September 27, 2010
CHANGES TO INSURANCE REQUIREMENTS FOR CONDOMINIUM ASSOCIATIONS
By: James Orlando, Legislative Analyst II
You asked several questions about PA 09-225's changes to insurance requirements for condominium associations, particularly the requirements regarding owner-installed improvements and betterments. The questions and answers appear below.
1. HOW DID PA 09-225 CHANGE CONDOMINIUM INSURANCE REQUIREMENTS?
PA 09-225 made several changes to the insurance requirements in the Common Interest Ownership Act (CIOA). Many of these changes were adopted from recommendations of the Uniform Law Commission of the National Conference of Commissioners on Uniform State Laws (NCCUSL) to amend the Uniform Common Interest Ownership Act (Uniform Act).
In addition to the changes described below, the act also made other technical and conforming changes to insurance provisions.
Extension of CIOA Insurance Requirements to Pre-1984 Common Interest Communities (PA 09-225, § 5)
Generally, CIOA applies to common interest communities created in Connecticut on or after January 1, 1984. However, certain provisions of CIOA, to the extent necessary to construe these provisions, apply to common interest communities created before that date but only with respect to events and circumstances that occur after January 1, 1984 (CGS § 47-216). PA 09-225 makes CIOA's insurance provisions apply to these older common interest communities.
Changes to Required Property Insurance and Coverage of Improvements Installed by Unit Owners (PA 09-225, § 29)
Prior law required associations to insure units in buildings that were part of a cooperative or that contained units having horizontal boundaries described in the declaration, but it specified that the insurance did not have to include improvements the unit owners installed. PA 09-225 instead requires associations to insure the units in any building containing either horizontal or vertical boundaries that comprise or are located within common walls between units. As explained in the commentary to the NCCUSL's 2008 revisions to the Uniform Act, horizontal boundaries are found “where units in a building [are] 'stacked' above or below one another, as in a high rise building.” Vertical boundaries are found where there is “a common wall between units” (NCCUSL, 2008 Amendments to Uniform Common Interest Ownership Act, pg. 183, available at http://www.law.upenn.edu/bll/archives/ulc/ucioa/2008final.pdf).
The act also requires that the insurance on such units include coverage for improvements unit owners installed, unless the declaration limits the association's authority to do so or the executive board decides, after giving notice and an opportunity for unit owners to comment, not to insure them.
For common interest communities containing more than 12 units, the act requires that, unless the association insures all improvements and betterments, it must:
1. prepare and maintain a schedule of the standard fixtures, improvements, and betterments in the units, including any standard wall, floor, and ceiling coverings covered by the association's insurance policy;
2. provide the schedule at least annually to the unit owners to enable them to coordinate their homeowners insurance coverage with the association's insurance policy; and
3. include the schedule in the resale certificate required by law.
Reasonable Deductibles (PA 09-225, § 29)
PA 09-225 specifies that the insurance policies that associations are required to maintain may be subject to reasonable deductibles.
Fidelity Insurance (PA 09-225, § 29)
PA 09-225 requires the association to carry fidelity insurance. This type of insurance protects the association from loss of money, securities, or inventories resulting from crime. Common fidelity insurance claims allege employee dishonesty, embezzlement, forgery, robbery, safe burglary, computer fraud, wire transfer fraud, counterfeiting, and similar criminal acts.
Permissible Methods to Notify Unit Owners That Insurance is Not Reasonably Available (PA 09-225, § 29)
Under prior law, if any required insurance was not reasonably available, the association had to promptly notify all unit owners by hand delivery or prepaid U.S. mail. The act instead requires the association to promptly notify unit owners by those means or by:
1. commercially reasonable delivery service to the mailing address of each unit;
2. electronic means, if the unit owner has given the association an electronic address; or
3. any other method reasonably calculated to provide notice to the unit owner.
Disbursement of Insurance Proceeds (PA 09-225, § 29)
The law requires an insurance trustee or the association to hold any insurance proceeds in trust for the association, unit owners, and lien holders. The act requires that the proceeds must be disbursed first for the repair or replacement, instead of the repair and restoration, of the damaged property.
