Full Replacement Value

Insurance - an ingenious modern game of chance in which the player is permitted to enjoy the comfortable conviction that he is beating the man who keeps the table.

- Ambrose Bierce

Someone told me this is a bit boring. So, I apologize in advance, but it's important.

One of the issues that has arisen lately in Condo World, is a bit of a pushback against the statutory requirement for every condominium association to have a master casualty and liability policy that will cover the full replacement value of all structures on the property of the Association.

The cost of insurance has obviously risen. So, instead of a 2% or 3% increase in insurance policies from year to year, some are seeing premiums double and triple in a single year - without an insurance claim having benefited.

That's a bit of a problem when trying to keep condominium fees to a reasonable increase. So, some boards of directors have been raising the deductible from $1,000.00 or $2,500.00 or $5,000.00 up to $10,000.00, $25,000.00 or more. That's okay, if raising the deductible will help decrease the premium, but it can lead to problems.

First, many states require a board of directors to notify owners when the deductible change. Why? Most owner insurance policies cover the association's deductible. Why? Many associations, if not most now, have language in their documents that note if a board of directors determines that the owner's act or neglect caused the insurance claim, such as by shutting the heat off before leaving for the winter, to assess the association's deductible to the owner. So, owners have to know what the deductible is in order to make sure it is covered under their own, personal policy.

Second, if the deductible is raised that high and there is an insurance claim, the association still has to make up the difference between what the insurance company pays out as a settlement of the claim and what has to be paid to make the repairs. One recent case made this clear.

In Grooms Property Management, v. Muirfield Condominium Association, a case out of North Carolina, the association suffered the damage of a fire. At the end of the claim the association received a check in the amount of $933, 421.00 on a claim the association estimated would cost between 1.36 million and 1.46 million to repair.

Instead of taking from the association's reserve account the difference between what the insurance company paid and the cost of the repairs, the board of directors attempted to take out a loan for the difference. The owners of the damaged building sued.

The owners claimed the association violated the language of their declaration in not insuring the buildings properly for the required 80% of the replacement value of the buildings. The trial court, affirmed by the appellate court, ruled the association did indeed violate the contract that is the declaration which required adhering to the language of the documents and insuring up to the full 80% value of the buildings.

How does this apply to your Association? Well, I have received multiple emails asking if it's okay not to have Association insurance or to defer it to the owners, because it is too expensive. The short answer is “No.” Unlike North Carolina where the requirement is insurance that will cover 80% of the replacement value of the structures on the property, the New Hampshire Condominium Act requires “full replacement value,” i.e. 100% of the cost of the structures on the property. Anything less comes from the Associaton, not assessed to the owners or, as some Asociatons try to do, require the owners

Let the North Carolina case be a lesson for us New Hampshirites. You have to insure for the full replacement value of the structures on the property. Anything less can lead to real problems.