Publications

New Insurance Coverage; New Problems

Every year, just like the color change of the leaves and the cycle of seasons, the Illinois Condominium Property Act is amended. This year, the hot topic was an overhaul of some very archaic insurance provisions. This reform was long overdue. However, there is a major shift in statutory coverage requirements.

On the one hand, responsibility for coverage will lie primarily with the association and eliminate a lot of disputes over covered risks. On the other hand, this expanded insurance program will be considerably more costly. The following is a summary of changes contained in the new bill; effective June 1, 2002. All condominium insurance in the State of Illinois must include the following:

Coverage for units, common elements and limited common elements. This includes anything controlled or built by the developer.
- Additions and improvements installed by the unit owner are still excluded
- Coverage is provided for portions of systems bounded by the walls, ceilings and
  floors.
- There is no coverage for wall, ceiling or floor coverings.
  Comment: Although limited common elements are to be covered by casualty loss, that does not affect association policies regarding financial responsibility for maintenance.
Fidelity bond coverage shall be for the board, officers and the management company for the full amount of operating and reserve funds on deposit.
Deductibles – there is no longer a question that a deductible may be charged back to the unit owner(s) causing the loss, as long as it is subject to notice and hearing.
Primary coverage – The association’s insurance will always be presumed to be the primary carrier.
Comment: One of the biggest sources of disputes between the association and an owner was which insurance covered a loss; the owner’s or the association’s. From this point forward, these types of claims are to be submitted to the association’s carrier as the "primary."
Associations can now require unit owners to maintain owners HO-6 insurance coverage and if they fail to do so, the association can purchase it and charge the cost back to the owner. Although insurance carriers can no longer subrogate losses against the unit owner(s) causing the damage.
Directors and officers insurance must now cover not just board errors and omissions, but also contracts entered into by the association. However, directors and officers are excluded from coverage for acts of gross negligence, bad faith or fraud.
Comment: Formerly breach of contract cases were often not covered.
All contractors providing services in excess of $10,000 annually must have a certificate of insurance on file naming the board, the association and the property manager as additional insureds.
Comment: If an association is sued and the plaintiff names the manager as a defendant, the association’s insurance company must also defend the manager, so long as the manager was acting on behalf of the association.
No liability claim against an association can be settled without 10 days notice to the association. The association does not have the right to reject the settlement.
Lastly, all policies issued after January 1, 2002 must include "full replacement cost" coverage which includes all code upgrades imposed by local government since the building was constructed.

In all likelihood, it will take several years to assimilate these changes of coverage into board procedure. Ultimately it will be easier to process a claim, but it will take time before the magnitude of change is fully understood.

In the meantime, in light of the devastating losses of 9/11, coupled with the expanded coverage for associations and their members, in my opinion boards of directors can expect sizeable increases in their premiums for the next renewal period. Before final preparation of the operating budget, a diligent board should consult with its insurance professional in order to determine the ultimate cost of insurance before plugging it into the line item for insurance cost.

Unit owners are especially unhappy about special assessments, so having to pay one to cover increased insurance premiums as a result of poor planning is a casualty of a different magnitude.