Who Should Pay the Deductible?
Assigning Property Insurance Deductible Responsibility to the Unit Owners

The most common form of property insurance used to cover condominium association buildings is what insurance professionals refer to as Single Entity coverage. Single Entity Insurance covers the condominium's common elements, limited common elements, and, to an extent, the individual units. It does not cover the structural improvements and betterments made to the units (after the developer conveys the units). The improvements and betterments made to the units are generally the insurance responsibility of the individual unit owners.

Covered property losses are always subject to deductibles that represent threshold amounts that must be exceeded before actual insurance proceeds are paid. These deductible amounts are insurance-related liabilities that are very often the financial responsibility of the condominium associations.  Many community managers and unit owners agree, however, that condominium associations should not always have to foot the property insurance deductible bill, especially when a loss that creates the deductible is the result of unit owner negligence, or damage created by a non-resident (unit owner's tenant).

Over the years, we have been asked to give advice on how to draft insurance bylaw provisions that make the individual unit owners responsible for condominium association property insurance deductibles. Before I discuss how this might be best accomplished, I offer the following pure insurance perspective on a fundamental flaw with a system that makes a condominium association the responsible party for all property loss deductibles.

Generally speaking, condominium associations have control over and the maintenance responsibility for the common elements. The consequences of that control and responsibility cannot be directly transferred to the individual unit owners. The individual unit owners maintain responsibility for the maintenance of their individual units. In situations where structural items and appliances simply break or wear out, the individual owner cannot transfer the consequences of their control over and maintenance responsibility to the association.

But, in an insurable property loss situation where the damage originates from a unit that the owner controls, the consequences of that control are transferred to the association responsible for paying all property loss deductibles. Herein lies the problem: Because the consequences of the control over the units do not completely reside with the individual unit owners, there is often a minimized understanding of the need to exert sufficient care for unit maintenance and control. The Single Entity form of condominium property insurance exacerbates this fundamental flaw. Because Single Entity coverage reaches into the units and repairs structural items that the individual unit owners control and maintain, there is often a misguided belief that the association's property insurance covers more than it actually does. Therefore, it is assumed that the association providing the coverage should pay all property insurance deductibles.

With this in mind, we have found that making the individual unit owners responsible for property insurance deductibles created by losses originating within their units is an effective and safe method of assigning property loss deductible responsibility to unit owners. It is an effective method because:

• It removes the issue of unit owner negligence from the equation. Even if a board of directors and/or a manager is granted the authority to determine negligence, the individual unit owner and/or the unit owner's individual insurance carrier does not have to assume negligence. If negligence is not assumed, it must be proven, and the cost of attempting to prove negligence will most likely exceed the coveted recovery (which is typically $1,000).

• The association's legal documents and the Condominium Act will help to determine the origin of the loss. Both define what are units and what are common elements.

• Property loss adjusters who are called onto the site to inspect the damage will also help to determine the origin of the casualty. It is a safe method because it will not make individual unit owners responsible for property deductibles created by losses that originate within or through the common elements. It will protect unit owners from the deductible amounts created by common element construction defect losses.

It is not suggested that associations try to purely tie in deductible responsibility with maintenance responsibilities. Generally speaking, the "duty to maintain" provisions of association bylaws simply state that unit owners will maintain their units, but not expressly state why. Binding unit owner deductible responsibility to maintenance responsibilities has the potential of making unit owners responsible for deductibles created by property losses affecting their units, not just the deductibles created by losses originating from their units.

Origination of loss-based deductible responsibility will also maximize the potential for recovery by the unit owner under the Condominium Unit Owners insurance policy. The most common condominium unit owners insurance policy is the Insurance Services Office (ISO) HO-6. The most current ISO HO-6 policy offers the following:

1) Dwelling Insurance that covers "items of real property which pertain exclusively to the [unit owner's] premises" and "property which is the [unit owner's] insurance responsibility under a corporation or association of property owners agreement." If property damage is confined to the unit of loss origination, the association's property loss deductible has the potential to be covered up to the amount of Dwelling Insurance that is purchased, subject to the individual's HO-6 property loss deductible (which is typically $250).

2) Liability Loss Assessment Insurance that "will pay up to $1,000 for [the unit owner's] share of loss assessment charged during the policy period against [the unit owner] by a corporation or association of property owners, when the assessment is made as a result of … property damage." If the property damage that originates within a unit affects other units and/or the association's common elements, the insured owner of the unit where the loss originated has the potential to be completely covered up to $1,000, subject to no deductible.

If your association is considering drafting an insurance bylaw provision that will make individual unit owners responsible for certain property loss deductibles, it is imperative that you obtain the advice and counsel of your association's legal representative. No opinion offered in this article will replace your legal representative's unique understanding of the law and your association's legal documents.