Section 66-27-413 of the Tennessee Condominium Act includes specific requirements for insurance obtained by the condominium association for condominium regimes. If there are horizontal boundaries (residential units above other units), the condominium association is required to obtain property insurance on individual units. The condominium declaration should describe, with specificity, the insurance that will be obtained by the association and whether each owner should obtain supplemental insurance, i.e., an HO-6 policy or equivalent.  The declaration should also provide for an annual review of the property insurance policy by an insurance consultant to ensure that coverage is adequate or whether any additional endorsements which be considered. 

In many condominium communities where there are no horizontal boundaries, e.g., a townhome condominium or detached condominium, an individual unit owner typically obtains property insurance for his or her unit.  However, due to shared components (such as roofs, foundations or party walls) in attached communities, a loss suffered to one home is much more likely to also cause a loss to a neighboring home. Thus, instead of requiring each homeowner within an attached community to obtain separate insurance for their attached dwelling, the developer should consider requiring that the association maintain 100% full replacement value insurance of the individual dwellings. Single source association insurance can ease the claim process since a casualty will be adjusted and determined by a single insurer, reconstruction will be less complicated as proceeds for reconstruction will be from a single source, and there is certainty regarding endorsements, exclusions and deductibles.  It may also be the case that a single sourced policy will be less costly as compared to separate policies for each dwelling in the building.

For townhome product, if a decision is made to require that each owner obtain property insurance for their dwelling, the condominium documents should include minimum standards for insurance such as utilizing an insurance company with an appropriate AM Best Rating, a requirement that the insurance cover 100% full replacement value with an agreed-value endorsement, and that the owner provide evidence that the insurance has been obtained and in place each year. The condominium documents should also allow the association to obtain insurance on behalf of the owner if the owner fails to do so (with a corresponding right to recover any premiums paid).  Whatever approach is decided upon, be sure and confirm compliance with retail mortgage insurance underwriting requirements which frequently change.

Irrespective of the insurance program selected for a community, the developer or association management company should be prepared to summarize and educate the owners about the insurance obtained by the association and provide some guidance to owners regarding additional owner-maintained insurance to supplement the association’s coverage.

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