Form of Certificate or Memoranda of Insurance (PA 09-225, § 29)
The law requires an insurer that issues a required insurance policy to provide certificates or memoranda of insurance to (1) the association and (2) on request, any unit owner or holder of a security interest. The act
requires the request to be made in a record (information inscribed on a tangible medium or stored in an electronic or other medium and retrievable in perceivable form) instead of in writing.
2. WHAT IS THE LEGISLATIVE HISTORY OF THE INSURANCE CHANGES IN PA 09-225?
In December 2009, the Connecticut Law Revision Commission voted to convene a study committee to evaluate the NCCUSL's amendments to the Uniform Act, as well as other relevant amendments to CIOA (Connecticut Law Revision, Dec. 11, 2008 Meeting Minutes, available at http://www.cga.ct.gov/lrc/2008%20Agendas%20and%20Minutes/Agenda121108.pdf).
In the 2009 regular session, the Judiciary Committee favorably reported HB 6672, which largely incorporated the changes recommended by NCCUSL. This version of the bill required unit insurance coverage, to the extent reasonably available, for common interest communities with units that have vertical boundaries comprising common walls between units. It specified that the coverage need not include improvements and betterments installed by unit owners. Other than some minor and technical changes, the insurance provisions in the bill were otherwise the same as in PA 09-225.
HB 6672 was passed by both the House and Senate as amended by House Amendments A and B. House Amendment A changed the requirements regarding owner-installed improvements, adding the provision requiring coverage for such improvements and the exceptions to this requirement.
There was no testimony at the committee level concerning the insurance changes to CIOA. The only discussion in the House or Senate regarding the insurance requirements was a brief summary by Representative O'Neill of all the changes in House Amendment A. Representative O'Neill stated that the amendment “clarifies the association's ability to distinguish association unit owner insurance responsibilities,” but did not discuss the insurance changes in detail (House Transcript, June 3, 2009).
3. WHAT IS THE BACKGROUND TO THE REQUIREMENT REGARDING OWNER-INSTALLED IMPROVEMENTS AND BETTERMENTS?
According to the American Association of Insurance Services, when condominiums were first introduced in the United States, the insurance responsibilities of condominium associations could be grouped into one of three approaches: bare walls, single entity, or all inclusive. Under the “bare walls” approach, which has generally fallen out of favor, the association insures only (1) the building's structure, (2) fixtures and furnishings in the common areas, and (3) any of the association's personal property. Unit owners are left to insure against damage beyond their unit's unfinished walls.
Under the “single entity” approach, associations insure building property, including original fixtures in units. Unit owners are still responsible for insuring any betterments and additions. This is the approach adopted by NCCUSL in the Uniform Act, and the approach followed in Connecticut before the changes in PA 09-225.
Under the “all inclusive” or “all in” approach, in addition to building property and common areas, associations must obtain insurance for all structures and fixtures within units, including improvements and additions installed by unit owners (American Association of Insurance Services, Emerging Issues and Exposure: Insuring Condominium Property, available at http://www.aaisonline.com/articles/topics_condos.html).
4. HOW ARE ASSOCIATIONS HANDLING THE NEW REQUIREMENTS REGARDING OWNER-INSTALLED IMPROVEMENTS AND BETTERMENTS?
We contacted attorney Matthew Perlstein, a Connecticut condominium law expert. His sense is that most associations have decided to obtain coverage for owner-installed improvements, rather than to prepare a schedule of standard fixtures, improvements, and betterments. In general, he believes the added expense for obtaining more coverage has not been substantial. He stated that the transaction costs for preparing the list might not be worth the expense, unless an association has units with significant owner-installed improvements.
We also contacted Kim McClain, executive director of the Connecticut chapter of the Community Associations Institute. She is aware of only two associations that have decided to opt out of “all in” coverage and prepare a schedule of original fixtures. She indicated that for most associations, the task of devising such a list would be daunting.
5. WHAT IS THE RATIONALE AND PROS AND CONS OF THE NEW REQUIREMENTS REGARDING OWNER-INSTALLED IMPROVEMENTS?
The legislative history of PA 09-225 does not describe the rationale for the insurance changes.
One potential advantage of the new requirement is that unit owners may have better protection if there is damage to any improvements or betterments installed by unit owners. Under the prior “single entity” approach, the association would only be required to insure building property sufficiently to restore it to the original condition. A potential disadvantage is that the requirement may raise association insurance premiums.
