Condo Insurance - Are you Covered?

Most people don’t necessarily understand how their insurance policy works…but then throw a condo in the mix, and worry about common and personal property issues! What a headache! Here is a little info about condominium insurance and an example of a recent condo insurance claim.

Although an association's master policy may cover the exterior and the rebuilding cost of the barebones interior of your home, there is much more to protect. A HO-6 policy is a regular homeowner’s policy, tailored specifically for the special needs of condominium homes. These policies cover the interior structure of the unit and personal property inside. In most cases, the community’s master policy only covers areas such as the common walkways, roof, basement, elevator, and boiler, for both liability and physical damage–but nothing inside your home except in special circumstances.

Your HO-6 policy provides coverage for damage to furniture, computer equipment and clothing. It may also provide personal liability coverage, medical coverage for guests injured in your home, and coverages for improvements or upgrades, such as flooring or granite countertops. 

Under new FNMA (Fannie Mae) and FHA requirements, HO-6 policies are now required for all new loans. Sounds like common sense - but before the housing market changed, lenders didn’t necessarily require HO-6 policies, and many condominium unit owners were (and still are) under the mistaken impression that the master condominium insurance policy covers all damage to the interior of his/her unit as well as damage to furniture, appliances, etc. In the event of disasters such fire, the rebuilding that occurs from the master association policy may possibly leave you with a shell of a home!

Another benefit of an HO-6 policy is that in certain situations, it will provide gap coverage caused by the often-high deductibles on a master insurance policy. Typically, condominium documents stipulate that the unit owner is responsible for losses falling below the deductible. A well-tailored HO-6 policy protects you in this situation.

HO-6 policies can also provide coverage for assessments applied against an individual unit due to a direct loss to the condominium. This type of coverage is called “Loss Assessment” and protects against an assessment from the Association for an uninsured loss, an underinsured loss, or as a result of the deductible for a given loss. The loss must be a “peril” covered under the unit owner’s individual policy. A standard condo policy typically provides only $1,000 in loss assessment coverage – absolutely increase this coverage to at least $5,000!

A real life example

The homeowner on the bottom unit of a two-story building called the management company to report that water was leaking through his ceiling from the unit above. The source was the air conditioning condensation line in the condo above him. This had possibly been leaking for several months, since the upstairs homeowner had not lived in the unit for some time. This homeowner did not have insurance, and the Association’s deductible for this type of claim was $7,500. The deductible had to be paid by the homeowner suffering the damage. Unless negligence can be proven (which is very difficult to do), each homeowner is responsible for repairing his own interior damages, regardless of the source of the damage. The impacted owner discovered that it was more cost effective to just pay for the repairs out-of-pocket, rather than file a claim on the Association’s master policy. If HO-6 insurance had been in place, he would have only had to pay a $250 or $500 deductible, with the HO-6 policy covering the rest of the $7,500 deductible.

In the above example, be aware that there may be different deductibles for the Association’s master policy, depending on the cause of the damage. It is not unusual to have a $5,000 deductible for all except water damage, and a water damage deductible of $25,000. Make sure your HO-6 covers these variations!

If you have not already done so, get with your insurance agent today and confirm you have appropriate coverage!

Dirty Water

If you are currently a member of your community's board of directors, or even considering serving on a board, here is some important information to consider:

Last October, federal regulations were enacted that consider both Board members and Community Association Managers to be “co-permittees” along with maintenance companies/vendors using any type of biological or chemical applications that might run in to nearby waterways (ponds, lakes, streams). All must comply with the National Pollutant Discharge Elimination System permit for items such as the treatment of mosquitoes, algae, weeds, tree pests, etc. 

Even if the Board or Community Association Manager selects a vendor whose contract stipulates that the vendor is responsible for obtaining a permit and complying with regulations, Board members are also on the hook if the vendor fails to comply.

Along with proof of insurance, make sure your landscapers and pest control people are providing the Association with copies of this NPDES permit!

More information about this topic is available at the following links:

http://cfpub.epa.gov/npdes/pesticides/prtool.cfm?action=clear

http://www.georgiaepd.org/Documents/NPDESPesticideGeneralPermit.html

Contact your Community Association Manager if you have any more questions!

Proactive or Reactive? Where Do You Stand?

Many people find taking a proactive stance to be very difficult - you are essentially making repairs to something that is not yet broken.  The opposite, being reactive, is responding to a circumstance requiring immediate attention. Research shows that the majority of people naturally fall into this latter category. The basic belief about the proactive approach is that you are spending monies that are not (yet) needed.

A better understanding of a proactive view leads to a better appreciation about what is being done and probably more importantly – why it is being done!

