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The following new condominium insurance requirements, set forth
at Section 12 of the Illinois Condominium Property Act as recently
amended (the “Act”), apply to all policies issued or renewed to
condominium associations from and after June 1, 2002.
I. PROPERTY DAMAGE INSURANCE
A. All condominium insurance must cover the following: the
units and the common elements, including the limited common
elements.
B. In other words, the policy insures everything except
the unit owners' personal property and decorating.
C. The policy must provide full insurable replacement cost
coverage, less deductibles, including coverage for extra
costs to comply with code requirements at the time of reconstruction.
D. The insurance companies are required to comply with these
requirements.
E. The policy is to be "bare walls" except when
the association board requests otherwise. Fixtures installed
by the developer are included. Floor, wall and ceiling
coverings are excluded. Therefore, the Association must
determine whether its declaration obligates it to provide insurance
greater than the law requires, such as to floor and wall coverings,
various internal installations, and decorating. In the event
the declaration so requires, the board may have a duty to request
the coverage required by the Declaration.
F. In addition the law allows the declaration to provide requirements
for other insurance coverage not mentioned in the law, such as
workers compensation, employment practices, environmental hazards,
and equipment breakdown insurance. Again, the board must ascertain
whether its declaration requires any such additional coverage.
G. The insurance does not have to cover improvements
and betterments installed by a unit owner, but in the event the
insurance does cover such improvements and betterments, the extra
premium for such coverage can be assessed against the units that
are benefitted. Improvements and betterments include fixtures,
appliances and cabinets added by the unit owners.
ACTION RECOMMENDATIONS
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Each board should obtain a written opinion from the association
attorney specifying the insurance coverage that is required,
and then the board must make sure that the association’s insurance
policy includes the required coverage.
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The Association should maintain accurate records of the type and
quality of the fixtures and decorating installed within the original
units sold by the developer. This may require investigative work,
depending on the age of the units and the record-keeping to date.
II. GENERAL LIABILITY INSURANCE
A. The policy must provide general commercial liability insurance
for at least $1,000,000.00 of coverage for the association, its
board and managing agent, and their employees and agents.
B. The policy must cover as an additional insured the developer
in its capacity as a unit owner, manager, board member, and officer.
C. The unit owners also must be covered as additional insureds.
D. The policy must cover claims between insured parties.
E. The law obligates the insurance companies to provide this
coverage.
ACTION RECOMMENDATIONS
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The board must ensure that the minimum statutory coverage
of $1,000,000.00 will be sufficient to cover the risk of exposure
to the particular association.
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The board should obtain a qualified insurance adjuster's
risk assessment to determine adequate levels of coverage.
III. FIDELITY BOND AND DIRECTORS AND OFFICERS
ERRORS AND OMISSIONS INSURANCE
A. For associations with six or more units, the board must
obtain a fidelity bond.
B. Management companies that have custody or control over
association funds must obtain the maximum available fidelity
bond coverage.
C. The association has standing to recover against such a
bond for losses sustained.
D. Coverage must be for the full amount of funds in the insured's
custody or control.
E. The Board must obtain a "reasonable" amount of
directors and officers liability coverage (or the amount required
by the declaration or bylaws) over all contracts and actions
taken by the board members in their official capacity as directors
and officers, except when they are not entitled to indemnification
under the declaration, bylaws, or Not for Profit Corporation
Act.
ACTION RECOMMENDATIONS
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The board must make a determination of what is a reasonable
amount of directors and officers liability coverage.
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The board should obtain a qualified insurance adjuster's
risk assessment to determine adequate levels of coverage.
IV. DEDUCTIBLES
A. The association may pay the deductible for damage claims
to units or common elements as a common expense.
B. Or, the board may assess the deductible against the owners
of the units affected.
C. After notice and an opportunity for hearing, the board
may assess the deductible against the owner who caused the damage
or from whose unit the damage originated.
ACTION RECOMMENDATIONS
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The board should consider whether to adopt rules and regulations
governing the assessment of insurance deductibles so that the
association follows a clear and uniform policy.
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In taking such action, the board must follow proper rule
enactment procedures, and should work with association counsel
to ensure that the proposed rules are most likely to be enforceable.
V. OTHER INSURANCE REQUIREMENTS
The new law imposes a variety of other requirements for condominium
policies, including the following:
A. Each unit owner and secured party must be an insured person.
B. The insurance company must waive its right of subrogation
against the unit owner and his or her household members and against
the board members and the association, and the unit owner must
waive his or her right of subrogation against the board and the
association.
C. The association's policy is the primary insurance.
D. The insurance settlement must be adjusted by and with the
association, and made payable to the association for the benefit
of the unit owners and secured parties. All funds shall be held
in trust for the repair and restoration of the common elements,
the bare walls, floors and ceilings of the units, and then to
any improvements or betterments insured by the association. Unit
owners are not entitled to any proceeds unless there is a surplus
of funds after complete repair and restoration.
E. The board may require the unit owners to maintain insurance
covering their personal liability and for damages caused by their
negligence or originating from their unit, including payment
of deductibles and for unit decorating, furnishings, appliances
and equipment. In the event the unit owner does not provide proof
of insurance, the association may obtain it at the unit owner's
expense.
F. Contractors providing more than $10,000.00 per year of
services must provide proof of insurance naming the association,
board, and managing agents as additional insured.
G. Insurance companies must notify the association of any
settlement ten days before settling any claim.
H. Non-residential condominiums may opt out or vary from the
insurance requirements imposed by the law.
ACTION RECOMMENDATIONS
- Unless the declaration or bylaws already require unit owners
to provide insurance, the board will need to adopt rules and
regulations to govern unit owner insurance requirements.
- Rule adoption must comply with the Act. Rule content should
be reviewed with an eye toward enforceability.
- The board must institute procedures to ensure that it receives
certificates of insurance from its contractors.
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