Insurance Myths: Does “Full Replacement Cost” Insurance Requirement Really Mean an Association has to Cover Everything?

Nancy Polomis | Hellmuth & Johnson | November 1, 2019

I recently had a conversation with an insurance agent who acknowledged he “didn’t deal much with homeowners associations.” His client lived in an association, and had suffered damage within his townhome that the agent thought should be covered under the association’s master insurance policy.  He believed that, if a declaration states that the association’s master policy must provide coverage for “full insurable replacement cost of the property,” the association must maintain what is commonly referred to as “all in” coverage.  “All in” insurance covers not only the building’s exterior and common elements, but also items on the interior of homes such as cabinetry, countertops, built-in appliances and flooring.  It was not the first time an agent has taken such a position.  Unfortunately for their clients, those agents are mistaken.

Where does the requirement for “full replacement coverage” come from?

The declarations of many associations—regardless of whether the associations are subject to the Minnesota Common Interest Ownership Act (“MCIOA”)—include language requiring coverage for “full insurable replacement cost.”  This requirement is mandated by lender guidelines established by federal mortgage lending agencies such as Fannie Mae, the U.S. Department of Housing & Urban Development (HUD) and the U.S. Department of Veterans Affairs (VA).  The requirement applies to all homes with federally-backed mortgages, but confusion arises most often in homes that are located in community associations.

What insurance does MCIOA require?

Some people seem to get tripped up by the language of MCIOA with regard to the level of coverage to be maintained by the association.  Under MCIOA, the master insurance policy maintained by the association may cover certain components on the interior of a townhome or condominium home, including (i) ceiling or wall finishing materials, (ii) finished flooring, (iii) cabinetry, (iv) finished millwork, (v) electrical, heating, ventilating, and air conditioning equipment, and plumbing fixtures serving a single unit, (vi) built-in appliances, or (vii) other improvements.   However, unless the declaration specifically states that the association must cover any or all of those components, the association is not required to maintain insurance that covers those items.  If there is no requirement to cover these items under the declaration, the decision whether to cover them lies with the board of directors.

Federal mortgage lending agencies all acknowledge that an association may not provide adequate coverage to meet the agencies’ requirement to maintain coverage for “full insurable replacement cost.”  If that is the case, those federal agencies require the homeowner’s personal insurance (commonly referred to as an “HO6 policy”) cover the items not covered by the association’s master insurance policy – including such items as flooring, cabinetry, etc.  The master policy and the HO6 policy then work in tandem to provide the full replacement coverage required by Fannie Mae, VA and HUD.

Why wouldn’t an association’s insurance cover everything?

As we are all painfully aware, insurance rates have risen substantially over the last several years.  Not surprisingly, “all in” coverage is significantly more expensive than lesser levels of coverage.  In many cases, the cost for “all in” coverage is simply prohibitive for an association.  Where associations have the flexibility to choose the level of coverage, many are moving to the more affordable “bare walls” coverage, which covers the building, but not the interior finishes of a home, and is sometimes referred to as “studs out” coverage.  For example, if an association opted not to cover any of the items listed above (flooring, cabinetry, etc.), it is likely that the association has “bare walls” coverage.  Having each homeowner cover the interior of his home ensures that the homeowner gets the coverage for his home that he wants, while helping to reduce the insurance costs borne by the association.

How do homeowners know what’s covered by the association’s policy?

If an association has the option to cover certain components within a townhome or condominium, some people have expressed concern as to how homeowners know what is covered under the master policy.

  • First, MCIOA requires that associations provide an annual report to all members that includes, among other things, a “detailed description of the insurance coverage provided by the association including a statement as to which, if any , of the items [referred to above] are insured by the association[.]” (Minn. Stat. §515B.3-106(c)(5).)[1] Therefore, homeowners receive information every year as to what the association’s master policy covers.  Homeowners can then take this information to their own insurance agent to ensure they have adequate coverage, with no gaps or overlaps.
  • Second, when associations make a significant change in coverage, they typically provide multiple notifications to owners prior to the change taking effect.

