If an admitted insurance company becomes insolvent, the Florida Insurance Guaranty Association (FIGA) generally becomes obligated to pay up to $300,000 for each covered claim. However, for multi-building condominiums, the manner in which the association’s property insurance is structured could affect the amount FIGA will pay if the association’s admitted insurer becomes insolvent.
FIGA provides a mechanism for the payment of covered claims in the event an admitted insurance company becomes insolvent. Once an insurance company becomes insolvent, FIGA is deemed the insurer for covered claims up to the statutory cap.
In the context of a condominium association made up of multiple buildings, does the $300,000 cap apply to all of the buildings or each one separately? According to a Florida appellate court, the answer depends on how the property was insured under the policy.
The case involved a condominium association made up of seven separate buildings, all of which were damaged during Hurricane Wilma. The declarations page of the association’s property insurance policy indicated that the policy covers the seven buildings. Importantly, each building was listed separately in the “Description of Premises,” the coverage and premiums were calculated separately for each building, and each building had its own deductible.
Following the insurance company’s insolvency, FIGA stepped in and paid $299,900 (which represents the $300,000 cap minus the $100 deductible). Though the condominium association believed that each building made up a separate claim entitled to its own $300,000 cap, FIGA treated the loss to all of the buildings as a single claim.
In deciding which party was correct, the court focused on the difference between a policy containing an “aggregate” value for several insured buildings, and a policy containing separate schedules for each of the insured buildings. Specifically, the court noted that:
A distinction must be made between a policy which speaks in terms of a lump-sum obligation or value of the property (“blanket coverage”) and one which separately schedules different items of property (“specific coverage”). In the latter case, each separately treated item of property is in effect covered by a separate contract of insurance and the amount recoverable with respect to a loss affecting such property is determined independently of other items of property.
Applying this rule, the court concluded that the association’s insurance policy provided separate contracts of insurance since the policy spoke in terms of separately scheduled buildings. Since each building was separately listed on the declarations page, with a separate covered amount and separate premiums listed for each building, the court held that each of these seven separate claims should have its own statutory cap of $ 300,000.
The association in this case clearly benefited from having specific coverage as opposed to blanket coverage. However, it is often considered preferable to purchase multi-building property insurance that affords blanket coverage rather than specific coverage because it may offer greater flexibility in terms of coverage and limits.
To reconcile this paradox, it is important to understand that the benefit of the distinction between blanket and specific coverage was not realized until the association’s insurance company became insolvent, thereby implicating FIGA and the $300,000 cap. Had the insurance company not become insolvent, it is possible that the association would have benefitted from the opposite conclusion than that reached by the court.
Unfortunately, since predicting insurer insolvency is difficult, the decision between specific versus blanket property insurance for a multi-building condominium association may prove incorrect when viewed with the benefit of hindsight. By reducing the likelihood of insurer insolvency, however, an association can address the variable that is most likely to affect the outcome—the insurer’s insolvency.
Although there are no guarantees that a particular insurance company will remain solvent, it is commonly understood that financially strong insurance companies are less likely to become insolvent. Unfortunately, doing business with a financially strong insurer may not be a viable option due to increased costs or the lack of options in a particular marketplace. Nevertheless, an insurer’s financial strength should be considered when shopping for insurance.
Though purchasing the association’s insurance may be complicated, officers and directors of the association have a fiduciary obligation to the unit owners. Though this obligation does not necessarily mean that all decisions must be correct, it does mean that they must be informed. This often means that an insurance agent possessing the appropriate experience should be consulted during the process.
If you would like to learn more about insuring condominium association property, or if you would like assistance in obtaining insurance, please contact us.