QUESTIONS AND ANSWERS...

Date:  8/18/02  (this document was updated July 2003)

Overview

Q. When did the changes to Section 12 of the Illinois Condominium Act (ICA) become effective?

A.  Although the legislation was passed early in January, 2002, the changes became effective June 1, 2002.

Q. Do all policies have to be updated on June 1?

A. No.  It is expected that each policy will be corrected and rewritten at the time of its normal renewal, so that having all associations in full compliance could take a year.   However, if any of the insurance companies go ahead and change their policy forms, their liberalization clauses may apply if coverage were broadened (but not if reduced).   Also, each policy has a “conformity with statute” section that could come into play in the event of a dispute.

Q. Why were these changes made?

A. For many years Section 12 has been confusing, did not comply with available industry coverages, and some of the insurance language was to be found in other ICA sections.  The intent was to clarify the insurance language of the ICA and what was required of Associations and their residents.  That has been done.

Q. What are the major changes in Section 12?

A. The key elements of the new Section 12 are:

1)      a precise statement of what components of the structure are the Association’s responsibility to insure,

2)      a clear statement of other coverages required,

3)      a clear statement that the Board can charge back deductibles,

4)      the requirement for contractors to provide evidence of coverage naming the association as an additional insured, and

5)      the option for the Board to mandate  unit owner coverage.  

The language also transfers some of the responsibility for how the policy is put together to the insurance company.

Q. Do these changes require that the Board immediately change our policies?

A. It does not, as noted above.

Q. Our agent says that our current company cannot provide the coverages required.  What do we do now?

A. The ICA Section 12 language requires insurance companies to issue policies in accordance with the statute.   The basic coverages for perils, general liability, and directors and officers’ liability were not changed materially by the Amendments.  If the company elects not to provide such coverage, which is its prerogative, you may be required to find another insurance company.  If you cannot, you should fully inform your residents of the situation and confirm this with your agent and attorney.

Q. Do the changes affect homeowners associations or townhomes that are not condominiums or cooperatives?

A. No.

Property Insurance

Q. I understand the condominiums now have to insure to their “full insurable replacement cost”?   Isn’t that one of the reasons that insurance premiums are going up so fast?

A. No.  The requirement for full replacement cost coverage has been in place since 1963.  This was not changed in Section 12.  However, many insurance companies are “re-underwriting” their insureds, which includes actually calculating the replacement value of their clients’ property rather than relying on what they’ve been told.  The result is many corrections or changes in value.

Q. Who is responsible for determining this value?

A. Technically, the insurance company must issue a policy in compliance with the requirement, but the Board is also required to provide full coverage.  Many Declarations and Bylaws specifically require an appraisal to determine this value; that has not changed.   Our advice is that the Board continue to recognize its role.

Q. Who insures the floor, wall, and ceiling coverings?

A. The unit owner.

Q. I thought that the Association always insured fixtures.  Now I hear that they do not.  What is the real answer?  

A. The Association only is required to insure developer installed fixtures, not ones that are replacements or installed by the unit owner.

Q. What happens to the insurance requirement if I have replaced my cabinetry? If the owner before me did?

A. In either case, you should insure the cabinetry.

Q. In our building the developer just converted an existing apartment building.  He did not install the fixtures.   Is the Association still responsible for them?

A. Probably not.   The  current ICA language says that  the unit owner is.

Q. To simplify our lives, can we exclude developer installed fixtures?

A. That was the original intention of the ICA changes.   However, without concurrence from your attorney, or a change in your Declarations and Bylaws, it is not recommended due to the Section 12 language.

Q. What about improvements and betterments?   And just what are they? 

 A. Improvements and betterments are “all decorating, fixtures, and furnishings installed or added to or located within the boundaries of the unit, including electrical fixtures, appliances, air conditioning and heating equipment, water heaters, or built-in cabinets installed by the unit owners.”  The unit owner is usually responsible for insuring them.

Q. If the Association insures the I&B, who pays the premium?

A. The unit owner does.  That means quite a bit of administrative work to be sure the right amount of charge is made to each unit owner since each is likely to have a different amount of improvements and betterments.

Q. Our property is over 40 years old.  I have no idea what is original and what is an upgrade or replacement.  How do we figure that out?

A. The chances are very good that the fixtures and related items have been replaced or upgraded.  If there is any question, we recommend that the unit owners insure these components.

Q. What is meant by ordinance and law coverage?  And how much coverage do we need?  What limits are appropriate?

A. A replacement cost policy provides coverage for “like kind and quality” on a repair or replacement basis.   However, after a significant loss, the municipality may require reconstruction be done with a change in type of material or upgrade to what is required under the current building code.   It could also require that the existing building be totally demolished, even when part of the building was not damaged by the peril.  You need additional insurance to pay for that gap in coverage or the undamaged portion and/or for demolition costs, which is what ordinance and law (or operation of municipal ordinance) insurance does. 

While it could be interpreted that full building limits of coverage are required, that was not the intent.  You must have some coverage and it should be the amount needed.  Determining how much you need is not simple to do.  It depends on how much would have to be done in   the event of such a loss.  Consult with your agent for a recommendation.