Homeowners and associations must bear in mind that that the extent of the association’s coverage is determined by the association’s governing documents (typically, the declaration).  Even if the association has been paying for “all in” coverage, if the declaration states that the association is to provide “bare walls” coverage, then the insurer will cover a loss based on the “bare walls” requirement of the declaration.  (If the association’s agent doesn’t ask for a copy of the association’s governing documents as part of the agent’s due diligence when providing a quote for coverage, that should be a red flag for the board of directors.)  If a homeowner insures his home based upon the association maintaining an “all in” policy, when the declaration provides otherwise, there will likely be a gap in coverage.

In addition, homeowners often assume that any repair costs that are not covered by the homeowner’s insurer will be covered under the association’s master policy.  That is not necessarily the case.  For example, if a homeowner’s insurer pays to replace a portion of the homeowner’s damaged wood flooring, the association’s policy may not necessarily cover the cost to replace all the flooring.  As is the case with master insurance coverage, if a homeowner’s agent doesn’t ask for a copy of the declaration and a copy of the master policy (or at least a summary of the coverage), that should be a red flag for the homeowner.

Cut to the chase:  Does “full replacement cost” really mean an association has to cover everything

Not necessarily.  If the declaration of an association governed by MCIOA includes the language giving the association the option – but the obligation – to provide coverage for interior items (or simply refers to the insurance provisions of MCIOA), the association is not obligated to cover those items.  In order to meet the “full replacement cost” requirements under federal lending guidelines, homeowners must ensure that their personal insurance policy covers those items not covered under the association’s master policy so that the combined coverage under both policies provides “full replacement cost” coverage.

If homeowners have questions about what is covered by the association’s policy, they should contact the association’s management company or the board of directors.

The information in this article is provided solely as general information and not as legal advice.  Receipt of this information or its use does not establish an attorney-client relationship.  Readers are urged to speak with a qualified attorney experienced in community association law when making decisions regarding a specific legal issue.

* Special thanks to Grant Herschberger at Marsh & MacLennan Agency for graciously sharing his expertise during the drafting of this article.

[1] The governing documents of many associations that are not otherwise governed by MCIOA also incorporate the annual reporting requirements of MCIOA.

The Accidental Construction Owner: a Checklist of Considerations for HOAs Engaging in Construction

Jason T. Strickland | Ward & Smith | July 26, 2019

Homeowners associations (“HOAs”) do not typically act as construction owners.

HOAs are set up as entities to maintain and manage planned unit communities. The most important and common role of the HOA is to maintain the common elements of the community. However, in that capacity, HOAs will typically be compelled to undertake a construction project. In these circumstances, the HOA plays the role of a commercial construction owner but is doing so without the experience that a commercial construction owner has in managing a construction project. The following is a list of considerations for the HOA that is engaging as a construction owner:

Written Contract

The HOA will typically hire a contractor to perform the construction work. Sometimes the HOA will also hire a designer to develop a design for the work and to inspect construction of the work. In each instance, there should be a written contract put in place between the owner and the contractor (and between the owner and designer, if the latter is involved). The contract should have express terms and be clear and understandable.


Payment for the work should be set out in the written contract. The two most common types of payment are cost-plus or lump sum. In a cost-plus situation, the contractor will be paid for the materials and labor it provides to the project, plus a markup which is intended to compensate the contractor for its overhead and profit. In a cost-plus situation, the HOA should strongly consider requiring a guaranteed-maximum-price or GMP. A GMP caps the total costs and fees for which the HOA will be responsible — there is a maximum cap above which the HOA does not have to pay.

The second arrangement is a lump sum whereby a fixed price is paid by the HOA to the contractor for the work. This price is negotiated at the outset of the project and set forth in the contract. Unless unforeseen conditions are encountered, or the scope of work is changed for some reason, the owner is required to pay the lump sum, no more or less, to the contractor for completion of the work, regardless of the actual costs. This arrangement is generally more favorable to an HOA but is generally disfavored by contractors.

