Covered for Catastrophe?

Condo Owners, Renters Often Don’t Know Limits of Insurance

By Renae Merle
Washington Post Staff Writer
Saturday, January 12, 2008; F01

During most of the six hours it took D.C. firefighters to extinguish a blaze that engulfed his condominium building, Paul Carabello huddled outside with his neighbors, clutching the things he had managed to save: his passport, Social Security card and cellphone.

But soon enough, Carabello was thinking about the things he had left behind: The television. Waterlogged wool carpet that he later decided smelled like “stinky ashtray water.” And the books. Shelves and shelves of books on architecture, design and art that he had collected over 10 years.
“If I had realized we weren’t going to get back in, I would have taken some of those,” said Carabello, 37, the lobby ambassador at the Hay-Adams Hotel.

The four-alarm fire in October at Carabello’s Adams Morgan condo building, the Avalon, prompted an urgent question for its residents: How much will my insurance cover?

Victims of the Cherry Glen condominium fire in Beltsville confronted the same question last month. It’s a concern for all homeowners and renters who face misfortune, be it a flood, a fire, a leaky pipe, an overflowing tub or a pesky dog that chews up the carpet.

While mortgage lenders require that single-family houses and condominiums have basic insurance coverage to protect their investment, homeowners have many options for additional coverage to safeguard their personal property.

Misunderstandings about what is covered can leave owners unprotected. Renters who mistakenly rely on a landlord’s policy for protection can also face losses.

Many Avalon residents, including Carabello, had homeowners insurance. Others didn’t and are struggling, according to residents. The condo association’s master insurance policy will pay for the rebuilding but not for the replacement of owners’ personal property. And despite the destruction of their homes, owners must continue to pay their mortgages, monthly condo fees and property taxes.

Local fundraisers brought in $9,000 in donations, which went to temporarily offset the cost of monthly condo fees. Council member Jim Graham (D-Ward 1) is pushing legislation to temporarily forgive residents’ property tax bills. But even with insurance and donations, displaced owners still expect to feel a pinch.

Most owners have an allotment from their insurance company to cover the cost of renting another apartment while the four-story building is rehabilitated, said Samiya Edwards, a consultant on African policy who lived on the building’s fourth floor and heads the reconstruction committee.

“The problem we run into with a fire of our magnitude is it is very easy to max out on that. In the coming months, people, depending on their insurance policies, will have varying degrees of financial distress,” Edwards said. Her committee’s goal is to have the building’s restoration completed by the end of the year, she said.

Edwards and her fiance are renting an apartment nearby but may have to dip into their savings before they can move back to the Avalon. “We will definitely be out of pocket . . . thousands of dollars,” including the cost of replacing furniture and other items, she said. “You’re never going to recoup all your costs after something like this.”

Jenn French, another fourth-floor resident, said that she expects her insurance to cover up to 13 months of rent and to replace many of her lost belongings but that she knows it will not cover everything. “I still think of something every day that I left off my list,” said French, the owner of a graphics design company.

Deciding how much insurance is enough to protect your home can be daunting. A student renting a first apartment, for example, may have a hard time putting a value on a hodgepodge of cheap furniture, books and music.

Insurers recommend that homeowners keep a running tally of their property, including any special items, such as heirlooms or expensive jewelry, that may require additional coverage. Renters considering whether to get coverage should think about the value of not only furniture but also electronic equipment, including iPods, laptops and computer games.

“Renters need to realize that, yes, the landlord does have insurance, but it is to protect their interests, not yours,” said Carolyn Gorman, vice president of the Insurance Information Institute, an industry trade group.

The landlord’s policy, for example, will not cover a renter’s personal property or protect him or her from personal liability if there is an accident in the unit, Gorman said. “Suppose you were frying some chicken in your kitchen and caused a grease fire, and it causes massive damage,” Gorman said. “The landlord could sue you for that.”

For owners of single-family homes , deciphering what is covered on the standard policy can be confusing. Mortgage lenders require owners to have enough insurance to cover the cost of rebuilding the home. But in a recent study, the National Association of Insurance Commissioners found widespread misunderstanding about what else the policies cover.

