{"id":896680,"date":"2019-11-07T11:48:48","date_gmt":"2019-11-07T18:48:48","guid":{"rendered":"https:\/\/www.myconstructionexpert.com\/blog\/?p=896680"},"modified":"2019-11-07T11:48:55","modified_gmt":"2019-11-07T18:48:55","slug":"does-full-replacement-cost-really-mean-association-covers-everything","status":"publish","type":"post","link":"https:\/\/www.myconstructionexpert.com\/blog\/does-full-replacement-cost-really-mean-association-covers-everything\/","title":{"rendered":"Insurance Myths: Does \u201cFull Replacement Cost\u201d Insurance Requirement Really Mean an Association has to Cover Everything?"},"content":{"rendered":"\n

Nancy Polomis | Hellmuth & Johnson<\/a> | November 1, 2019<\/p>\n\n\n\n

I recently had a conversation with an insurance agent who acknowledged he \u201cdidn\u2019t deal much with homeowners associations.\u201d His client lived in an association, and had suffered damage within his townhome that the agent thought should be covered under the association\u2019s master insurance policy.  He believed that, if a declaration states that the association\u2019s master policy must provide coverage for \u201cfull insurable replacement cost of the property,\u201d the association must maintain what is commonly referred to as \u201call in\u201d coverage.  \u201cAll in\u201d insurance covers not only the building\u2019s 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.<\/p>\n\n\n\n

Where does the requirement for \u201cfull replacement coverage\u201d come from?<\/em><\/p>\n\n\n\n

The declarations of many associations\u2014regardless of whether the associations are subject to the Minnesota Common Interest Ownership Act (\u201cMCIOA\u201d)\u2014include language requiring coverage for \u201cfull insurable replacement cost.\u201d  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.<\/p>\n\n\n\n

What insurance does MCIOA require?<\/em><\/p>\n\n\n\n

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<\/em> 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 <\/em>cover any or all of those components, the association is not<\/em><\/strong> required <\/em><\/strong>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.<\/p>\n\n\n\n

Federal mortgage lending agencies all acknowledge that an association may not provide adequate coverage to meet the agencies\u2019 requirement to maintain coverage for \u201cfull insurable replacement cost.\u201d  If that is the case, those federal agencies require the homeowner\u2019s personal insurance (commonly referred to as an \u201cHO6 policy\u201d) cover the items not covered by the association\u2019s master insurance policy \u2013 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.<\/p>\n\n\n\n

Why wouldn\u2019t an association\u2019s insurance cover everything?<\/em><\/p>\n\n\n\n

As we are all painfully aware, insurance rates have risen substantially over the last several years.  Not surprisingly, \u201call in\u201d coverage is significantly more expensive than lesser levels of coverage.  In many cases, the cost for \u201call in\u201d 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 \u201cbare walls\u201d coverage, which covers the building, but not the interior finishes of a home, and is sometimes referred to as \u201cstuds out\u201d 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 \u201cbare walls\u201d 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.<\/p>\n\n\n\n

How do homeowners know what\u2019s covered by the association\u2019s policy?<\/em><\/p>\n\n\n\n

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.<\/p>\n\n\n\n