Attorney Perlstein noted that one concern leading to the change was that it is often difficult to tell which fixtures in condominium units were installed by the developer and which were installed by unit owners. This is especially true in older units that may have changed ownership several times. Thus, it may be easier to insure all fixtures or to at least make a baseline list for the units. He indicated that another potential benefit of requiring the association to cover owner-installed improvements is that in case of substantial damage to the unit, the owner will get the unit back to its previous condition without having to worry about who pays for what.
In an article on the website of the Connecticut chapter of the Community Associations Institute, Rich Bouvier writes that
From a premium point of view, to change your master insurance policy form from “Single Entity” coverage to “All In” coverage, most insurers are estimating a 6%-10% increase in the premium. This is proportionate to the increased amount of property coverage necessary to encompass these improvements and betterments. This amount of coverage is determined by each insurance company and will vary from insurer to insurer as well as from association to association (Rich Bouvier. 2010, Issue 5.
Common Interest Ownership Act and Connecticut Condominium Master Insurance, Improvements and Betterments?, available at http://www.caict.org/Articles/comm_interest_articles_legal_cioa_insurance.html).
An April 2010 article in the Stamford Advocate noted that the new
insurance requirement for owner-installed improvements “has been considered controversial because it threatens to raise the cost of premiums for the overall development, which come out of common charges paid by all homeowners.” William Ward, a Stamford attorney who represents associations, stated in the article that it was not certain that insurance premiums would rise. He added that covering such improvements with the association's insurance should reduce the cost of insurance purchased by individual homeowners. He stated, “It should be a wash” (Elizabeth Kim. Apr. 13, 2010. New State Law to Change How Condo Associations Operate, Stamford Advocate).
6. HOW DO THESE NEW PROPERTY INSURANCE REQUIREMENTS COMPARE TO NEARBY STATES?
We surveyed the property insurance requirements for condominium associations in the other New England states, New York, and New Jersey. All of these states require condominium associations to maintain property insurance in some form or under certain circumstances. None of the states have requirements regarding owner-installed improvements similar to the requirements in PA 09-225.
Maine, Rhode Island (for condominiums created after July 1, 1982), and Vermont (for condominiums created after January 1, 1999) all have requirements similar to those in Connecticut before the changes in PA 09-225. These states require the association, to the extent reasonably available, to maintain property insurance on the common elements. The insurance must cover units in buildings with horizontal boundaries between them (units stacked on top of each other), but the coverage need not include improvements and betterments installed by unit owners (Me. Rev. Stat. Ann. tit. 33, § 1603-113; R.I. Gen. Laws § 34-36.1-3.13; Vt. Stat. Ann. tit. 27A, § 3-113).
For condominiums created before July 1, 1982, Rhode Island requires the association, manager, or management committee to obtain property insurance only if required by the declaration, bylaws, or a majority of unit owners, or at the request of a mortgagee having a first mortgage covering a unit (R.I. Gen. Laws § 34-36-29). Vermont has similar requirements for condominiums created before January 1, 1999.
Vermont law requires the manager or board to obtain property insurance only if required by the declaration, bylaws, or a majority of the apartment or site owners, or at the request of a mortgagee having a first mortgage covering an apartment or site (Vt. Stat. Ann. tit. 27, § 1325).
Massachusetts law authorizes associations to obtain insurance on common areas and facilities, but does not require them to do so (Mass. Gen. Laws ch. 183A, § 10).
New Hampshire requires the association (or board or managing agent on the association's behalf) to obtain insurance on the structures within the condominium or structures that in whole or part comprise the common areas (N.H. Rev. Stat. Ann. § 356-B:43).
New Jersey requires associations to maintain insurance covering all common elements and all structural portions of the condominium property (N.J. Stat. § 46:8B-14).
New York requires the board of managers to insure buildings (1) if required to do so by the declaration, by-laws, or a majority of the unit owners or (2) if the community is a qualified leasehold condominium (NY Real Property Law § 339-bb).
7. ARE CIOA'S INSURANCE PROVISIONS ADMINISTERED BY THE STATE INSURANCE DEPARTMENT?
The Insurance Department has regulatory authority over the insurance industry and can monitor insurance policies for compliance with CIOA and other applicable law. However, the Insurance Department does not regulate common interest community associations regarding their compliance with CIOA's insurance requirements.