deductible article

Disclaimer- This information only applies to Massachusetts

For those who sell Homeowners Policies..... don't miss our HO-2000 change courses presented in September and at our Annual Convention in October.
Just when I thought things were going so well . . . the insurance department approved ISO's HO-2000 filing . . . Doesn't serve to get too comfortable with anything that you know.

Condominium Master Policy deductibles ... can they be deadly for personal lines clients who live in condominium units? Yes!

First ... in a condominium arrangement, who insures what??????
That can be an EXCELLENT question! We all know that when one buys into a condominium situation - shared ownership - one receives two different ownership interests. First, the individual unit for living is individually owned. If I buy a condominium unit, it belongs to me. Everything in that unit that I can touch, I own!

I also receive "common" ownership in the non-individual or common areas such as land, roof of building, common walls, common beams, swimming pools, etc. In Massachusetts, as in most other states, the Association is required to purchase insurance on common areas.

How does the individual unit get insured? That depends. It depends on the bylaws or insuring agreement in the condominium documents. Sometimes the bylaws only require the Association to insure commonly owned areas, and the individual unit owner must insure ALL of his/her individual unit. The individual unit owner accomplishes this through the purchase of large amounts of Coverage A - Dwelling value under the HO-6 Unit-owner policy. This can be expensive for the unit owner, but insurance coverage can be easily obtained.

In other situations, the Association agrees to "take on" the responsibility of insuring individually owned unit-building items through a discussion in the bylaws. The Association may insure ALL building items in the individual units or just some of the individually owned unit-building items. One must read the bylaws carefully to determine what, if any, insurance responsibility is left for the unit-owner. Does the Association OWN the items in the individual unit? NO, NO, NO!!! But, through the bylaws, a contract, an insurable interest is granted to the Association allowing the Association's commercial policy to apply to individual unit-owner items.

Let's suppose the Association, through its bylaws, has chosen to accept responsibility for insuring the individually owned items. The Association buys a Condominium master policy to cover the building items whether common or individually owned . . . hopefully on a Special Form basis. Suppose the
Association purchases a $250 deductible for the Master policy and there is a loss fully contained in one unit. Who pays the deductible?

This is a point that the unit-owner should address when purchasing his/her unit. Or, you should have them look into this issue when you sell them their Unit-Owner Policy covering their contents and liability exposures. If the Association chooses to pay the deductible, great! If the Association makes the unit-owner responsible for the deductible . . . $250 out of pocket for the unit-owner shouldn't be too much of a hardship!

What if the Association has a $5,000 deductible for all losses . . . and the loss - a kitchen fire - happens entirely in your client's unit. Who pays the deductible amount here? Again, your client should check into this issue with the Association. Quite often, the Association bylaws state the Association will provide insurance for unit-owner building items, but will NOT cover the deductible. Generally, a loss that is contained in a specific unit is NOT assessed to other fellow unit-owners. The individual unit-owner suffering the loss is expected to pay for the deductible.

How do we cover the deductible in this situation????
I have NO idea!!! I used to think that I knew. Fire, Casualty and Surety (FCS) bulletins wrote Q&A #1142 on this issue. I always believed that since the unit-owner owns his/her unit that he/she has a right to INSURE his/her unit. After all, if I own a one family home, I have a right to insure it. Both FCS bulletins as well as many other insurance instructors, including me, suggested that Coverage A would respond to the Master Policy deductible for claims happening WITHIN an individual unit. Under the ISO HO-91 and the HO-2000 programs, Coverage A covers:

COVERAGE A - Dwelling
We cover:

1. The alterations, appliances, fixtures and improvements which are part of the building contained within the "residence premises";

2. Items of real property which pertain exclusively to the "residence premises";

3. Property which is your insurance responsibility under a corporation or association of property owners agreement; or

4. Structures owned solely by you, other than the "residence premises," at the location of the "residence premises."

Obviously, the unit-owner CAN insure his/her building items. However, it appears that the Other Insurance Provision of the HO-6 is being used to NEGATE the individual's right to insure his/her own property. The Other Insurance Provision has always stated that if the Association and the
unit-owner insure the same property, then the Association Master Policy will be primary and the HO-6 will be excess. FCS bulletins, myself, many other insurance instructors and a few lawyers that I have shown the language to believe that the Other Insurance Provision demands that the Master Policy be primary but will allow the HO-6 to respond to any uncompensated loss that could be covered under the definition of Coverage A. The following is the ISO HO-91 language, and the HO-2000 language is similar regarding this issue.

Other Insurance. If a loss covered by this policy is also covered by other insurance, except insurance in the name of a corporation of association of property owners, we will pay only the proportion of the loss that the limit of liability that applies under this policy bears to the total amount of insurance
covering the loss.

If, at the time of loss, there is other insurance in the name of a corporation or association of property owners covering the same property covered by this policy, this insurance will be excess over the amount recoverable under such other insurance.

Unfortunately, ISO has chosen not to interpret their policy in the way that many other insurance professionals or company adjusters have. ISO and some carriers have stated that the unit-owner is only covered for the amount of the loss that EXCEEDS the amount RECOVERED by the association under its policy. This interpretation believes that Coverage A can ONLY be available for the "high-end" . . . not pick up any master policy deductible. This is a DANGEROUS interpretation for your clients.

