Insurance Appraisals and Coverage for Condominiums
Property insurance premiums are continuing to rise, and now is a good time for condominium boards and property managers to review their understanding of insurance coverage requirements and the insurance appraisals that are used to establish coverage limits. Per Florida Statute 718, The Condominium Act, the association “…shall use its best efforts to obtain and maintain adequate property insurance to protect the association, the association property, the common elements, and the condominium property….” Additionally, the statute requires that the insurable replacement cost be “determined by an independent insurance appraisal or update of a prior appraisal.”
Every hazard insurance policy issued or renewed after January 1, 2009, must provide primary coverage for “All portions of the condominium property as originally installed or replacement of like kind and quality, in accordance with the original plans and specifications.”
Further, the statute defines building components that are not included in the condominium hazard insurance. The Statute specifically states:
The coverage must exclude all personal property within the unit or limited common elements, and floor, wall and ceiling coverings, electrical fixtures, appliances, water heaters, water filters, built-in cabinets and countertops, and window treatments, including curtains, drapes, blinds, hardware, and similar window treatment components, or replacements of any of the foregoing which are located within the boundaries of the unit and serve only such unit.
Items excluded from the condominium association’s property insurance are the responsibility of the individual unit owners to insure. Thus, it is important for condominium unit owners to have a good understanding of the association’s insurance policies and their individual unit policy to avoid gaps or overlap in coverage. Certainly, a key goal for the Condominium Act is to clarify coverage responsibility and “to ensure consistency in the provision of insurance coverage to condominiums and their unit owners.” Additionally, standard underwriting guidelines for hazard insurance values exclude foundations and piping underground from coverage.
While the Florida statutes specify coverage parameters for hazard insurance, they are largely silent on the issue of flood insurance. Coverage for flood insurance is defined by the National Flood Insurance Program (NFIP), which is managed by the Federal Emergency Management Agency (FEMA). FEMA coverage is based on Replacement Cost Value (RCV) of the complete residential condominium building without the exclusions mentioned previously for hazard insurance. RCV is defined as the full current cost to construct replacement buildings (or portions thereof based on the extent of flood damage) having equal utility as the damaged property using current construction methods and materials. This coverage includes the interiors as they were originally built, and does not cover upgrades which were added by the unit owners. Federal flood insurance, underwritten by the U.S. Government, is available for residential condominium buildings up to a maximum RCV of $250,000 per unit (calculated by multiplying the total number of units in the building by $250,000). Additional flood coverage over this limit is obtained on the open insurance market.
Non-residential association buildings (defined as buildings with less than 75 percent of structure floor space for residential use) having two or more outside rigid walls and a fully-secured roof can obtain FEMA flood insurance up to a maximum actual cash value (ACV) of $500,000 per building. ACV is defined as replacement cost minus physical depreciation value. Clubhouses and pool houses would be typical examples of association non-residential buildings. Note that any amenities not meeting the rigid wall and roof requirement such as carports, walkways, pools, tennis courts, fences, etc. would not be covered for flood insurance.
The difference between hazard insurance and flood insurance values can create a great deal of confusion among unit owners and condominium boards. Typically, hazard values are typically around 65–70 percent of flood insurance values.
For an association property to be properly insured, an accurate, unbiased appraisal of the replacement costs must be obtained. Given the complexities of the appraisal process in determining current building costs and differentiating hazard and flood values, it is strongly recommended that condominium associations seek out an appraisal firm that has expertise in this area. A firm that has Florida state-certified and licensed appraisers assures a high level of competence. Licensed appraisers are accountable to the Florida Department of Business and Professional Regulation and the Florida Appraisal Board. Cost estimators who are not state-licensed appraisers typically have no government oversight or accountability for the accuracy of their reports.
The insurance appraisal process involves a physical inspection of the buildings and amenities being insured. Photographs are taken for reference as required by the insurance carriers. When available, “as-built” architectural building plans are utilized by the appraiser to determine square footages and building details that are not observable from the on-site inspection. When plans are not available, measurements are taken and drawings are made on-site. From these, computer-aided drawings are created to accurately determine the square footage for all building areas.
Current construction costs are determined using professional building cost systems based on building type, class, size, design, quality and many other factors including local construction material and labor costs. Finally, an appraisal report is developed in the format required by the insurance carrier to properly underwrite the association hazard and flood policies.
Accurate Appraisals Are Critical
The risks associated with poorly developed and inaccurate insurance appraisals can be high. No association wants to find itself in a position of being over or under-insured. If the appraisal is low, the risk of co-insurance penalties and insufficient insurance proceeds to replace a total loss are very real. Conversely, if appraised value is high, the insurance premium will be higher than necessary and a waste of association budget dollars.
Rick Logan and Bob Townsend are both Florida State-Certified General Real Estate Appraisers and have more than 50 years combined appraisal experience. Their firm, Townsend Appraisals, specializes in developing insurance appraisals for condominium associations and commercial building owners to establish coverage limits for hazard and flood policies. Their office is in Naples, Florida, and they service all Southwest Florida from Everglades City to Tampa. All staff appraisers are state-certified and licensed. For more information, visit www.townsendappraisalsinc.com.