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Flood Insurance Considerations for Condominiums Associations, Condominium Unit Owners, Cooperatives, Timeshares and other Common Interest Living Entities

Go to njfloodinsurance.org for New Jersey Flood insurance rate quotes, select Flood Insurance from the drop down menu.

Condominium association considerations:

Boards of Directors of condominium associations typically are responsible under their by-laws for maintaining all forms of property insurance necessary to protect the common property of the association against all hazards to which that property is exposed for either the insurance value or replacement cost of those common elements. Boards would be well advised to include their attorneys, as well as their agents, in coverage considerations, because insurance requirements are driven by by-laws and affected by state regulations.

This responsibility would typically include providing adequate flood insurance protection for all common property located in Special flood Hazard Areas. Such association document requirements could make the individual members of the boards of directors of associations personally liable for insurance errors or omissions, including those relating to flood insurance. It would be prudent to determine whether the Directors and Officers (E&O) policies provide for such coverage.

Unit owner considerations:

Condominium is that form of ownership of real property in which each unit owner has an undivided interest in common elements. Condominium unit types include detached single-family dwellings, townhouses, row houses, or units within a high-rise or low-rise apartment type building, which are considered to be single-family residences by the National Flood Insurance Program (NFIP). Unit owners, who may be individuals or associations, have unique coverage needs that merit particular care. Owners should obtain information about the by-laws and building coverages already provided by the association, because such coverage would be primary, while the unit owners coverage of building elements is excess. The assistance of their agent is needed to coordinate the appropriate coverage combinations. The two policies that address the insurable needs of residential unit owners are the Residential Condominium Building Association Policy (RCBAP) and the Dwelling Policy, explained below.

Insurance agents considerations:

When calculating flood insurance coverage, the same general business practice, which is used for hazards other than flood, should be employed. In addition, the replacement cost of the building foundation and its supporting structure should be included in the calculation, as it is covered under the RCBAP and typically excluded under private commercial policies. Agents should review coverages periodically to ensure that they are adequate, because the RCBAP does not include a mechanism that automatically increases the coverage amount to address increasing construction costs due to inflation.

Contents coverage up to $100,000 is available under the RCBAP to protect eligible personal property owned by the association.

Lender considerations:

Federal financial institution regulators state that the amount of flood insurance purchased for a structure in a high-risk area must at least equal the outstanding principal balance of the loan or the maximum amount of coverage available for the particular type of property under the NFIP. However, the lender may exceed the minimum requirements, if necessary, and compel the purchase of limits that more fully protect the lender and the property owner.

The Federal Home Loan Mortgage Corporation (Freddie Mac) and Federal National Mortgage Association (Fannie Mae), which purchase loans on the secondary market that are secured by properties located in high-risk areas, may have more restrictive requirements. Freddie Mac, for instance, will not purchase loans on condominium units unless the association insures to full replacement value of all improvements. Fannie Mae guidelines state that if a condominium association declines to carry any flood insurance coverage, then each unit owner must purchase an individual policy to comply with Fannie Mae's requirements.

Although Federal mandatory purchase laws apply to lenders, the practice of the lending industry, as followed under the RCBAP, is to defer to the association to ensure compliance. The association does not bear mortgage responsibility on the individual units, however, its interest springs from the obligation to maintain and repair the premises for the community benefit and unit owners as tenants in common. A key feature of the condominium insurance format is the separate ownership and mortgaging of the individual units, yet the insuring of the building, as a whole, is with a policy issued to the association only. Because the RCBAP provides flood insurance coverage protection for both the unit and the common elements of common buildings, the security interests of individual unit owner and mortgagees should be protected, so long as the amounts reflect insurance to value, as with other forms of property insurance.

If the lender determines that coverage purchased under the RCBAP is insufficient to meet the mandatory purchase requirements or if there is no RCBAP, the lender can request the borrower to ask the association to carry adequate limits or require the purchase of separate unit owner €™s building coverage under the Dwelling Policy Form. Although a Dwelling Policy purchased by the unit owner would satisfy the minimum mandatory requirements for federally regulated lending, the lending institution and unit owner assume unknown possible exposures. For example, following a major flood loss, the insured unit owner would have to rely upon the association's and other unit owner's financial ability to make the necessary repairs to common elements in the building, such as electricity, heating, plumbing, elevators, etc. Recovery could be lengthy and the unit owner may incur additional housing costs.