A car analogy:  You are planning a long trip. You realize your tires are becoming worn and are approaching the end of their useful life. Your two options are: 1. Being reactive – waiting until the tire blows out and then replacing it or; 2. Being proactive - replacing the tires before they blow out.

A reactive perspective:

You leave and a hundred miles into your trip, you find yourself with a blown out front tire. You are now on the side of the road with no way to replace it, except by using your spare.  You change the tire, knowing that the spare will only get you so far (at a minimal speed) and continue on your way. You go another hundred miles and you lose a back tire…what are the odds, right? Now you are in a pickle! You are stuck on a highway, far from home, where you know no one to call and fix the tire. Your smart phone locates a local tire company, but after calling them, you discover they do not tow cars. They refer you to a local tow company who comes to you within the hour and transports you to the local tire shop. You meet with the tire shop representative only to discover that your size tire is not in stock and will not be available until noon the next day. You order the tire and then get a taxi to a local hotel for the night. The next day you return by taxi to the tire shop, the tire is mounted in 45 minutes and you are finally back on your way.

Now let’s recap the total costs of this reactive venture.

Tow bill to the local shop                                             $85.00

Ordering a single special tire incl shipping costs        $185.00

Cab rides to and from hotel                                         $36.00

Hotel for the night                                                        $129.00

Total                                                                            $435.00 (plus a day lost from your trip).

And let’s not forget that lost $155 deposit on the hotel room at your destination

Grand Total                                                                 $590.00 reactive cost per tire

Now from a proactive perspective:

Since you are aware that your tires are worn, a few days prior to your trip, you call up the local tire shop with which you have done business for years.

The owner pulls your records.  He sees that he has ordered your tires in the past and that the installed cost for the set of four tires is $540.00. It will require a three day order time, which comes in the shop’s regular shipment and requires no additional cost. Since you planned ahead, this doesn’t inhibit your trip, since you are not scheduled to leave until next week. You place the order, the tires come in, you drop off your car at the shop and because you are a regular customer, they drop you off and pick you up from work. Absolutely no additional hassle or time on your behalf. So, that $540 divided by 4. Your proactive cost per tire $135.00. (In terms of actual dollars spent - by being proactive, you actually spent $50 less and got 3 additional tires!)

In terms of just replacing the one tire, being reactive cost you an additional $455.00 plus a lost day of your trip. This does not include the mental anguish you suffered – being stranded in an unfamiliar area, spending monies not planned or budgeted, missing out on certain activities planned, etc. All of these things may have removed a lot of enjoyment that you were anticipating on your trip.

Now consider your building, house, clubhouse, etc. A professional can review certain items that need to be addressed before they become costly. For example, a typical paint job on the exterior of a building has a useful life of 4 to 8 years. Again, this estimation is based upon several items and can be easily identified.  The loss of paint coverage can result in water entry and wood rot. These items can become very costly to repair but can be avoided if you repaint before the failure of the original base coat of paint. This means preplanning and prebudgeting your expenses.  Another negative of allowing paint to fail (and subsequent wood rot) is the potential for mold growth within the walls of your building. This mold growth could lead to thousands of dollars in expenses to remove the mold - not to mention the potential impact to your life and safety due to mold spore inhalation.

This same process applies to your roof, sewer systems, lighting, gates, roadways, gutters and drainage systems, just to mention a few.

One way to be proactive is to have a Reserve Study completed by a reputable engineering firm. This process will show you the anticipated life each item, the future replacement or repair costs (based upon normal inflation) and help you allocate the appropriate funds to make the repairs required when needed.  This may mean you actually have $150,000 allocated and in the bank for that new roof before it actually begins to leak.

So now ask yourself:  Are you as a Board of Directors going to be proactive and preplan to maintain your community’s property or are you going to be reactive and pay a premium for work when the work HAS to be done and you are in a bind?

We, at Access Management Group, promote being proactive. Not only does it save you money in the long run, it shows your community that their money is being spent wisely. We can assist you in every aspect of the process and will refer you to tried and true contractors that are fully insured and capable.  Let us help you help yourself.

Up to Our Eyes in Alligators

A recent Georgia Supreme Court decision highlights an obligation that exists on the part of the Association and the residents.  In this decision (the combined Landings Association/Landings Club cases), a relative of an owner in the community was killed by an alligator while walking in the community.  Questions at both the trial and appeals level dealt with what level of responsibility the Association had in providing warnings and a safe environment for residents and their guests. 

In this particular instance, the Court determined that the guest and the Association had equal knowledge about the hazard, and therefore the Association could not be held liable. 

