Guest Post By George Nowack

This is a quiz:

Assume you are asked to insure a condominium. Section 107 of the Georgia Condominium Act (GCA) requires an association to obtain insurance covering the structures for full replacement cost.

Do you know what to insure? What is the “structure”? Does it include the units?  What about wall coverings, appliances, fixtures and floor coverings within a unit?

Give up?

Don’t.  Effective July 1, 2008, these questions will be answered when a comprehensive amendment to Section 107 becomes law.

Prior to the 2008 amendment, the word “structure” has not been defined in Section 107.   That is a significant problem.  Prior to the amendment, the answers were determined by the scope of coverage in each policy. ISO forms provide three (3) different levels of coverage for condominiums.  They are known as bare walls, single entity and all-in.

1.  Bare Walls Concept – It provides that an association has no duty to insure a unit inside the unfinished surfaces of the perimeter walls, floors, and ceilings.  The owner has the responsibility to insure not only personal property, but partitions, paint, cabinets, and all other property located within the finished surfaces of the perimeter walls, floors, and ceilings.

2.  Single Entity Concept – It provides coverage to replace a unit to its condition as originally constructed.  The policy insures paint, partitions, cabinets, plumbing, and fixtures.  It may also cover appliances.

3.  All-In Concept – It provides coverage to replace a unit to the condition it was in at the time of the loss, which includes all betterments and improvements made to the unit from the date of its original construction.

Single entity is the most prevalent type of coverage. It provides coverage for the building, including the units. It also provides coverage for wall coverings and floor coverings, appliances, and fixtures within a unit to the extent required by the association documents. If the declaration requires coverage for these items, they were included in the coverage.  If the declaration did not specifically require coverage for those items, they were not included in the coverage.  Since condominium documents are not uniform, the scope of coverage of the interior of the units depended solely on what the declaration required.  That left agents, underwriters, board members and managers responsible for reviewing each declaration to determine the scope of the required coverage and then confirming the policy provided that coverage.

Determining the scope of an association’s policy became more complicated when adjusters attempted to apply traditional insurable interest analysis to damage to units.  Adjusters looked at the documents to determine the boundaries and the maintenance responsibilities for a unit.  Adjusters took the erroneous position in determining coverage for unit damage that there was no coverage because an association had no insurable interest in the units since the association had no ownership interest in a unit.  Adjusters also erroneously determined that an association’s policy only covered portions of a building which were the maintenance obligation of the association.

Both of these analyses ignored the insurance contract – the policy. Section 107 of the  GCA creates the insurable interest by requiring an association to insure a structure to its full replacement cost. Losses must be adjusted in accordance with the terms of the policy.  The policy (bare walls, single entity, all-in) determines the scope of the coverage. Coverage has nothing to do with maintenance responsibility and maintenance responsibility has nothing to do with coverage.

The differences in coverage created by the three (3) forms of coverage and the lack of a uniform provision in documents resulted in countless disputes between associations, owners, adjusters, agents, managers and board members. On a number of occasions it resulted in a “black hole” – a unit whose interior was not covered by the association policy and the owner did not have an HO-6 policy.  The unit was rebuilt to the bare walls, but was not habitable.

Those unfortunate scenarios will become a thing of the past beginning July 1, 2008.  As of that date, the GCA will require association policies to cover the costs to return the building and each unit to the condition that existed when they were originally constructed.  It will require single entity coverage that also mandates coverage for the interiors of the units including appliances and fixtures. Regardless of the boundaries of the units, an association policy will have to cover all portions of a building which are common elements, the limited common elements and the units. The policy must cover all foundations, roofs, exterior walls, including windows and doors and the framing.

The new law requires coverage of the following items, regardless of who is responsible for maintaining them under the condominium declaration:  The HVAC system serving the unit, and sheetrock and plaster board comprising the walls and ceiling of the condominium unit.

The law also specifies the items within a unit that must be covered by the association policy to prevent black holes.  An association policy will be required to cover the following items within a unit:

1. floors and subfloors;

2. walls, ceiling and floor coverings;

3. plumbing and electrical lines and fixtures;

4.  building-in cabinetry and fixtures; and

5.  appliances used for refrigeration, cooking, dishwashing and laundry.

Those items must be repaired or replaced with the type and quality initially installed or replacements of the like kind and quality as existed at the time the condominium unit was originally sold.  This will require a unit be returned to a habitable, turn-key condition.  It does not require coverage for betterments and improvements made by unit owners.

Assume a condominium unit is damaged by a fire.  The damage is limited to the unit.  The fire started in the dishwasher from an electrical short. The dishwasher and the countertop and a part of the floor are damaged. The dishwasher is the original Maytag. The units were originally built and sold with Corian countertops and vinyl flooring.  At the time of the fire, the countertops were marble and the floor was tile.

The new law will require the insurer to pay the full replacement cost, subject to any deductible, for the dishwasher, the value of Corian countertops and the value of the vinyl flooring.  If the marble and tile cost more than the Corian and vinyl, the unit owner will be responsible for the difference in cost because those are betterments and improvements.

The new law also creates a requirement for coverage of shell units. A shell unit is a unit that has not been built-out when sold to purchaser. Shell units are custom units so the build-out is considered betterments and improvements. The new law will require the unit owner, not the association, to insure the five (5) items within the unit.  The association policy will only be required to cover the portion of a shell unit constructed by the developer.

The new law also changes the minimum limits for the association’s commercial general liability policy from a $1,050,000 to $1 million for a single occurrence and $2 million aggregate.

Returning to the quiz, effective July 1, 2008, the answers are clear and are applicable to every condominium. Association insurance policies, subject to applicable deductibles, must cover the building – common elements, limited common elements and units – for full replacement cost. The policy must also insure the interior of a unit to cover the cost to return the unit to a habitable, turn-key condition using materials, fixtures and appliances comparable to the materials, fixtures and appliances used in the original construction. Unit owners will only be  responsible for insuring betterments and improvements made to the interior of a unit.

George E. Nowack, Jr.

Weissman, Nowack, Curry & Wilco, P.C.

Mr. Nowack is one of the attorney’s who worked with IIAG to draft and achieve passage of the 2008 amendment to the condominium law, H. B. 1121.