I think Insurance is the center of the universe, but apparently most of the world does not agree with me.  I’m constantly amazed at the ever-changing ways attorneys and tax accountants come up with to title property or transfer risk via a contract.  They either don’t consider the ramifications to the insurance program, or think we can just change our contract to match their latest gimmick.  As you well know, it’s often not that simple.

One of these fads is for a homeowners’ association to agree to provide the outside building coverage for all its members and to tell each homeowner to buy an HO6 for their inside improvements and contents.  Of course they’re not really a condo, and if you check either the property appraiser website or county clerk’s website for the ownership of each home you’ll find it to be Mr. & Mrs. Jones and not the homeowners’ association.

Remember Insurance 101 – that little thing called insurable interest?  Can I buy a homeowners policy (with myself as the named insured) that covers my neighbor’s house?  No, because if the house is damaged, I could collect on the claim even though I didn’t lose anything.   This doesn’t make sense to the insurance world, because we expect you to have some skin in the game.  We want you to have an incentive to maintain the home, and not want to be inconvenienced or suffer a financial loss if the home is damaged.

So, now we have a condo association policy with a named insured that doesn’t own the buildings. What happens at the time of loss?  Does the agreement give the association insurable interest?  It’s debatable. Is the association out anything because this property was damaged?  Not really.  The company could deny the claim and off we go to court to figure it out.  How long does that take?  Meanwhile, what does the homeowner with the HO6 do after he collects the measly Coverage A he purchased and runs out of Additional Living Expense?  What about the homeowner’s mortgagee?  It’s not going to be pretty.

I suppose someone had wonderful reasons for dreaming up this scenario, but it doesn’t work in the world of insurance.  What do you, the agent, do?  Make sure the condo is legally organized as a condo, and run screaming from any other scenario.

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