Q. Who has to insure the limited common elements?

A. The Association.

Q. Can an Association buy more coverage inside a unit than the ICA says?

A. Yes, if the Declarations and the insurance carrier agree, and if evidence the coverage in the insurance policy, which is a contract.

Q. What happens if the Declarations and Bylaws language is broader than the ICA?

A. That is a little unclear; we recommend that you consult with your attorney.  However, it appears that you should comply with the Declarations and Bylaws and then act to bring them into harmony with the ICA, by amendment.

Q. If the Association’s policy covers my improvements and betterments and I have been paying the premium for them, and I have a fire in my unit, will the insurance check for the loss be made out to me?

A. No.  The check will be made out to the Association and the monies you are due then be paid to you to reimburse your expenses.

Q. As unit owners, we are currently responsible for maintaining all of our appliances and utilities, as well as our windows.   I assume that means we are also responsible for insuring them.

A. Not necessarily.   Maintenance responsibilities and insurance responsibilities are independent and may differ.   You should have separate lists for each of them.

Q. Should we amend our Declarations and Bylaws?

A. If the Declarations and Bylaws are not in conformity with the ICA, it seems like a good idea.   Talk with your attorney.

Deductibles

Q. I have heard that the Board of Directors can now charge me with the deductible on the Association’s policy.  Is that true?

A Yes, if the cause of loss arose from your Unit.   The Board must give you the opportunity for a hearing before charging you for the deductible.   We recommend that the Board pass a resolution clarifying when and how the deductible is to be charged.  Whatever decisions are made should be clear and consistently applied.

Q. I am a board member.  How should the Board handle a decision to charge back (assess) deductibles to the unit owners?

A. Similar to the requirement to levy a fine, the Board must hold a hearing to determine whether an owner should pay this cost.  It is essential that the Board prepare a letter to the residents telling them what is happening and recommending that each renter and homeowner review this information with his/ her personal agent to be sure that deductible can be paid by his/ her own policy.

Q. I now have $1,000 loss assessment coverage on my unit owner policy.  Will that cover the deductible if the Board decides to charge it back to me?

A. In many cases it will, if the Board has passed a resolution on the process.  You often can also get coverage through the Coverage A portion of your policy.   However, it is wise to check with your own agent.  And do note that $1,000 might not be enough coverage.  The voluntary property damage section of your policy can also be used.  Many associations now have deductibles in excess of $1,000.  Also, if there is an underinsured loss and the association Board elects to special assess the residents to make up the gap, that would come out of this fund.

Liability Insurance

Q. How much general liability (formerly known as public liability) should I buy?

A. One million dollars is mandated.  More is often a good idea; that depends on the nature of the association.

Claims

Q. Can I, as a unit owner, file a claim directly against the Association’s policy?

A. No, it should go through the property manager or the Board.

Q. Can I, as a board member, file a claim directly against the Association’s policy?

A. This depends on the process agreed upon with the Agent.   Often the agency will only accept a claim from the property manager or from the designated representative of the Association.

Q. Do we, as board members, have the right to know what claims have been paid?

A. Absolutely.   You should regularly ask for loss runs from your agent so you can understand and manage what is being paid on your behalf.   The ICA requires that you be notified of the terms of any general liability settlement at least 10 days prior to the settlement, but does not allow you to veto the settlement.

Q. Can the Association or its insurance company seek reimbursement from the unit owner?  From a renter?   Is that what waiver of subrogation means?

A. The waiver means giving up the right to see reimbursement.  The Association’s insurance carrier cannot subrogate on behalf of the association against a unit owner or his family, but the ICA is silent regarding renters.  In addition, Association Declarations and Bylaws often have language that enables the Association to seek compensation from the unit owner in the event of uninsured damage or damage done by negligence.   Section 9.1 of the ICA also includes language requiring payment from unit owners for damage done; talk with your attorney on how that applies.

Mandatory Unit Owner Insurance

Q. The new language allows the Board to mandate that all the unit owners buy insurance.  Do we have to implement that change?

A. No.   That is a Board option.  A number of factors need to be considered before making the change, including the administrative burden and what action would be taken if the requirement is made.

Q. Doesn’t mandating this purchase put an additional liability onto the Board?

A. ICA specifically removes such liability, including failure to act in all cases or failure to act in a timely manner, unless the Board has specifically assumed it and committed to certain actions or behaviors.

Q. What about the section (h) or “regardless of any negligence” language?

A. What you are referencing is the fact that the mandatory unit owner insurance required, if the Board so elects, should cover for damage done to a unit by another unit owner, “regardless of any negligence….”    Existing law, in Section 9.1, provides that an owner is responsible for damage that arose from his or her unit.   Normally, unless negligence is demonstrable, this would not be covered by unit owner insurance under the Personal Liability section.  However, several companies are acting to bring their policies into compliance with this language. 

Q. My Board has decided to collect certificates of insurance from all the residents?   Can they do that?   Should they do that?   What are they looking for?

