Board members often find that the least exciting part of governing an association is also one of the most important: insurance and managing risk. Questions about who provides insurance for the exterior, what happens after a major loss (like a fire), and how to handle shared roofs and walls can turn into expensive disputes if the association’s governing documents are unclear or outdated.

One tool that may solve these headaches is an “Insurance Declaration” or insurance allocation provision within the association’s governing documents. An “Insurance Declaration” is a provision in an association’s governing documents that lays out:

· What portions of the property does the association insure?

· What portions individual unit owners must insure?

· How deductibles, premiums, and special insurance assessments are allocated?

· How claims are handled and who pays for what?

The Illinois Condominium Property Act (the “Condo Act”) and the Illinois Common Interest Community Association Act (“CICAA”) allow associations to structure their insurance responsibilities without real specific language, which can lead to gaps in coverage or confusion on coverage. An “Insurance Declaration” removes ambiguity and gives the board the roadmap it needs to obtain proper community coverage.

Some condominium and townhome communities still rely on each owner to insure the exterior of their unit. In practice, this means each owner purchases their own insurance policy, which supposedly covers their share of the roof, siding, or shared walls. This almost always leads to problems. When two units share roofing or structural components, and each owner has a different insurance company, a single incident (like hail damage or a roof leak) may trigger finger-pointing between insurance carriers as to who will provide coverage.

Further, unit owners don’t always understand what they are purchasing as far as insurance coverage. One owner may purchase a bare-bones policy that does not cover common structural elements, while another buys a more comprehensive policy. The result? Totally different levels of protection on shared building components, leaving the association in the middle to cover the gaps. Even if the association’s governing documents require unit owners to insure certain exterior or shared items, the board has no real ability to inspect or enforce the adequacy of individual insurance policies.

The good news is that there’s a far better system. A condominium or townhome association can choose to insure the building exteriors, roofs, and all shared structural components under a single master policy, while individual owners insure only their interior finishes, personal belongings, loss of use, and personal liability. Rather than leaving insurance coverage to chance, the association manages the exterior insurance centrally and recovers the cost from owners through insurance assessments or as part of the annual operating budget.

A single master policy eliminates the individual insurance problem. The association only has to deal with one carrier, one adjuster, one deductible, and really just one point of responsibility. Claims are therefore managed efficiently, consistently, and fairly. This also eliminates any gaps in coverage. Additionally, master policies typically offer cheaper rates because the association is buying at large scale versus individual owners purchasing independent policies. Finally, a single master policy allows for predictable repairs and faster reconstruction. The board selects the contractors and coordinates the repairs among the affected units. This protects property values and ensures the community remains uniform.

For Illinois condominium and townhome boards, an “Insurance Declaration” is more than a legal formality. It is a governance tool that 1) reduces disputes between unit owners; 2) protects the association from liability; 3) simplifies insurance claims; 4) ensures consistent insurance coverage; and 5) safeguards the association’s physical and financial health.

If your association still relies on unit owners to insure exterior structures independently, it may be time to revisit the association’s governing documents and consider adopting a modern, association-controlled insurance model.

If you have any questions about this article, please contact Kathryn Formeller at kformeller@tresslerllp.com.

Kathryn A. Formeller

Kathryn A. Formeller is a partner and Co-Chair of the Condominium & Common Interest Community Association Law practice. Her practice includes representing condominium associations and common interest community associations in a variety of areas, including rule enforcement, interpretation of governing documents, review and negotiation of contracts, and collection of assessments. Kat also practices in the areas of insurance coverage analysis and litigation. Her insurance coverage and litigation practice primarily focuses on directors and officers liability, EPL, professional liability, and fiduciary liability matters. Click here to read Kat’s full attorney bio.