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January 28, 2015

Best Practices: Documenting Business Condominium Insurance

by Jessica L. Conn

Condominiums can present a particular challenge with regard to insurance because the ownership structure bifurcates the responsibility for insuring the property between the condominium association and the condominium unit owner. Additionally, not all condominium associations handle insurance issues in the same fashion, which means that lenders must be particularly diligent when reviewing condominium documentation to ensure that the lender understands who is legally responsible to insure which part of the property.

Generally, the outer structural walls, foundation and interior structural walls dividing units are the responsibility of the condominium association; while typically, any interior, non-structural walls and fixtures are the responsibility of the condominium unit owner. This structure is most commonly used when the subject unit is a part of a larger building that contains other condominium units owned by other parties.   If responsibility for maintaining hazard insurance is allocated as described above, a lender will need to obtain evidence of the condominium association’s master hazard insurance policy on the building. The lender should request to be added as a mortgagee on this policy.  Additionally, the lender must also obtain a copy of the condominium hazard insurance obtained by the condominium unit owner, which will cover the internal fixtures and non-structural walls. Depending on the nature of the coverage, the policy may also cover contents. The lender should be named as mortgagee and lender’s loss payee on this policy. It is important to note that neither a condominium association’s master hazard policy nor a condominium unit owner’s insurance will cover floods or general business liability, which require additional insurance policies for coverage.

Another variation of the division of responsibility between the condominium association and unit owner may occur when the business condominium unit is its own freestanding building in a complex of other freestanding units. In this case, the condominium association may have no responsibility for maintaining insurance on the structure and the condominium owner may be required to insure all of the structural components (external and internal) and fixtures for the building.

If all insurance responsibility falls on a condominium owner, then the owner will likely be able to insure the property as it would any other commercial real estate that it owns. A lender would require real estate hazard insurance if taking the real estate as collateral and then a separate policy for business personal property (contents), if such assets are located at the condominium and serve as collateral for the loan. Again, these policies would not cover floods or liability, which require additional insurance policies for coverage.

The examples set forth above are merely the most common allocations of responsibility for maintaining hazard insurance for condominiums. Because condominium associations contractually determine which parties are responsible for maintaining insurance on the property in the condominium declaration, which is recorded in the real estate records,  it is imperative that lenders review this document in order to determine what types of insurance the condominium association will provide and what types of insurance the condominium unit owner should obtain and present to the lender prior to closing.

For more information regarding condominium insurance, please contact Jessica at jconn@starfieldsmith.com or at 267-470-1188.