Other communities have faced similar litigation.  The majority of this litigation was also resolved by determining who had superior knowledge about a safety condition - such as trip hazards or criminal activity. The lesson for all communities is that communication is key.  If a potential situation cannot be remedied immediately, it is critical that all residents be put on notice.  In addition, other steps can be taken such as possibly installing signage or temporarily closing dangerous areas, so that everyone has an equal level of knowledge.  The Board cannot afford to bury its head in the sand when such a situation comes to light.  Permitting the problem to fester is negligence.

While Community Association Managers assist in identifying such dangers, the Board should not rely solely on the manager, who may not be around when a hazard arises (such as lighting outages or sinkhole formations over the weekend).  Depending on the terms of the management contract, some managers may only visit/inspect the property once a week or once a month.  Every tragedy is not avoidable, but it is crucial for Boards and residents to partner in policing the common areas for such hazards or potential hazards.

In a perfect world, communities that have taken all appropriate measures would never find themselves in court.  In a perfect world no one would be injured.  

There are several additional actions that a cautious Board may decide to take in order to be best protected, should a situation like this arise. A Board might consider ordering an audit or review of the community’s insurance coverage, as there may be exclusions or inadequate coverages that have not been detected.  Better to discover these in advance!  A Board might also institute a regular maintenance review of the community. A maintenance review, coupled with a capital reserve review by an engineer every few years, can also be an effective way to further insulate the community by relying on the opinions of third-party experts.  Finally, an annual conference with the Association’s attorney to review all contracts, governing documents, and standard practices is a must.  The legal expense incurred for this procedure is minor compared to avoided potential losses.

While not a comfort to the loved ones of the person killed in this alligator tragedy, in the eyes of the law the community did take sufficient actions to avoid being considered negligent.  May the lessons learned during the litigation process of the Landings Association not be lost on the rest of our Georgia communities.

Water Water Everywhere

Water is nature’s universal solvent. We all know that its size (volume) changes dramatically when transitioning between vapor, liquid, and ice. But what you probably don’t know, or at least haven’t thought about, is its specific effects on differing building materials.

Concrete and brick are porous by nature, acting as sponges and over time expanding. They are also very susceptible to the freeze-thaw cycle, with parts of the material cracking and chipping off over several seasons. If this type of expansion occurs at the top of a building, imagine the potential safety concerns for those walking below! 

Water can cause corrosion between differing metals adjacent to one another. This then promotes electrolysis, which expands one of these metals and forces surrounding materials (such as concrete) to crack, allowing even more water penetration. Ultimately entire sections of the metal reinforcement to a building can be fully exposed to the elements.

Water poses a big threat to wood. Wood’s porous cellular structure is a great incubator and food source for fungus. As fungus grows, it removes cellular material, leaving a brittle structure and ultimately resulting in dry rot. Going through wet and dry spells is actually worse for wood than when it is being constantly exposed to a damp environment.

Fiberglass insulation is also strongly impacted by water exposure. Normally the glass fibers create air pockets that resist heat flow. The more void air space, the higher the energy efficiency of the insulation. But when exposed to water, this ability to resist heat transfer is lost.

Typical weak points for water penetration are window perimeters, transitions between materials, expansion joints, joints in metal through-wall flashing, barrier wall systems, and roof to rising wall conditions.

Without proper enclosure design, construction and diligent maintenance, buildings will fail under water’s touch. While your community buildings may not be “proper” now, be aware of the following tips when having repairs or upgrades conducted:

• Do not rely on a sealant as the only line of defense. Use a sheet membrane to bridge the gap between materials or adjacent systems.
• Lap materials so that they shed water.
• Provide a robust backup waterproofing system that will drain accumulated moisture out of the exterior walls. Provide ventilation for the drainage cavity so that the materials that become wet from incidental moisture intrusion can dry out.
• Provide a slope to drain water off horizontal surfaces and projections such as windowsills, stone bands, metal flashing, and roof edge coping.

Remember: Proper maintenance is key to the durability of your buildings. By performing a comprehensive annual survey of the building envelope systems, the safety of your owners and guests can be preserved from the effects of water.

Lights Out

Most Community Associations have a handful of utilities that are paid for by the Association fees collected from each homeowner in the community.  These “community utilities” include expenses like common area utility lighting, water running to pools and community bathrooms, trash pickup, etc.  These community-wide expenses are crucial in maintaining the look and expectations of the Association as a whole. All homeowners within the community share in the benefit from the payment of these expenses.

When potential buyers consider buying in a community governed by a HOA, a very important question to ask should be “What does the HOA fee cover?” or “What utilities are covered in the HOA fee?” In some instances (more often in condominium and townhome communities) there can be utilities that are also covered for individual homes, so it’s obviously important to know what you are paying for!

