One of the most common questions we get from Condominium Associations is “How much should we insure our buildings for?”
In this article, I will try to help answer this question, so you can make an informed decision when reviewing the amount of property insurance you carry on the master insurance policy for your Condominium association. Generally speaking the Board of Trustees is responsible for making the decision on how much insurance to carry, but that should be with the advice of their insurance agent.
The first place to look for answers is in your condominium bylaws. Many bylaws require that you insure the buildings to 100% of the replacement cost. 100% replacement cost means that you have the correct amount of insurance to rebuild the Association to the way it was before you had a loss.
This left a potential gap of $10 million in coverage.
If you do not have the correct amount of property coverage required to rebuild, there can be several consequences, co-insurance penalties, loss assessments to unit owners and possible suits brought against the condominium trustees.
Replacement Cost is calculated based on several factors, including, the age of a building, type of construction, gross square feet and the cost of construction per square foot in your geographic area.
The best way to determine the replacement cost of your association is to have an Insurance Replacement Cost Appraisal performed. This appraisal should be conducted by an appraiser licensed in this type of work, as it differs from a real estate appraisal used to determine market value.
The appraisal will use factors described above in calculating replacement cost, along with, measuring your association, checking for comparable units and buildings in your area and looking at the improvements and betterments made by unit owners that differ from the original construction.
Once the appraisal is complete, you will have an accurate report, showing the cost to rebuild your association. This number can be discussed with your agent and insurance company to properly insure your association. Having this document also protects the trustees. With this process complete, you now have documentation to show how the property values on the policy were determined vs. a best guess.
Here is a real life example of why having an appraisal is so important.
One of my associations recently had an appraisal done. Their bylaws require that this is done every certain number of years and required a 100% replacement cost. The Board had been insuring their buildings at $19 million but once the appraisal was complete, it came back with a value of $29 million. This left a potential gap of $10 million in coverage.
Over time the cost of construction had increased and unit owners had made many changes to the units such as new counter tops and finished basements. We now need to increase the building value on the policy.
Unit owner improvements is an area to be very cautious of. Depending on how your bylaws read, the association may be responsible to cover the replacement cost of these improvements.
Many associations overlook this and are often underinsured as a result of unit owners not alerting the Trustees so they can endorse the master policy to cover the added building value.