The HOA should also have the written contract set forth a process for the timing of payments (i.e., when and how payments are made) and the paperwork that must be submitted in order for the contractor to establish its entitlement to payment.

Scope of Work

Written contracts should set forth the scope of work to be performed. There should also be some provision that determines how the work will be accepted, including whether there will be inspections by the owner and/or the designer, and what happens if work is rejected.


The contract should set forth the time in which the contractor is required to complete the work and the remedies available to the HOA if the work is not completed in the time required. Remedies for late completion are typically in the form of liquidated damages, which are a daily rate fixed at the beginning of the project. For each day late that the contractor finishes the project, the contractor will pay to the owner an amount equal to the daily rate. It is important in the contract to not turn the liquidated damages into a penalty. The liquidated damages should be a reasonable approximation or estimate of the actual damages that the HOA will suffer if the project is not completed in the time required.


In the event of a dispute with a contractor, there likely will be liens asserted against the project. These liens can be asserted not only against the common elements, but also the individual units in the planned unit community. Thus, the HOA’s members, the unit owners in the community, are subjected to being defendants alongside the HOA. This can create problems between the HOA and its members. The HOA should keep its members informed of the construction project. In the event of a dispute or if a dispute looks likely, the HOA should try to get ahead of the problem by informing its unit owners of the problem. Although the assertion of a lien by a contractor or subcontractor cannot be wholly prevented, certain key provisions, if present in the contract, can reduce the likelihood that liens can be successfully asserted against the common elements or the individual units.


A written contract between the owner and the contractor (or between the owner and the designer) should set out insurance requirements for the contractor or designer, including specific dollar minimums and types of insurance the contractor is required to maintain.


All of the above considerations must be considered in light of the sequence in which negotiations with the contractor are conducted. If the HOA gets too far into negotiations with a specific contractor and becomes wedded to using that contractor, then the HOA has little leverage to negotiate contract terms with the contractor and likely will be forced into a situation where it must sign the contract presented by the contractor as a fait accompli. Therefore, an HOA proceeding as an owner on a construction project should make sure the issues listed above are put forward, considered, addressed, and made part of negotiations at the earliest stage so as to prevent a loss of leverage and avoid being forced into a contract with inappropriate, unfair, or harmful terms.


The HOA should consult with its attorneys, and if necessary, have its attorneys refer them to a competent construction attorney to advise them at the very earliest stages of the construction project. Doing so will allow the HOA to avoid or at least mitigate the risks and losses associated with acting as a commercial owner when the HOA lacks experience doing so.

Construction Defect Claims at Common Interest Developments

Alex M. Chazen and Jason Daniel Feld | Kahana & Feld LLP | March 8, 2018

A homeowners’ association (“HOA”) governing common interest developments is subject to a different set of requirements for construction defect claims as opposed to single-family developments. In 1995, the California legislature enacted the Calderon Act (formerly CA Civil Code §1374) which set forth the requirements for an HOA to bring forth a construction defect action against a builder or developer including a series of pre-litigation procedures aimed at attempting to resolve the matter prior to formal litigation. The Calderon Act required dispute resolution before a common interest development with 20 or more units can sue a developer for construction defects.

In 2013, the California legislature enacted the Davis-Stirling Act (Civil Code §6000), which replaced the Calderon Act and established a statutory framework that regulates HOAs for all types of common interest developments. The Act provides the HOA the power to impose fees that are cycled back into the community for the community’s benefit, and allows the HOA enforcement powers under the CC&R’s to regulate and maintain the “atmosphere” of the community.