If the building elements are insured to at least 80% of the replacement cost value, up to the available limits under the RCBAP, the unit owner would be wise to still purchase building coverage for possible loss assessments against the unit owner by the association. Please review RCBAP below and Flood Loss Assessment Against Unit Owners and Settlement Outcomes for more detailed explanations of coverage combinations.

Lenders could determine whether or not the amount of coverage purchased by the association under the RCBAP adequately protects the lender's and borrower's financial interests by utilizing either of the following practices. Apply the same practice they use when requiring other forms of property insurance on a condominium unit, i.e. require that the entire building be covered up to the Replacement Cost Value of the building, including its foundation and supporting structure. Or follow this general rule of thumb: determine the Replacement Cost Value or the Market Value of the unit (knowing that this value typically includes other non-insurable values, such as land) and multiply this value times the number of units in the building. For example, if the estimated value of the unit is $150,000 and there are 100 units in the building, then the estimated value of the building would be $15 million. Clearly the later option would not take into account price differences that may exist between units due to size and/or location in the building, but it might provide the ability to get a general sense as to the adequacy of the coverage. If such an approach is taken, then it is recommended that full estimated amount of building value, not the 80% value, be used to determine the adequacy of coverage. This may help avoid underestimation of building value for RCBAP purposes and the possibility of co-insurance penalties being applied at the time of loss. If the full estimated replacement cost value were the amount of coverage purchased, it should be adequate to protect the lender's interests, their statutory flood insurance requirements and a good part of the equity interests of the borrower, in the same manner as their other property insurance practices. Lenders also should seek the assistance of property insurance agents who can calculate the replacement cost and periodically review the coverage to ensure that the amount of flood insurance continues to reflect increasing construction costs.

The RCBAP form is specifically designed for buildings owned by condominium associations that have at least 75% residential occupancy and are located in regular program communities. High-rise and low-rise residential condominium buildings and timeshares (fee or real estate ownership) located in regular program communities can be insured under the RCBAP. Residential Condominium buildings that are being used as a hotel or motel, or are being rented must be insured on the RCBAP, if in a regular program community with 75% residential occupancy. The RCBAP enables the association to manage flood insurance needs according to their insurance requirements, which typically require insurance to value. Under the RCBAP, the entire building is covered, including the common areas, individually owned building elements within the units, and personal property owned in common if contents coverage is purchased. The RCBAP is a replacement cost policy so that no deduction for depreciation is taken at loss settlement. However, it should be insured to full replacement cost value or up to the maximum available limits of $250,000 per unit times the number of units, whichever is less. Buildings that are not insured to at least 80% of their replacement cost or the maximum amount of insurance available for that building under the NFIP, at the time of loss, would be subject to a co-insurance penalty. The co-insurance penalty could considerably reduce the amount the association would be entitled to, forcing them to have to make up any such shortfall either by using reserves or having to levy special assessments to unit owners.

For example if $1,000,000 building coverage is purchased, but the replacement cost value of the building is $2,000,000 and 80% is $1,600,000 an $800,000 flood loss would result in a loss settlement of $500,000. The $300,000 shortage would be the co-insurance penalty due to the building not being insured to at least 80% of its replacement cost value.

The RCBAP benefits to associations and unit owners include:

  • Convenience to associations that can obtain coverage for buildings without having to rely on the actions of individual unit owners.
  • Cost savings to unit owners, because the RCBAP premium is proportionately lower cost than each unit owners premium if individual policies are used to protect the building, in the absence of an RCBAP.
  • RCBAP reduces complaints against associations.

The GP form is used to cover residential condominium buildings that are not eligible for coverage under the RCBAP, such as, cooperatives, non-fee interest timeshares or right-to-use timeshares, apartment buildings and schools.

The maximum amount of building coverage available under the GP Form is $250,000 for residential buildings in regular program communities and $100,000 in emergency program communities. Owners of timeshare buildings that are non-fee interest, such as right to-use and owners of residential cooperative buildings, would utilize the GP Form up to the maximum available coverage limits. Cooperatives and timeshare buildings with 75% residential occupancy are defined as residential buildings under the NFIP.

The maximum amount of contents coverage available is $100,000 for residential buildings located in regular program communities and $10,000 in emergency program communities.

