Insurance worries for condo owners

By Bankrate.com

To state the obvious, a condominium is not the same thing as a house. Usually, there's no backyard or basement, and you don't have to worry about cutting the grass or shoveling the front walk.

Insurance is another area where homes and condos differ. Condo owners are typically responsible for insuring just a portion of their property on their own. However, rules differ from complex to complex, and it's important to ask the right questions to ensure you have proper insurance coverage.

Here are six things you need to know about insuring your condominium:

What does your master policy say?

Owners of condominium units obviously do not own the entire complex. Typically, they own their own unit outright and share ownership of the rest of the complex with all the other owners.

From an insurance point of view, that means all individual unit owners have a collective responsibility for insuring areas of the complex owned in common -- building exteriors and hallways, the pool area, etc. A condominium association typically collects monthly dues from unit owners and uses a portion of these funds to insure common areas.

Meanwhile, the unit owner typically is responsible for separately insuring everything within the four walls of his or her individual unit.

The condo association's master policy, as well as association rules, should spell out clearly which parts of the complex are insured through association dues and which parts are not.

There are two broad categories of master policies, says Steve Slattery, a property underwriting manager for Liberty Mutual Group in Boston:

• Bare walls in. These policies cover all real property from the exterior framing inward but do not cover fixtures or installations within a condo unit. Features such as countertops, bathroom and kitchen fixtures, and flooring are not covered. If your condo association has this kind of master policy, you'll probably have a greater need for individual coverage, according to Slattery.

• All in. These policies cover fixtures, installations or additions within the interior surfaces of the perimeter walls, floors and ceilings of individual units. Condo owners under an all-in plan will probably have a more limited need for individual coverage, Slattery says.

There are also variations of the two types. These details should be spelled out in a condominium association's bylaws.

"Most bylaws will talk about anything within the four walls of the unit you own," says Matthew Cullina, the director of product management for MetLife Auto & Home in New York. "Everything else is owned by the condo association ownership. Knowing specifically what you own when you buy that condo is the first thing I recommend."

How much is the association deductible?

Condo association insurance typically includes commercial insurance coverage for the commonly shared building and common areas. Such policies typically have an association deductible.

"Basically, in the event of a natural disaster or hurricane or whatever, it is spelled out in the policy," Cullina says. "If the condo association needs major work or there is major damage to the structure, the condo association will tender the claim to their commercial insurer, and they would get covered for their loss.

"But there would be a deductible, and that deductible would be assessed against all unit owners -- so if there are 10 unit owners, it would be divided 10 ways."

Cullina notes a recent trend toward higher condo deductibles.

"In the past it might have been only $5,000, but we've seen $25,000 and up to $50,000," he says. "That's the biggest one I've seen. You could really be hit with a bill that you weren't expecting or didn't know about if you didn't do your homework."

The coverage should be spelled out in the association's bylaws, Slattery says.

"A copy of the association's insurance agreement should have been given to the unit owner at the time of purchase," he says. "It specifies the responsibilities of the association and the individual owners.

"If the owner does not have a copy, he or she can obtain one from the association's board of directors, its business manager or anyone from the association responsible for addressing individual unit owner questions. The owner's condo insurance sales representative should be able to assist in answering questions about the insurance agreement."

How much coverage is appropriate?

Once you've determined exactly which parts of your condominium unit you must insure individually, you need to decide how much coverage to buy.

Eileen Sutz, an agent with Allstate Insurance in Chicago, suggests estimating coverage by paying attention to how much other owners in the development paid for recent upgrades, such as new flooring, cabinetry and countertops.

"Another way we can roughly estimate that is we go by about half the market value for interior structures," Sutz says. "So if there's a fire, for instance, people have enough to replace their flooring, their cabinetry and their walls -- anything else that's actually considered their personal responsibility. That's a pretty good way to estimate it."

Cash-value or replacement-cost coverage?

Once you determine the appropriate amount of coverage, you'll need to decide what kind of coverage to buy. You need to pick between two basic categories: cash value or replacement cost.

What's the difference? Thousands of dollars, in many cases. Cash-value coverage replaces the value of the insured item minus depreciation.

Continued: Expert recommends replacement-cost coverage

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