Flood Insurance Co-Insurance Penalty Impacting New Jersey Condominiums Associations
For those of you that are members of a condominium association that sustained flood damage as a result of Hurricane Sandy, you probably already know that residential condominiums are subject to the statutory and regulatory requirements for the Nation Flood Insurance Program (NFIP). In places like Lavallette, SeasideHeights, Ortley Beach, Normandy Beach, Point Pleasant, Sea Bright and OceanBeach, dozens of condominium developments have sustained significant flood damage. Some of those developments are only now discovering the applicable co-insurance penalty for condominiums that are under-insured.
The NFIP requires condominium associations in flood zones to purchase an NFIP Residential Condominium Building Association Policy (RCBAP). An RCBAP is a master policy issued by FEMA for residential condominiums. A residential condominium building is defined as having 75 percent or more of the building’s floor area in residential use. It may be purchased only by condominium owners associations. The RCBAP covers both the common and individually owned building elements within the units, improvements within the units, and contents owned in common (if contents coverage is purchased). The maximum amount of building coverage that can be purchased under an RCBAP is either 100 percent of the replacement cost value of the building, including amounts to repair, or replace the foundation and its supporting structures, or the total number of units in the condominium building times $250,000, whichever is less.
So how does the RCBAP’s co-insurance penalty apply in the case of residential condominiums? In the event the RCBAP’s coverage on a condominium building at the time of loss is less than 80 percent of either the building’s replacement cost or the maximum amount of insurance available for that building under the NFIP (whichever is less), then the loss payment, which is subject to a coinsurance penalty, is determined as follows (subject to all other relevant conditions in this policy, including those pertaining to valuation, adjustment, settlement and payment of loss):
Step 1: Divide the actual amount of flood insurance carried on the condominium building at the time of loss by 80 percent of either its replacement cost or the maximum amount of insurance available for the building under the NFIP, whichever is less.
Step 2: Multiply the amount of loss, before application of the deductible, by the figure determined in Step 1 above.
Step 3: Subtract the deductible from the figure determined in Step 2 above.
The policy will pay the amount determined in Step 3 above, or the amount of insurance carried, whichever is less.
Example of Inadequate Insurance
Replacement value of the building: $2,500,000
80% of replacement value of the building: $2,000,000
Actual amount of insurance carried: $1,800,000
Amount of the loss: $1,500,000
Step 1 : $1,800,000 ÷ $2,000,000 = .90
(90% of what should be carried to avoid coinsurance penalty)
Step 2: $1,500,000 x .90 = $1,350,000
Step 3: $1,350,000 – $5,000 = $1,345,000
The policy will pay no more than $1,345,000. The remaining $155,000 is not covered due to the co-insurance penalty ($150,000) and application of the deductible ($5,000).
As you can see, the co-insurance penalty can be significant and at the end of the day may contribute to a special assessment of unit owners. In cases like these, other parties may be responsible for the shortfall, including the insurance agent. For those condominium associations that continue to deal with flood insurance issues, including the co-insurance penalty and under-insurance, deadlines are quickly approaching and need to be addressed immediately.