For example, standard policies cover damage from fire, lightning, hail or theft, but not floods or earthquakes. Insurance against flood damage, for example, is provided by the National Flood Insurance Program. This issue often emerges after disasters such as hurricanes, when surprised homeowners find themselves without enough coverage.

The need for separate flood and earthquake insurance is just the start of the issues homeowners seem misinformed about, said Cathy Weatherford, chief executive of the National Association of Insurance Commissioners. “A pretty high percentage thought their pets would be covered under [their] homeowners policy if they were stolen or injured,” Weatherford said. They’re not.

Condominium owners are sometimes equally perplexed about what is covered under their policies. Condos are required to have insurance, known as a master policy, to pay for the building’s reconstruction in the event of a fire, accident or disaster. But owners’ personal property would be covered under separate homeowners policies, which are not required. Generally, the master policy covers the physical building and each unit owner’s walls, floors and ceiling. Some policies also include standard fixtures such as kitchen cabinets, major appliances and bathroom fixtures, according to insurance experts.

Master policies can be extended to protect a condominium association from theft. Last year the Virginia Real Estate Board filed a complaint against local property manager Koger Management Group, alleging that large cash withdrawals had been made without documentation from numerous homeowners associations. A Fairfax County Circuit Court judge placed the firm under court supervision; it has since changed name and ownership. The successor firm referred questions to former management, which did not respond to requests for comment.

“I can tell you that we have paid some claims to some communities who were managed by Koger and whose funds were missing,” said John Manougian, president of John Manougian Insurance Agency in Silver Spring. The buildings had “fidelity” coverage, which protected them from “dishonest acts,” he said.

But some owners confuse the master policy maintained by the condominium association with personal homeowners insurance that would protect their belongings. “They wrongly assume [the master policy] covers more than it does. That is why some are left with very little after a significant fire,” Manougian said. Many new condo communities now require their owners to have homeowners insurance, while older communities may not, he said.

After 19 units at the Cherry Glen condominium were damaged by last month’s fire, property manager John Sheehy found that most of the owners had homeowners policies. But Sheehy heard from two who didn’t. One appeared to think that the unit was covered under the master policy, while the other had let the policy lapse the month before.

The association’s bylaws state that owners should carry additional insurance coverage for their personal items, said Sheehy, director of property management at D.H. Bader . Owners will receive “another mailing soon reinforcing that if you don’t have insurance, you really need to have it,” he said.
There are limits to what many master policies will cover. A kitchen damaged by a broken pipe, for example, will be restored to its original condition. But if owners have made any upgrades to the kitchen, such as new granite countertops or maple cabinets, their personal homeowners insurance would have to make up the difference in restoration costs.

Condo owners and their community associations can also disagree on who should pay the deductible if the association decides the damage to a unit should be covered by the master policy. “The deductible can be $1,000 or $25,000. Does the unit owner pay the deductible, or does the association pay the deductible?” said Shelah F. Lynn, a lawyer with Ballard Spahr Andrews & Ingersoll.

The Gables on Tuckerman, a Bethesda condominium community, faced a similar question when an owner asked to be reimbursed for repairs to her unit after a water-heater leak on the upper level of her two-level unit. The association declined to file a claim with its master insurance policy because the damage did not meet the $10,000 deductible.

The Montgomery County Circuit Court sided with the association in the dispute, which is now before the Maryland Court of Appeals in Annapolis. The condo board “has the duty to undertake repairs that affect the condominium as a whole,” said Tom Mugavero, a lawyer with Whiteford Taylor Preston in the District, who is representing the association in the case. “When it affects only one person, the board has to consider the costs to the association as a whole and decide whether or not it is in the association’s interest to send the claim.”

The lawyer representing the condo owner declined to comment.

An excessive amount of claims could push insurance premiums higher and make it more difficult to secure a policy, Mugavero said. The board has “a fiduciary duty,” he said. “Excessive claims on the master policy result in an extended loss report, which has a detrimental effect. You can effectively claim yourself out of the primary insurance market.”