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How much insurance can a condo board require for owners and how is that enforced?
“It is good governance for a condo to require the unit owners to purchase homeowners’ insurance for their apartments,” says Ian Brandt, partner at the Manhattan real estate law firm Wagner, Berkow & Brandt.
If there is damage to an apartment, the condominium association usually has no contractual liability under the bylaws to repair the apartment's interior. However, the affected owner might ultimately have a negligence claim against the condominium association or neighboring owners.
“Litigation in these situations is expensive—legal action may be avoided by having appropriate homeowner’s insurance to cover at least most of the losses.” says Brandt.
Outlining requirements in bylaws or house rules
The bylaws for condos usually compel the board to carry a certain amount of insurance for the common areas and the association generally, but rarely compel the unit owner to do so. So does the board have authority to impose that on the owners?
Brandt says the answer is yes.
“There is nothing that forbids it in the bylaws. It’s like an open issue. The bylaws never address it,” he says, and if it is not addressed, it is not ruled out.
Getting this requirement into the bylaws, however, can be complicated because changing them requires a two-thirds majority vote at a special or annual meeting.
So, while “it’s always better to have these changes written into the bylaws, which are more difficult to change, it’s easier, faster, and just as enforceable through the house rules,” Brandt says.
By putting the requirement in the house rules or bylaws, the board can ask for a proof of insurance renewal or a declaration page to be given to the board annually.
“It’s not too hard to keep track of this, but there are several questions that arise including the minimum insurance requirements for the homeowner’s policy and whether to impose penalties for failure to comply,” Brandt says.
It’s fairly easy to insist on condo owners getting coverage for their personal property, Brandt says.
“It is affordable to get coverage for contents, build-back costs, and damage to improvements to your apartment,” he says. It’s more difficult to ask a condo owner to have substantial additional living expense coverage to protect them if they are unable to live in their condo while damage is repaired.
“All the carriers that I am aware of have limited the additional living expense benefits to very low dollar amounts—and that’s important because when you are knocked out of your apartment and you don’t have a place to go, it’s a very expensive endeavor to cover the additional living expense costs of hotels, short term housing, or furnished apartments. It can be between $10,000 or $20,000 a month,” Brandt says.
He points out insurance companies that do offer living expense protections typically cap these benefits at 40 percent of your personal property [contents] coverage, so if owners have $100,000 in contents coverage, additional living expense benefits would be limited to $40,000.
“If a board says owners must have additional living expense coverage for $200,000 or one year based on either money or time, it might be impossible. The board cannot insist on rules that are impossible,” Brandt says.
How to enforce the issue
By insisting that condo owners supply the board with their annual declaration page from their insurance carrier, they can keep track of who is fulfilling this requirement. Failure to comply could result in a fine but Brandt says boards need to be careful that it’s not a disproportionate penalty.
A penalty of $500 or $1,000 would be reasonable—something akin to the cost of coverage, Brandt says.
Condo boards should also have insurance
Even if a board imposes the obligation for unit owners to have a minimum amount of coverage in the house rules or bylaws, they should not skimp on the building's commercial property coverage.
A board "might need the coverage for the very reason just mentioned,” Brandt says. “If the owner cannot live in the apartment and only gets $25,000 for additional living expenses from his homeowners insurance and is still out of pocket for tens of thousands of dollars, the board is going to want to have coverage for that in the event the owner brings a negligence action against the board.”
Typically this expense will be picked up by the building’s insurance carrier, if the damage is determined to be a result of negligence on the part of the board.
Ian Brandt is a partner at the New York City real estate firm Wagner, Berkow & Brandt. Send Ian an email to arrange a free 15-minute telephone consultation or call 646-780-7272. We also encourage you to submit a question for this column.
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