If the master policy bylaws do NOT insure certain items for the unit-owner, then Coverage A will be the PRIMARY and the ONLY coverage responding to the loss. If the Association bylaws covers some or all of the unit-owner building items, then Coverage A will NOT pick up any Master Policy
deductible for damage to these items. This interpretation is ESPECIALLY dangerous in the light of increasing Master Policy deductibles!!!!!!

What should you do????
If I were you, I would ASK my HO-6 carriers HOW they interpret the Other Insurance Provision. Many of them do interpret HO-6 to respond to the Master Policy deductible. If your carriers agree with the ISO interpretation of the mechanics of the Other Insurance Provision, then Coverage A will NOT respond to a Master policy deductible situation when damage to the individual unit occurs.

How can this loss under the Master Policy deductible be covered?
Under the HO-91 there is NO WAY to fix this if your carriers take a non-user friendly interpretation. Isn't it interesting, that if the bylaws DON'T cover the unit-owner building items, then he/she can rely on his/her Coverage A. But, if the bylaws allow the Association to cover the unit-owner building items, then he/she will have no ability to insure the amount subject to the Master Policy Deductible!

Under the HO-2000 ISO "addressed" this situation by creating an endorsement to "fix" the Other Insurance Provision. If the provision was "broke," it's a pity the HO-2000 HO-6 couldn't have been WRITTEN to fix it! The endorsement that ISO created to fix this situation is HO 17 34. I've had a couple of lawyers read this, and they wonder what the point of the endorsement is since the policy language shouldn't be a problem in the first place! But, nevertheless, this endorsement supposedly fixes the gap. Will your carriers sell it? Who knows. It can't be sold until the carrier utilizes the HO-2000 program . . . unless they make their own filing.

Perhaps, the association should be requested to LOWER its deductible?
If the association CHOSE to increase the deductible to reduce overall premium, perhaps the deductible should be lowered again. If the association was FORCED into a higher deductible, then the unit-owner could find him or herself in an "unfortunate situation" of having to come up with a high Master Policy deductible if the loss is contained within his/her own personal unit. Who said life was supposed to be easy?

How is the Master Policy deductible paid when the loss happens to COMMON property?
Suppose a fire burns the clubhouse and there is a $10,000 deductible on the Master Policy, how does the Association get the $10,000? Well, hopefully, there is a "slush fund" to cover deductibles . . . but I suspect in many associations that is NOT the case. What does the Association management do? They assess the unit-owners since each unit owner has a share of the clubhouse and other common areas.

Can the unit-owner insure his/her assessment responsibility?
Yes ... and no. The unit-owner can insure his/her share of assessments due to "insurance related situations." Loss Assessment is an additional coverage provided under the HO-6.

HO-91 language reads:
7. Loss Assessment. We will pay up to $1000 for your share of loss assessment charged during the policy period against you by a corporation or association of property owners, when the assessment is made as a result of direct loss to the
property, owned by all members collectively, caused by a Peril Insured Against under COVERAGE A - DWELLING, other than earthquake or land shock waves or tremors before, during or after a volcanic eruption.

This coverage applies only to loss assessments charged against you as owner or tenant of the "residence premises."

We do not cover loss assessments charged against you or a corporation or association of property owners by any governmental body

If a loss that would be a covered peril under the unit-owners HO-6 damages COMMON property, then the loss assessment additional coverage will pay the unit-owners assessment responsibility up to $1,000. The unit-owner can increase this assessment coverage up to $50,000 with HO 04 35 Increased Loss Assessment Endorsement for only $25 or so.

The HO-2000 will RESTRICT Loss Assessment coverage to only respond to assessments for damage to property that would also be covered under the HO-6, but other than that, the coverage is still intact.

The assessment must be made as a result of direct loss to property, owned by all members collectively, of the type that would be covered by this policy if owned by you

What if the Association has a Percentage Windstorm deductible and there is MAJOR windstorm damage to common property??????
Suppose your client purchased HO 04 35 Increased Loss Assessment coverage in the amount of $50,000 and his/her assessment share of this Master Policy windstorm deductible is $10,000, will the HO 04 35 respond for the whole $10,000? NO, NO, NO!!!

The endorsement should always be sold and it can be very helpful in other property assessment situations as well as many liability assessment situations, but it is NOT helpful in "deductible" assessment situations. The insured will ONLY receive $1,000 towards this assessment from his/her HO-6 unit-owner policy. The rest of the assessment will come "out of pocket."

The HO 04 35 under both the HO-91 as well as the HO-2000 program has a restriction for assessments that are due SOLELY to master policy deductibles.

SPECIAL LIMIT - We will not pay more than $1,000 of your assessment that results from a deductible in the policy of insurance purchased by a corporation or association of property owners.

Make sure that you address this restriction with your client when selling this endorsement. have to admit that I do agree this restriction is NECESSARY in this endorsement. Otherwise, the Association would buy commercial property EXCESS policies assuming that each loss will be assessed BACK to the individual unit-owner who has been TOLD to carry HIGH Loss Assessment coverage.

If you sell the Master Policy . . . perhaps you could suggest LOWER deductibles to the Association insurance decision making team?

So, back to the original issue . . . Who pays the Master Policy deductible????
It appears the insurance industry feels that the individual unit-owner who has little to no control over the coverage purchased by the association should pay for the deductible out-of-pocket! Buying a one family house has FEWER insurance headaches than buying into a condominium situation!