior to the commencement date of that policy.
Homeowner Insurance Policies
In addition to the various policies described above that should provide coverage for losses, damages and defense costs involving the common area and elements of a condominium and the operation and governance of the condominium, unit owners should also consider obtaining coverage for the contents of their individual unit under a policy of insurance which is commonly denominated an HO-6 policy. An HO-6 policy is the equivalent of a homeowner’s insurance policy for a single-family home. It bridges the gap for losses and/or damages not covered under the condominium’s master policy, CGL policy or other policies intended to insure for losses and/or damages arising out of or incurred in the common area and elements. It primarily provides coverage for damage to one’s personal effects such as furniture, appliances that are not considered fixtures, area rugs, art work and decorative pieces, and personal items, such as clothing, jewelry, valuable papers and the like. A concept that is often used to determine what is covered by an HO-6 policy is to take the roof or ceiling off of one’s unit and turn it upside down and shake it. Everything that falls out would be covered by your HO-6 policy. In addition to material items, an HO-6 policy can provide coverage for personal injury that might occur within your unit as the condominium will not be responsible under its CGL policy for injuries sustained by individuals who might be injured within your unit. Further, HO-6 policies can provide assessment coverage in the event there is a casualty for which there is insufficient insurance under the condominium’s master policy and a special assessment is necessary to pay for the loss. Also, an HO-6 policy can provide coverage for a unit owner’s share of the deductible on the master policy, which in today’s insurance market can be as much as $25,000. Finally, Fannie Mae, Freddie Mac and the FHA require buyers to purchase HO-6 policies if financing is to be procured under one of these agencies.
In summary, to avoid gaps in coverage, at the risk of being redundant, it is extremely important that you review with your insurance professional and/or attorney the types of insurance policies not only required by chapter 183A and the condominium’s governing documents, but also those policies that a condominium and unit owner should have to “insure” against damages and losses for which there is no coverage under the “required” policies. In undertaking this analysis, to once again borrow on another “gap” analogy, as the say in London when riding the “Tube” (their subway) “mind the gap.”
Mark Rosen, Esq. is an attorney with the law firm of Goodman, Shapiro and Lombardi, LLC. An active member, he serves as a delegate to the CAI Massachusetts Legislative Action Committee (MALAC) and participates in meetings of the chapter’s attorneys’ committee.
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