A. They can do that, and probably should.   They should be looking for the existence of insurance, the right coverages, the adequacy of the limits (not that they are insurance agents and should not be acting as ones), and additional insured language, if required.

Q. Does Section 12 clarify what is the insurance responsibility of the unit owner?

A. Absolutely, as described above.

Q. What is the best thing that I can do as a unit owner?   What coverage should I buy?  How much coverage should I buy?

A. The best thing to do is to get information on your Association’s insurance program from your Board or current agent and then review it with your current insurance agent.   Many unit owners do not even know that they need to buy insurance; so that is a good starting point.   Then you should be sure that you have enough of:

• Coverage A or Building coverage, which includes everything fastened to the walls, most improvements and betterments, fixtures, and decorating.  Since most unit owner policies only have $1,000 or $5,000, that limit will have to be increased to be adequate.  Be sure to figure that out.
• Coverage C or Contents coverage – be sure the limit you have is high enough to replace your possessions.
• It is a good idea to buy “all risk” rather than “named peril” coverage.
• Loss of use coverage is important, as is loss assessment coverage, as discussed earlier.

This is not a complete recommendation of what insurance you should buy.  Do talk with your own agent for more details. 

Q. If both my policy and the Association’s policy covers my walls or my improvements and betterments or whatever, which policy pays?

A. The Association policy is primary for those elements required.  Thus it would pay first and your unit owner policy would be excess or pay any unpaid amounts (this could include the Association’s deductible, if charged back to you).   You would still have to pay your own deductible.

Q. Are there unit owner policies available today that provide all the coverages and protection described in Section 12?

A. Yes, for the most part, with the exception of the “no negligence” losses discussed above.

Other Insurance

Q. Hasn’t Directors and Officers Liability been required for a long time?

A. Yes, it has, but only for Associations with 30 or more units.  Now it is required for all associations.

Q. Hasn’t Fidelity bond or crime coverage been required for a long time?

A. Yes, it has, both by the ICA and the secondary mortgage market.  But now it is required for Associations with 6 or more units.

Q. Who has to be covered by the Association’s bond?

A. Per the ICA, “covering persons, including the managing agent and its employees who control or disburse funds of the association…”

Q. Does the property manager have to be covered on the Association’s fidelity policy?

A. Yes, as noted above.

Q. Does Section 12 mandate that the Workers Compensation be carried?

A. No, but it is a good idea.

Q. What is the new requirement for contractors?   That is confusing.

A. You are right to be confused.  The ICA requires certificates of insurance from “all contractors and vendors doing business with a condominium association under contracts exceeding $10,000 per year…”  The certificates must name the association, its board of directors, and the manager as additional insureds.   This implies that the policies do that also, but the law does not mandate it.  Requesting a copy of the endorsement is wise.

Q. Someone told me that the law now requires cross liability coverage.  What is that?

A. Cross liability has long been required and covers “claims of one or more insured parties against other insured parties.”

Q. Are there any other insurance coverages that the Board should consider or buy?

A.  All associations should examine, with the help of a risk management professional, all their exposures and decide what additional coverages are wise or required by their Declarations and Bylaws.  Those possible include Workers Compensation, Employment practices liability, flood, earthquake, Environmental hazards, Umbrella liability, and what used to be known as boiler and machinery (mechanical breakdown coverage).

General Issues 

Q. Are these changes in insurance requirements what is causing premiums to go up so much?

A. No, and in many cases, by themselves would have caused premiums to go down.   Many factors are driving prices up, including revaluing properties to their correct replacement cost, the losses caused by too low rates for several years, the losses caused by Sept. 11 and the scandals such an Enron, increased reinsurance costs, and all the other factors that have led to the hardening of the insurance marketplace.

Q. Are the insurance companies altering their policies to satisfy the new requirements?

A. They are beginning to.  Those for the Associations are more likely to do so than those for the unit owners, but the latter changes are coming also.   Many companies are still trying to reach a consensus on what the ICA language actually says and will hold off making changes until that is resolved.

Q. Whose responsibility is it to be sure that the policies are all in compliance with the law?

A. While the ICA says “No policy of insurance will be issued or delivered….”, every Board must still understand that it is a fiduciary and has ultimate responsibility for the well being of the association.

Q. This is all very confusing.  What is going to happen in the future?

A. While it always hard to be sure, we expect that more clarity will be sought for the areas that lack clarity, that some of the provisions will be tested in the courts, and the minor modifications or clarifications will be made in future legislation.  In the meantime, everyone should be acting in accordance with the language as presented.

Q. I am a Board member and really quite concerned about what the Board should do now.  What do you recommend?

A. The best thing you can do is review the existing insurance program and be sure that it is in compliance with the requirements of your Declarations and of the ICA.   Then you should take the actions necessary to correct any open or unclear areas and should decide what to do on the deductible charge backs and on the mandatory unit owner insurance issues.   Finally, with that done,  you must inform your residents of what their obligations are so they can communicate with their own agents.  

 Drafted by Barbara D. Wick, CPCU, ARM, AIS