Q. I am on the board of directors of our condominium association and have just learned of the serious fire that destroyed a condominium building in the District. We live in a renovated conversion-type condominium building and are also concerned about fire safety. We also need to know more about our insurance requirements. Can you give us some advice?
A. Insurance is something that all of us know we need, but most of us do not know how much and what kind of insurance to obtain.
The first thing you must do is read the bylaws of your condo association. Almost every set of bylaws for condominiums throughout the country have provisions dealing with insurance. You must make sure that, at the very minimum, the insurance requirements outlined in your bylaws are fully in place at your association. For example, if your bylaws require that you carry $2 million worth of all-risk insurance, and you only have $1.5 million in coverage, in the event of a tragedy, you and the other board members may be held responsible for failure to comply with your bylaws.
The next thing you should do is arrange for the board to have a lengthy meeting with your insurance agent to discuss your association's needs. Keep in mind that your minimum requirements may have been adequate years ago when your bylaws were written, but may not be adequate for the 1990s. If you feel that your agent is not being cooperative, I recommend that you shop around for another company that specializes in condominium insurance.
Generally speaking, there are three forms of property coverage written by insurance companies. The first two are called "named peril" policies and the third is referred to as an "all-risk" policy.
A named peril policy specifically names the risks for which the property is to be insured. The most common form of protection is fire coverage, which protects against fire and lightening but is usually not recommended for associations.
The second form of named peril policy is the fire and extended coverage policy, which would provide coverage to the association only for fire and other specifically named perils, such as lightening, wind, hail, smoke or explosion. Keep in mind that if the peril is not specifically named, your insurance policy will not cover that risk.
The more preferable policy is known as the "all-risk" policy, which covers damage to the association's property for all perils unless they are specifically excluded from the coverage.
Typical exclusions include such items as glass damage, explosion of steam boilers, wear and tear, shorts in electrical equipment and wiring and perils of a catastrophic nature, such as a war or a hurricane. Many of these exclusions can be included in the policy for an additional premium. You should carefully discuss the inclusions and the exclusions with your insurance agent, and the board should make a decision based on all of the available information.
You also should understand the distinction between insurance coverage based on "full replacement cost" and "actual cash value." Under a full replacement cost, if your roof is destroyed, and it costs $200,000 to replace, your association would be reimbursed the $200,000, less the agreed-upon deductible spelled out in your policy.
However, if you have actual cash value coverage, your reimbursement would be based on the replacement cost minus an amount taken for depreciation.
For example, if your association pays $10,000 for a carpet in your lobby, and the carpet is destroyed after five years of use, the insurance company will determine the useful life of the carpet before deciding how much to pay your association.
In our example, if the carpet was given a useful life of 10 years, its value after five years would be 50 percent of the replacement cost, and thus you may only get $5,000 back. Keep in mind that it will probably cost you $10,000 to replace the carpet.
Thus, understanding and obtaining the proper type of policy with the correct coverage is critical in the event disaster strikes.
I also recommend that you have your fire marshal do a thorough inspection of your complex. The fire marshal will be willing to make this inspection at no cost to you.
Then at your next annual meeting, invite the fire marshal to address all of the condominium owners. The marshal will give a full report on the findings and will suggest fire escape methods and procedures that should be implemented by your association. In elementary school we had periodic fire drills, and I recommend that we continue the practice in adult life.
Finally, you must address the situation of the individual unit owner's coverage. Find out from your insurance agent what is and what is not covered within the individual unit under the association's policy.
It is a major concern to me that many condominium unit owners do not have individual policies protecting their unit and their belongings from catastrophe. Many condominium associations are now amending their bylaws to require that individual homeowners also obtain adequate insurance coverage for their units.
But even if you do not have this requirement, you should periodically advise unit owners of the need to have their own coverage. My recommendation is that unit owners obtain the policy -- called a rider -- directly from the same company that issues the master insurance policy for the association.
In the event of a fire or other catastrophe, one company would be able to handle all the details, rather than having several firms fight out the question of responsibility and liability.
As a member of the board, you should take the time to educate yourself, your board members and your entire association as to the need and scope of coverage afforded by insurance policies. Benny L. Kass is a Washington attorney. For a free copy of the booklet "A Guide to Settlement on Your New Home," send a self-addressed stamped envelope to Benny L. Kass, Suite 1100, 1050 17th St. NW, Washington, D.C. 20036. Readers may also send questions to him at that address.