Bill Morris in Bricks & Bucks on August 4, 2021
Last week we reported on a sticky situation in Brooklyn. After a devastating fire in 2019, more than three-quarters of the 54 unit-owners in a Sunset Park condominium voted not to restore the building, which cleared the way for all unit-owners to split the proceeds of a building sale and any payouts from the condo’s insurance policies. Since then a group of unit-owners has sued the condo board for breach of contract, claiming its $8.2 million in property insurance was inadequate.
That legal mess points out the importance of a little-understood type of insurance policy available to co-op shareholders and condo unit-owners. Known as loss assessment coverage, this part of a homeowner’s policy usually protects residents if the building’s master policy fails to cover all costs for liability or for damage to the building’s exterior or common areas – and the board is forced to assess residents to cover the difference. A loss assessment policy will pay the resident’s share of that assessment, up to the limit set in the policy. That limit, while usually small, can range up to $100,000.
“It’s misunderstood,” says Jason Schiciano, co-president at the brokerage Levitt-Fuirst Insurance. “Any time a board levies an assessment, there’s an assumption that it will be covered by the loss assessment policy. But there’s a cap to the coverage, and it’s triggered only if the homeowner’s policy covers the cause of the loss that’s the basis for the assessment. If, for example, a sewage backup is excluded from the homeowner’s policy, any assessment to pay for repairs will not be covered by the loss assessment policy.”
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The recent condo collapse in Florida points to another area of misunderstanding. “Since the collapse,” Schiciano says, “a lot of co-op and condo boards are looking at their deferred maintenance on such things as elevators and roofs. An assessment to pay for a capital project or for deferred maintenance will not be covered by a loss assessment policy. It only covers unforeseen events or accidents. It makes sense, if you stop and think about it. These policies are not a way for a board to finance deferred maintenance.”
Another wrinkle: Some boards try to keep maintenance low by buying insurance policies with high deductibles and low premiums, then assessing residents to cover the deductible in the event of a claim. But Schiciano points out that one carrier’s policy with a $100,000 limit on loss assessment coverage also has a $5,000 limit on payouts for an assessment that covers an association’s insurance deductible.
Should boards urge residents to buy such coverage? “It’s not something for boards to advise their shareholders or unit-owners to buy,” says Alan Lyons, a partner at the law firm Herrick Feinstein and the chair of its insurance practice. “It’s something residents should discuss with their broker. Many unit-owners and shareholders may not be aware such coverage exists. The coverage limits are usually low, but it can be useful. Assessments are not budgeted for. They’re a surprise. This coverage can’t do any harm.”
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