Insuring Townhomes...HO Policies vs. Master Policy
Author: VU Faculty
A small lakefront development of townhomes includes five buildings, each with two units in it. The agent feels that the best way to insure the buildings is via a master policy. The developer's attorney thinks individual HO policies are the best way to go. Who is right?
Question..."I have a client that has built and is selling some townhomes. The client will own the land under each unit. I have advised that they buy a master policy. Their attorney thinks that individual homeowner policies will suffice. There are 5 buildings with 2 units in each building. There is one standalone building. They have docks on the water adjacent to each unit and they have a common area. I need your opinion on the pros and cons of doing it on a master policy vs. a homeowners policy on each unit."
Answer?I don't think there is any right or wrong answer to which approach would be best. It depends on your perspective and many other factors. Personally, I don't want to entrust MY property to someone else to insure it. On the other hand, I can see some advantages of having consistent control over the insurance program.
Below are some comments from our faculty on this specific issue, along with some feedback from participants in a Yahoo! discussion group involving professionals who focus on insurance and risk management for conds, co-ops, and planned communities.
1. Not enough information is provided in order to resolve all exposure issues. For example, who owns the land not "under each unit"? Who owns the docks? The stand-alone building? The common areas?
2. From whose perspective are we trying to provide insurance? The developer or each homeowner?
3. For each individual homeowner, an HO-3 seems appropriate, if the unit and land under it is owned in "fee simple." If some other form of ownership, such as a true incorporated condominium association, then possibly HO-6.
4. Assuming there is ownership of the non-home items in #1 above, whatever entity owns these should have insurance. As they say on sci-if programs, "If it lives, it can be killed." In law and insurance, "If it owns something, it can be sued."
From the agent posing the question:
The unit owners will own the land under the units. The developer is securing the coverage. There will be a property owners association and there will be bylaws. There will be common areas. Thanks for your help and please respond back so I can talk to them.
What if the neighbor wants to replace his roof green and you replace yours red? I think a master policy solves this, but that's why I'm asking.
I think those kinds of issues are resolved using by-laws and an architectural committee, not by the type of insurance policy in force. If there are truly firewalls between units, it seems even more appropriate to insure them individually, assuming they're truly firewalls and not just non-parapeted fire stops or barriers.
Here are several more responses from the VU faculty. As you can see, I don't think we'll reach a clear consensus since there are advantages and disadvantages with each approach. My personal opinion is that I don't want to rely on anyone else to insure my assets.
Here's the problem with a master policy covering all these dwellings. Suppose I plop down $300,000 for a house/townhome somewhere. I've worked a lot of years to save enough money to put some money down and then take out a mortgage on the single largest investment I will likely ever make. Strip out the cost of the land and I have maybe a $200K to $250K investment that I live in. "Why in the wide world of sports" as one of our VU faculty members often says would I ever consider trusting someone else to insure my investment? As the homeowner I have all the risk yet control none of the insurance. Some things to consider:
• Is there a master policy in place?
• Has the policy lapsed for non-pay?
• What is the deductible?
• Is it special form or named peril?
• Is the loss adjustment RC or ACV?
• Are there strange items not covered?
• What about additions I may make; does the master policy cover them?
What happened here in Florida was one of these associations got non-renewed (we require 90-day notice for that) and on a Friday afternoon they stuck a note on each owner's door saying, "We lost our coverage as of Monday at midnight...get your own coverage."
There is simply no way that a homeowner should ever trust anyone, even their association, to protect their most sizeable investment
1. I still do not have a clear picture of the situation.
2. For example: The unit owners will own the land under the units...but...
The developer is securing the coverage.
3. What type of coverage is the developer securing? And how will this provide all the coverages necessary to protect the individual unit owners like their own HO-3 would? Will they end up with HO-4s?
4. With many townhouse/rowhouse situations, where a developer or association is providing some sort of "master policy," many experts recommend that each unit owner ignore the coverage that might be provided by the master policy, and write an HO-3 in their own names,for all necessary coverages and values related to their unit, and basically ignore the so-called master policy. That is the recommendation in the article from the Florida Association of Insurance Agents.
Either option is legally proper in most states. The question arises, what if a unit owner fails to buy insurance or buys inadequate insurance? Assume that that unit is badly damaged and the unit owner now does not have the funding to repair. Perhaps he even abandons the property. In the meantime, the rest of the association is being significantly harmed. Go with the master policy, which should avoid this exposure.
Thanks but I respectfully disagree and that is why you have a board of directors with more than one person to handle the business of the association and have a D&O policy in place in case they mess up. At least you could call or ask them if the insurance had been paid. Could you ask your unit neighbor?
Often there is not just one way to insure something and the "best" way can vary by situation. One of our faculty members was talking to an agent recently whose insured owns a townhouse fee simple. The homeowners association voted to allow the association to insure everything but the contents under a master policy...i.e., they were going to insure the building and the owners would only need "renters" policies.
I don't know how they planned to handle improvements and betterments, built-in purchases, etc. If I were the agent handling the master policy, I'd be concerned as to how I was going to keep up with increases in value. Another problem is that, if I don't properly insure the property, I now have a group of homeowners suing me rather than one insured. In the example below, where the building is grossly underinsured, the agent is going to possibly have to deal with nine lawsuits.
The agent got a copy of the master policy written with a direct writing agent he knows whose expertise is in personal lines. The agent's insured owns a 1,500 sq. ft. townhouse, one of nine in a building. For a 13,500 sq. ft. building, the master policy limit is $540,000, or $40 per sq. ft. According to the agent, the building is grossly underinsured. In addition, this commercial policy has an 80% coinsurance clause which is worse than the HO ACV vs. RC "penalty" since these are new units and ACV and RC are equivalent.
So, from this perspective, a master policy is workable IF the agent structuring the coverages is competent. I'm not sure there is an absolute best answer to the issue. I suppose it depends on a lot of unique factors. Personally, I wouldn't trust the officers of a homeowners association to have the expertise to structure an insurance program on my behalf. If they decided to do that, I would still procure my own coverage. But that's just me.
There are two separate issues here. The owners of a true townhome assocaition own the land that their residence is built upon. The governing documents will dictate how the insurance is to be provided. If the documents require the owners to secure their own coverage, then they should get an HO-3 policy. Policies for the association should be obtained for the GL of the common areas, property coverage on the commonly owned amenities, D&O for the board, a fidelity bond, and an umbrella policy.
It gets messy when you try to fit a square peg in a round hole which is what happens when you try to insure true townhomes on a master policy.
Master fire insurance or individual policies? I had an interesting discussion on that subject years ago after the catastrophic Oakland Hills fire. I spoke with presidents of two townhouse style planned developments that were leveled by the fire. One project had a blanket fire insurance policy. In the other, owners had individual policies with no master policy. The two presidents said they preferred their respective methods of insurance. The big benefit of the master policy was efficient and fairly fast reconstruction. The individually insured buildings were reconstructed piecemeal over a long period of time. The Association didn't have to manage the claims or reconstruction. Owners were able to depart from the original floor plans and upgrade their finishes. There were some problems with party wall neighbors not reconstructing at the same time so weatherproofing had to be added in some cases. Both presidents said they had no interest in changing the type of fire insurance. To each his own.
Some of the above comments came from the CIRMS Yahoo! Group, an internet discussion group for insurance and risk management issues for condos, coops, and planned communities.
While that is the focus of the group, the topics of discussion range far wider than this limited market. From specific CGL, construction defects, and additional insured and certificate issues to natural disaster remediation and legislation, I have found CIRMS to be an invaluable source of highly current, interesting, and valuable information.
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