Under the GP form owners of commercial condominium units, located in a regular program community, can purchase contents only coverage up to $500,000 and can apply 10% of the contents coverage limit towards flood damage to interior walls, floors and ceilings. The 10% is not an additional amount and reduces the contents coverage.

Also, under the GP Form owners of commercial buildings located in regular program communities may purchase building coverage up to $500,000 and up to $100,000 in emergency program communities. Contents coverage is available up to $500,000 for commercial buildings located in regular program communities and up to $100,000 in emergency program communities.

Commercial condominium associations can purchase building and commonly owned contents coverage in the name of the association under the GP Form up to $500,000.

The DP form can cover building elements within units, improvements made by unit owners, flood loss assessments and personal property owned by the unit owner or only the personal property of unit owners.

The DP Form may not be used to meet coverage shortfalls in the RCBAP that apply to co-insurance and deductibles. Single unit coverage cannot exceed the $250,000 building policy limit, that applies to single-family dwellings, in regular program communities, or the $35,000 building coverage limit, in emergency program communities. In summary, the combined portion of the associations building coverage that pertains to a single unit and the building coverage purchased by the same unit owner to cover the building elements may not exceed the $250,000 maximum in regular program communities or $35,000 in the emergency program communities. Again, it is important that the unit owner obtains information about the association by-laws, and existing coverage, which would be primary. It is wise to seek the assistance of an agent who is familiar with the NFIP.

Coverage options for improvements within units made by unit owners:

  • If the condominium unit owner purchases contents coverage under the DP, coverage is also available for the interior walls, floor and ceiling, if not otherwise covered under the flood insurance policy purchased by the condo association, up to 10% of the contents limit. Use of the contents coverage for improvements is at the discretion of the unit owner and reduces the personal property limit.
  • Owners of cooperative units and timeshares that are non-fee interest, right-to-use, where no deed is held by the unit owner, can purchase contents coverage under the DP Form. If necessary, up to 10% of the contents coverage limit can be applied to improvements made by the unit owner. Use of the contents coverage for improvements within the unit is at the discretion of the unit owner and reduces the personal property limit.

Examples of flood loss assessment against unit owners and settlement outcomes:

Example A - no RCBAP

  • If the unit owner purchases building coverage under the Dwelling Policy and there is no RCBAP the Dwelling Policy responds to assessments against unit owners for damages to common areas up to the dwelling limit.
  • However, if there is damage to the building elements of the unit as well, the building coverage limit under the Dwelling Policy may not be exceeded by the combined settlement of unit building damages, which would apply first, and the loss assessment.

Example B - RCBAP not insured to value

  • If there is a RCBAP that was not insured to at least 80% of the full replacement cost of the building or the maximum amount of insurance available under the NFIP, up to $250,000 per unit times the number of units, whichever is less, then the Dwelling Policy would not provide loss assessment coverage.
  • The DP Form will not pay any co-insurance penalty under the assessment coverage, nor will it cover the associations policy deductible. If there is damage to the building elements of the unit and the unit owner has purchased building coverage the dwelling policy would be excess, pay to repair building elements after the RCBAP limits have been exhausted.

Example C - RCBAP insured to value

  • If the unit owner purchases building coverage under the Dwelling Policy and if there is a RCBAP that was insured to at least 80% of the full replacement cost of the building or the maximum amount of insurance available under the NFIP, whichever was less, then the individual Dwelling Policy would respond. The assessment coverage under the Dwelling Policy form will pay that part of a loss that exceeds 80% of the replacement cost covered by the RCBAP, up to the maximum combined total of $250,000. The Dwelling Policy will not cover the associations policy deductible under the assessment coverage.
  • If building elements within units have also been damaged the dwelling policy pays to repair building elements after the RCBAP limits that apply to the unit have been exhausted. Again, assessment coverage cannot exceed combined total limit of $250,000 per unit.

Assistance in locating a local agent who is familiar with the NFIP can be obtained by calling (800) 427-4661.

All areas are susceptible to flooding, although to varying degrees, and as forests and meadows give way to roads, malls and subdivisions, flooding events are becoming more frequent and severe. In fact, 25% of NFIP flood claims are paid in the low-to-moderate risk areas, where flood insurance premiums are considerably lower. Therefore, the Mitigation Division, which administers the NFIP, recommends that all property owners protect their investments with flood insurance.

Property owners and association managers should always discuss their insurance needs with their agent and consider whether coverage needs may exceed lender requirements and the NFIP program limits.

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