The answers to these questions vary depending on the individual community.  In communities that consist of single-family homes, you generally do not see any individual utilities covered through the Association.  However, that does not mean it cannot happen.  Each community is unique, so make sure to research before any purchase. 

As stated before, it is much more common to see the inclusion of one or more utilities within HOA fees in townhome and condominium communities. For example - water, sewer, trash, cable, internet, landscaping, etc can all be incorporated in the monthly HOA fee.  These items can create a big benefit to potential buyers when contemplating a purchase (i.e. the potential money savings by having these utilities included vs. paying separately).  Depending on the amount of utilities covered and the general cost, the assessments vary widely from one community to the next - regardless of size.

In addition to knowing what the Association fee covers, it is also important to understand what happens if the community experiences a high delinquency rate on collecting assessments.  Defaults in Association payments may delay or even prevent the payment of day-to-day bills that keep the community running.  Even a 10% delinquency rate may result in the inability to pay a power bill, resulting in a loss of lighting in a common area. 

Delinquencies do not just impact utilities in common areas. Another important question to consider is what can happen to an individual homeowner’s utilities when he/she has become delinquent?  Some Associations actually have the right to cut utilities for a single residence in the event of nonpayment.  The Georgia courts have been clear that this action is permissible, and it is not considered to create hazardous conditions if water or power is cut.  Rather than face such an inconvenience, owners usually quickly pay when faced with this reality.  It isn’t fair to force neighbors to cover the utility bills of a delinquent owner.

As a homeowner, don’t be afraid to ask questions about where your money is going because it is, in fact, your money. You have every right to know how it’s being applied.  It is important that you understand where these dollars go, so no one gets left in the dark asking, “Who turned off the lights?”

Legal Priority

“How do I determine which rules control my home, and what takes priority?” This is a question that frequently comes up as being confusing for homeowners. Below, in descending order of importance, are various legal documents you may come across when investigating this issue:

• Georgia Condominium Act / Property Owners’ Association Act.  These statutes establish the legal authority for the existence of housing corporations, and define and control their operation.  These default rules may in some instances be modified by any of the following documents.
• Articles of Incorporation.  This creates the official entity of your Association and sets restrictions as to its nature.  Associations must abide by the Nonprofit Code Statute – this is a good place to look for ideas of how the Board is to conduct itself.
• Survey.   This lays out the exact boundaries of the development, and may have restrictions on property usage listed.  There are usually so many restrictions that these have been relocated into another document - the Declaration.
• Declaration.  This is considered the controlling document for defining details of the Association, and laying out restrictions on usage and interaction.  It is recorded at the Courthouse (just like the two documents above).  If you are purchasing a home, the law assumes that you have gone down to the courthouse and obtained a copy of the Declaration and made yourself aware of its restrictions.  Ignorance is no excuse.
• By-Laws.  This springs from the Declaration, and details the method and actions of governance, such as how votes are conducted and qualifications to be a Director.
• Rules & Regulations.  These flow from both the Declaration and By-Laws, and give very specific rules, such as the type of pets you may have, or the hours in which you may use a hammer to do work in your home.  Typically these are easily changed by the Board, without prior approval from the Community, unlike the other items above, which require formal votes of the Association in order to alter.
• Resolutions.  These memorialize decisions on specific topics and may be changed as often as the Board desires.  The four types are Policy (architectural control or enforcement), Administrative (collections, meeting times), Special (authorizing a lawsuit, addressing individual situation), and General (budget adoption or contract approval).     

Case law resides above all of these documents:  The courts’ interpretation on the interplay of these regulations with other state and federal laws and specific situations, which may not have been contemplated by the creators of the various documents. 

 Each court jurisdiction (magistrate, state, superior, federal) may have some overlap on resolving disputes, and each resolution is both costly and time-consuming:  It is always best if Associations can resolve differences without resorting to the legal system.

While individual disputes may be addressed at the trial level, what matters most are determinations made on appeal, since these will be referred to when addressing similar disputes in the future.  As in other areas of law, the State Supreme Court trumps lower levels of appeals, and Federal appeals, if granted, are above those of the state level.  While one state is not bound to the decisions in other states, judges do frequently refer to out-of-state decisions to clarify a line of thinking.  Federal appeals cover multiple states, and one federal jurisdiction may look to others when reaching a determination. 

As consensus on a particular issue forms across the country via the judicial system, wise Boards of Directors keep track of such developments to avoid pitfalls made by others.  While a Director should avoid practicing law on behalf of his or her Association, there is a responsibility to self-educate so potential problems can be recognized in advance and experts consulted for the good of the community.