Pre-Litigation Procedures Under the Davis-Stirling Act (Civil Code §6000)

Before filing a complaint for damages against a builder, developer or general contractor, the HOA must comply with the following pre-litigation requirements:

  • The HOA must provide a “Notice of Commencement of Legal Proceedings” to the builder’s registered agent. The Notice must contain the following information: (a) name and location of the project; (b) an initial list of defect sufficient to apprise the builder of the general nature of the alleged defects at issue; (c) a description of the resultant damages from said defects; (d) a summary of the results of any surveys taken by the unit owners to determine the nature and extent of the alleged defects; and (e) a summary of any testing performed on the common interests allegedly suffering from construction deficiencies.
  • Key Deadlines: The HOA has 180 days to serve the Notice and attempt to resolve the dispute with the builder. The parties may mutually agree to extend this deadline. The builder has 25 days to serve a response to the HOA’s Notice and meet and confer with the HOA on a proposed resolution of the claim. After receipt of the Notice, the builder has 60 days to inspect the property, receive and review the construction documents and HOA reports (defect list, surveys, testing reports, etc.), and engage the implicated subcontractors and design professionals as needed.
  • The Pre-Litigation protocol will be governed by a Dispute Resolution Facilitator (“DRF”) who will oversee the discovery, inspections/testing and settlement negotiations. The DRF will conduct case management meetings, mediations and expert exchanges to assist in the resolution of this matter.
  • After the deadlines are met and settlement efforts are frustrated, the HOA can then file their complaint against the builder, and all evidence obtained during the pre-litigation process can be used as evidence for the litigation and eventual trial.

HOA Actions Still Governed by the Right to Repair Statute (SB800)

Once the pre-litigation procedures have been exhausted, the HOA’s construction defect action against the builder is still subject to the provisions of SB800 (Civil Code §895, et seq.). Civil Code §895(f) expressly states that a “Claimant” or “homeowner” includes the individual owners of single-family homes, individual unit owners of attached dwellings and, in the case of a common interest development, any association…” The HOA’s complaint would state a cause of action for Violation of the Functionality Standards of Civil Code §895, et seq. While the builders’ right to repair would be handled under the pre-litigation procedures of Davis-Stirling Act, the definitions of the alleged construction deficiencies would fall under the Functionality Standards of SB800.

It is important to know the proper method and timing of handling these construction defect actions involving a common area development.

Crossing the line? Obtaining Building Permits for Decks in CIC’s

Michael D. Klemm | Hellmuth & Johnson PLLC | June 21, 2017

As summer gets into full swing, Minnesotans spend more time outdoors, and some community association members make plans to build or replace decks attached to their homes.  In many cases, such decks extend beyond the unit boundaries and encroach upon the common elements that are owned by the association or by all association members jointly.

Sometimes, in the excitement of getting a fresh new deck, owners overlook the more mundane aspects of the project – getting the proper permits from the city and architectural approvals from the association (if required under the association’s governing documents).  Getting architectural approval can be relatively straightforward.  Getting a building permit can prove to be a more daunting task.

Cities generally require building permits for construction of decks, and city building officials may raise concerns regarding a unit owner’s application to construct a deck on property owned by someone else.  The unit owner is then likely to contact the association manager or board of directors for assistance in showing the city that the unit owner has an easement for construction of the deck.

Many declarations automatically create an easement for encroachments by the initial improvements constructed by the declarant and replacements thereof.  In that case, if a unit owner desires to simply replace an existing deck without expanding the encroachment onto the common elements, then the encroachment of the replacement may be covered by an existing easement.  If the declaration does not include such language, however, and there is no separate easement in place, the owner is likely to seek the association’s assistance getting such an easement.

The framework regarding easements for encroachments onto the common elements varies from association to association, depending on the governing documents and applicable law.  If the common interest community is subject to Minnesota Statutes Chapter 515B, the Minnesota Common Interest Ownership Act (“MCIOA”), then the board of directors has authority under Minn. Stat. §515B.3-102(a)(9) to grant an easement for a deck to be constructed and maintained over a portion of the common elements, provided the construction and maintenance of a deck is a purpose allowed under the declaration.  No approval of the association membership is required – unless the declaration or bylaws impose such a requirement.  Unless membership approval is required, the board of directors likely has authority to unilaterally grant (or deny) an easement for a deck to encroach upon the common elements.

