Condo Act Laws put Burden on Association to Properly Insure

An important Illinois Appellate Court Decision, Royal Glen Condominium Assn. v. S.T. Neswold and Associates, Inc., has brought increased risk to Condo Board members. The court ruling puts the burden to purchase proper insurance squarely on the association’s governing body.

In 2009 Royal Glen Condo Association bought a standard Travelers insurance policy, their “Condominium Pac Plus”, from local agent S.T Neswold. The policy contained a standard Ordinance or Law Coverage endorsement limiting coverage to $1M. Ordinance and Law limits the amount of money available to pay for additional costs required to make repairs compliant with current building codes. “Replacement Cost” insurance policies, like the one purchased from Travelers in this case, only pay to return a property to it’s pre-loss condition after a covered claim. Any additional costs to bring the property up to current codes is generally sub-limited in the policy.

The current Illinois Condominium Property Act requires “coverage for the increased cost of the construction due to building code requirements”, the new condo act that applies to renewals starting June 1st 2015  goes further in requiring a minimum Ordinance and Law limit of 10% of the building value, up to $500,000.

The Royal Glen association limit was above the new laws explicit requirement but was not enough to cover increased costs from newer building code requirements. When a fire substantially damaged the building the village required the association to comply with a 2004 code requiring sprinkler systems. This new system cost $1.3M to install.

When Travelers limited payment on the sprinkler system to $1M the association sued their insurance broker for not placing adequate insurance. The appellate court ruled in the agent’s favor and stated it was the boards responsibility to comply with the act.

The scenario brings up two important and commonly overlooked insurance issues – covering Ordinance & Law and Directors & Officers coverage for an allegation of failure to place adequate insurance. Building codes are constantly changing. For hundred year old associations it’s very apparent that rebuilding will require everything to be upgraded – from joists to wiring. For midcentury and newer buildings, it’s often not considered. Elevators, sprinkler systems and HVAC systems can be incredibly expensive to retrofit. Larger buildings should purchase guaranteed replacement cost coverage with full ordinance & law coverage or hire an experienced engineer to estimate the cost to comply with current codes.

Standard policies like the one from this case often include packaged Directors and Officers insurance. This coverage is there to protect the board members against an allegation that they breached their fiduciary duty. It’s not surprising but the cheaper the policy the more exclusions it contains. What is surprising is that a common exclusion cites “failure to purchase insurance” as an uncovered act. The board members could be sued by their fellow residents and have no coverage for legal costs and an ensuing verdicts or settlements.

In an effort to save money many associations purchase the cheapest insurance possible, assuming if an uncovered claim comes in they can sue their agent or broker for coverage. The case cited above means this is no longer a reliable option. There are cost effective policies with broad coverage available, contact an expert in covering condo property today to discuss your options.