To Insure or Not to Insure? – Determining the Association’s Insurance Obligations in Townhome Communities
A frequent area of concern and dispute among owners and board members of townhome communities is the scope and extent of the association’s obligation to obtain and maintain insurance over the townhome property and the individual townhome buildings. Townhome communities are unique in that they are commonly established and governed like single family homeowner associations under Chapter 720, Florida Statutes, even though townhome lots are more similar to condominium units in that they are attached and may share access and use of certain building components such as the roof, party walls or utility facilities.
While the Florida Condominium Act is relatively clear regarding a condominium association’s statutory obligation to insure the condominium property (s. 718.111(11), F.S.), the only specific insurance coverage required by law to be maintained by a homeowners association is insurance or a fidelity bond for all persons who control or disburse the association’s funds (s. 720.3033(5), F.S.). This means that a determination as to the portions of the community and buildings that must be insured by a townhome association and the type and amount of insurance coverage required to be maintained is primarily governed by the language contained in the association’s governing documents (declaration, articles of incorporation, bylaws).
Therefore, it is important for board members and owners to review the specific casualty and insurance provisions (if any) in the association’s governing documents to confirm that the association is meeting its insurance obligations. Below are a few “common areas” of concerns regarding insurance obligations for townhome associations.
Who Insures What?
As a general matter, the townhome declaration will require that the association obtain and maintain “adequate” property insurance on the “common area” as the term is defined in the association’s declaration and as designated or dedicated on the association plat. This would include all improvements, structures, equipment or facilities which are located within or on the association common area. The declaration may also expressly require that individual owners maintain and obtain insurance on their Lot and all buildings and “improvements” or “betterments” and personal property located within or on the Lot. In some cases, the term “improvements” or “betterments” may be specifically defined within the governing documents to include certain components (e.g., roofs, building exterior) so that it is clear what portion of the townhome building must be insured by the owner (e.g., interior) and what portion must be insured by the association. However, some declarations may be vague at best and silent at worst regarding which “improvements” must be insured by owners and those that must be insured by the association.
If there is a substantial ambiguity or vagueness in the governing documents regarding the association’s insurance obligations, the ambiguity would be interpreted against the association. See generally Kaufman v. Shere, 347 So. 2d 627, 628 (Fla. 3d DCA 1977). If this is the case, or the documents do not authorize the association to insure the shared building elements, the association should consider amending the documents to clarify the association’s insurance obligations, including which specific building components the association is required to insure (e.g., building exterior, etc.). As a general rule, the party that has the responsibility to maintain, repair or replace a specific portion of the property will also have the responsibility to insure that portion of property. One important exception to note is that most declarations will contain language that any damage or destruction caused to the property by an owner’s negligence or intentional actions (or that of their tenants, guests, family members, etc.) will be the responsibility of the owner, notwithstanding the association’s insurance or maintenance obligations.
What Type of Coverage is Required?
As noted above, the only specific insurance coverage required by the HOA Act is fidelity insurance for all persons (officers, directors, managers, employees) who handle the association’s funds. (s. 720.303(11), F.S., authorizes, but does not obligate, a homeowners’ association to obtain windstorm insurance coverage). Still, most townhome declarations will either require or authorize the board of directors to obtain and maintain various types of insurance policies as the board may determine necessary within its discretion. There may also be a provision within the governing documents which mandates the association to obtain and maintain certain insurance coverage upon the affirmative vote and approval of a certain percentage of the membership. While the specific coverages may vary depending on the language of the governing documents, many townhome associations will carry the following policies:
- Casualty or Loss Insurance (g.: wind storm, hurricane)– to cover all repairs or restoration of the association property required due to a casualty event or loss (as defined by the specific policy); the amount of this insurance should be equal to one hundred percent (100%) of the then current replacement costs of the common area and improvements.
- Fidelity – based upon the maximum amount of the association’s financial assets (e.: operating and reserve accounts).
- Employer/Workers Compensation – if the association has personnel who are hired as association employees.
- Flood Insurance – as may be required by law and depending on the location of the community.
What if No Coverage is Specifically Required by the Governing Documents?
Logistical and practical nightmares await townhome communities that experience casualty events if the shared building elements are insured by the individual owners. Consider that a roof shared by four owners will have to deal with four different insurance policies, adjusters, contractors, etc. If one owner is uninsured, how does that impact the remaining owners that share a roof or wall with the uninsured owner?
The association should consult with the association’s counsel and an insurance agent to determine the association’s exposure and recommended insurance coverages based upon a review of the association’s governing documents and an assessment of the association owned and/or maintained property.