As noted above, it is important to remember that construction or alteration of decks is typically subject to architectural approval requirements.  In some common interest communities, the governing documents may include a provision under which approval of proposed plans for a deck that will encroach onto the common elements would automatically create an easement for the deck, regardless of whether such an easement existed before.

Unit owners, association managers and boards of directors can expedite the process for obtaining municipal building permits for deck construction or replacement projects by reviewing the association’s governing documents before the owner submits the application for the building permit and by complying with any applicable procedural requirements.  Associations are advised to consult with their attorneys regarding the governing documents and laws that apply to easements in their common interest community to ensure appropriate easements are granted where appropriate – and granted in compliance with the requirements of the association’s governing documents and any city rule or ordinance.

Poor Workmanship Tops List of Construction Defects in New Report From Community Associations Institute (CAI)

Marketwired | February 28, 2017
Poor Workmanship Tops List of Construction Defects in New Report From Community Associations Institute (CAI)
Protecting Homebuyers and Homeowners from Construction Deficiencies in Condominiums and Preserving Property Values Survey

The majority of construction deficiencies occur in new condominium developments compared to townhomes and single family homes, according to a new study released today by Community Associations Institute (CAI), the leading authority in community association education, governance, and management.

The report, titled, “Protecting Homebuyers and Homeowners from Construction Deficiencies in Condominiums and Preserving Property Values Survey” examines the scale of construction deficiencies, litigation surrounding those claims, and the national impact on homeowners and community associations.

According to the report, 81 percent of respondents claim poor workmanship is the most common type of deficiency, resulting in plumbing leaks, electrical or mechanical problems, and cracks in foundation walls. In addition, the research found that 35 percent reported construction deficiencies negatively impact a homeowner’s property value and the ability to re-sell the home.

For years, community associations have been under attack in state legislatures and municipalities by legislation and ordinances aimed at stripping associations’ ability to seek relief from damages due to legitimate deficiencies found in the construction of homes, units, or common areas.

“There exists identifiable trends in the legislation,” says Dawn M. Bauman, CAI senior vice president, Government & Public Affairs. “Most of what we see in the declaration or preamble of the bills cite the need for more affordable housing.” Proponents of these bills argue that frivolous lawsuits filed by associations and the costs associated with them make building affordable condominiums too risky. The bills create additional obstacles associations must face before filing a lawsuit or limiting the definition of a construction defect to those only causing physical, bodily harm.

Ross Feinberg, Esq., and Ron Perl, Esq. describe the complexities of construction deficiencies in the introduction to their book, Construction Defect Litigation, published by CAI, which include:

  • “Developers and contractors are professionals whose businesses are challenging under even the most ideal conditions. Residential development and construction are made all the more complex by fierce competition for resources, a shortage of qualified labor, an erratic economy, and incessant market demands.”
  • “Developers and contractors dislike construction defect litigation as much as homeowners do, and most will make genuine efforts to resolve problems quickly and efficiently — if you let them.”
  • “For the homeowner, understandably, all defects are serious; but, from a practical standpoint, most probably aren’t serious enough to require a lawsuit. Constructive negotiations with the developer, builder, or contractor nearly always lead to resolution. In fact, most construction defects are resolved without legal action — and for good reason. Litigation is extremely costly.”

The 2017 CAI study found the vast majority of the claims (44%) were resolved outside of the courthouse. Most being resolved with direct negotiation.

“The process for associations to recover damages from a building deficiency is far more complex than filing a lawsuit,” Bauman adds. “Associations must determine whether the cost and time to pursue claims outweigh the repair costs.” The report found it took more than a year for nearly two-thirds of the communities to recover damages, and only one-third reported the damages paid were enough to cover the repair.

“Market forces are dictating whether condominiums are being built,” Bauman further added, “not warranties. Laws are present in the states that make associations weigh the breadth of filing a warranty claim before doing so. Reducing consumer protections by watering down the statutory warranties will not reduce purchase prices, but will increase the post-sale cost of home ownership.”