Condo Media - February 2017 - 31

says. Not having the coverage can
make a bad situation a lot worse.
More HO6 Protection
The HO6 provides other essential coverage for owners, including: Coverage for
liability claims-if someone is injured in
the owner's unit; and "Loss Assessment
Coverage"-paying the owner's share of
a special assessment levied to cover the
shortfall, if the master policy doesn't
fully cover an association claim.
Stephen Marcus, Esq., CCAL, a partner in Marcus, Errico, Emmer & Brooks,
PC, notes an interesting quirk in loss assessment coverage: Owners may be able
to obtain this insurance after-the-fact.
It's well known that you can't increase
the amount of coverage for your house
after it's been destroyed in a fire. However, Marcus explains, loss assessment
coverage in a condominium would be
triggered by the assessment, which won't
come until the insurer has calculated the
loss and the association has identified
the coverage gap. Using that interpretation, an owner might be able to purchase
loss assessment coverage after the disaster has occurred, but before the board
has approved the special assessment.
"This sounds wrong, but it is probably
correct," Marcus says, "and it would
certainly be worth exploring with your
insurance agent." While insurance companies might well resist, he adds, "it's a
battle owners might want to fight."

value," she notes. It's not the original
purchase price or even the building's
current appraised value that you're targeting, Shapiro emphasizes. "Rebuilding,
not resale, is the name of the game."
Stated Value
The ideal coverage for associations is
guaranteed replacement cost, where
the insurer promises to pay whatever
it costs to rebuild a damaged structure.
But that coverage isn't widely available.
Most policies instead cover the property's
stated value. But the stated value only
represents the insurer's estimate, Marcus
cautions. "It's not a guarantee" that the
coverage based on that value will be sufficient, "and agents will be the first to tell
you, they aren't valuation experts." If their
estimate of value is too low, the coverage
limit will be too low, as well. For that
reason, Marcus advises boards to obtain
an "insurance replacement appraisal"
from an independent expert who provides

that service, and to update the appraisal
at least every three years to make sure
their coverage limits accurately reflect the
likely replacement costs.
Inflation Guards
Some industry executives recommend an "inflation guard," which will
automatically increase the property's
stated value by a specified amount
every year. But this is also an estimate,
Pierce points out. If inflation is higher
than the adjustment factor, the association will be under-insured. But
automatic adjustments can create the
opposite problem, Pierce notes. He uses
this example: If the stated value of a
building is $5 million and the inflation
guard increases that by 4 percent every
year-with compounding, after five
years, you'd be insuring for $6 million.
"If it only costs $5 million to replace the
building, you're carrying and paying for
more insurance than you need."

Pitfall Number Three: Associations set
their property coverage limits too low.
This problem results because boards assume that the coverage limit should match
the purchase price, and/or that the stated
coverage limit in the policy will guarantee
enough coverage to repair or replace the
building. Neither assumption is correct.
"The coverage limit is the maximum
the insurer will pay if there's a loss,"
explains Ellen Shapiro, Esq., a partner
in Goodman, Shapiro & Lombardi, LLC,
so you want that limit to be high enough
to replace the property if it is destroyed
today. "That is certainly not going to be
the same as the original purchase price
and it may not be the current appraised
February 2017

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Condo Media - February 2017

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