Comparison of Louisiana and HUD bond and insurance requirements for condominiums

With the passage of a new Louisiana state law on condo fidelity insurance, condo associations in Louisiana must now satisfy the requirements in both the state law and HUD regulations, just as the associations must also be mindful of both state and HUD requirements for its other insurance coverages.

As creatures of Louisiana law, it goes without saying that condominium associations in Louisiana must comply with state laws concerning various types of insurance and bonds. And, to attract unit owners, the same condo associations must also comply with insurance regulations by the U.S. Housing and Urban Development (HUD). HUD guarantees many mortgages and has issued regulations on the terms under which it will do so, including mandated insurance requirements.

The following discussion integrates the insurance requirements under Louisiana state laws with the HUD regulations. Compliance with one or the other is not acceptable; condo associations must choose insurance coverages that comply with both standards.

Practical Tips

A list of practical tips related to the insurance considerations is set out at the end of this bog.

List of insurance condo associations must maintain

As will be discussed below, all Louisiana condo associations must maintain each of the following:

• a fidelity bond
• hazard (property) insurance
• flood insurance, if it is in a flood hazard area
• general comprehensive liability insurance

Fidelity Bonds

HUD has for some time required that condo associations maintain fidelity bonds or insurance. Louisiana now also requires this coverage. In both instances, this bond protects against missing or stolen money, property or securities by persons handling or responsible for these association assets.

As announced in our newsletter earlier this month, Louisiana’s new law on fidelity bonds goes into effect on August 15, 2011.  What will be different on August 15, 2011 is that all condo associations must follow these rules and there is a minimum coverage requirement of $10,000.

Applicable to all Louisiana condo associations

Both new and established condominium projects, no matter the number of units, must obtain fidelity coverage. Some of you may be aware that HUD requires only condo developments of 20 units or more to obtain fidelity coverage. The new Louisiana law does not have a size minimum. Therefore, all condo associations in Louisiana, regardless of size, must be covered by a fidelity bond.

Coverage amount of fidelity bond

Louisiana requires a minimum coverage of $10,000 and a maximum amount of $1,000,000. HUD has no minimum or maximum limits.  Applying the most restrictive terms of both standards, all condo associations in Louisiana must maintain minimum coverage of $10,000, but there is no maximum coverage.

So, the bottom line in applying both standards is:  All Louisiana condo associations must maintain fidelity coverage that

• covers all officers and directors and
• covers employees and third parties (such as property managers and employees of property managers) that are responsible for or handle the association’s money; and
• is in an amount equal to the association reserves plus 3 months of aggregate assessments, but not less than $10,000.

Can the association satisfy the fidelity bond requirements through coverage provided by others?

Louisiana directly answers this in the affirmative; specifically Louisiana law provides that condo associations can satisfy the bond requirement as an “additional insured” under its property manager’s insurance, so long as the manager’s policy satisfies all of the statutory requirements for direct coverage. While HUD is silent on this, it would seem logical that the HUD requirements would be satisfied by coverage as an “additional insured” on the manager’s policy or bond. To be sure, your insurance agent should confirm that there is no difference in coverage for a named insured and an additional insured in this instance.  

Between Louisiana law and HUD regulations, Louisiana condo associations must obtain other types of insurance, as follows:

Hazard (Property) Insurance

Both Louisiana and HUD require that condo associations carry hazard or property insurance. However, the calculation of the amount of coverage differs.

The state law calculation is: after application of any deductible, the amount of coverage must be 80% of the actual cash value of the insured property. The HUD calculation is: 100% of the current replacement cost of the condo development. The Louisiana condo association should purchase coverage in an amount that would satisfy both standards.

Both standards exclude land, foundations, excavations and other items normally excluded from property policies.

HUD also provides that unit owners cannot make up the “gap” in coverage if the association does not maintain 100% coverage in its hazard/property coverage. Therefore, the association is the only party that can maintain this insurance.

HO-6 Insurance-Interior/”Wall to Wall” coverage

Individual unit owners must obtain their own coverage for the interior if the condo policy does not include this coverage.

Under this policy, unit owners may also purchase Loss Assessment coverage, which is additional coverage to pay for assessments imposed by the association on unit owners to cover the deductible or costs by the association when an insured loss is suffered. Following Hurricane Katrina, condominiums must now absorb very high deductibles.  In some instances, condo associations impose an assessment on the unit owners to cover the deductible for the claim. These assessments can be substantial. Unit owners with the Loss Assessment coverage can look to their the HO-6 insurer to pay all or part of the assessment. Check with your insurance agent for complete details on this coverage.

Liability Insurance

Combining the provisions of Louisiana law and HUD regulations, Louisiana condo associations must maintain comprehensive general liability coverage that

• insures against death, bodily injury and property damage arising out of or in connection with
• the use, ownership or maintenance of
• common elements, commercial space owned and leased by the association and public ways of the condo project,
• including medical payments insurance.

The amount of coverage for this insurance is whatever amount the executive board determines, but cannot be less than any amount specified in the condo declarations.

Flood Insurance

Louisiana has no legal requirement for flood insurance, so each Louisiana condo association in a Special Flood Hazard Area must follow HUD requirements, which are:

• The insurance must cover the individual condo units and the common elements.
• The coverage amount is the LESSOR of  (1) the replacement cost of the project less land costs or (2) up to the National Flood Insurance Program (NFIP) standard of $250,000 per unit.
• For residential condo buildings in a regular program community, maximum coverage is $250,000 times the number of units in the building (not to exceed the replacement cost).

The association, not the unit owner, is responsible for obtaining the flood insurance on the development. However, this insurance may not cover certain claims for interior damage, so unit owners should discuss this with their insurance agent.

Miscellaneous

Insurance policies carried pursuant to the above must provide that:

(1) Each unit owner is an insured person under the policy with respect to liability arising out of his ownership of an individual interest in the common elements or membership in the association.

(2) The insurer waives its right to subrogation under the policy against any unit owner or members of his household.

(3) No act or any omission by any unit owner, unless acting within the scope of his authority on behalf of the association, will void the policy or be a condition to recovery under the policy, and

(4) If, at the time of a loss under the policy, there is other insurance in the name of a unit owner covering the same property covered by the policy, the policy is primary insurance not contributing with the other insurance.

Condo Declarations

The condo declarations should be reviewed for additional insurance requirements.

Practical Tips:

1.  Go over this information with your insurance agent.

2.  Determine if your condo development is in a Special Flood Hazard Area and if so, make sure you have flood insurance.

3.  If your association is covered through your property manager’s fidelity bond,

• make sure the association is named as an “additional insured”
• tickle the anniversary date of the bond to obtain a new declarations page or proof of the bond each year. Keep this dec page in a handy place so it is easily accessible when mortgage companies, selling unit owners or prospective new owners request it

4.  If the association increases its assessments, be sure to determine if the fidelity bond should likewise be increased.

5.  Keep copies of all of the insurance dec pages in a handy place so they are easily accessible when mortgage companies, selling unit owners or prospective new owners request copies of them.

Sources

• HUD Mortgage Letter 2009-46B, dated November 6, 2009.
• State Law:  La. R.S. 9:1123.113

Sign up for condo newsletter

Over the past few months we have published several condo newsletters, including one in July 2011 that announced these fidelity bond changes and the new condo law regulating late fees.  If you would like to receive future newsletters, sign up at the top of this page.  For past issues, send an email to lydia@alfordlegal.com and referemce “past condo newsletters” in the subject line.