Why the Property Replacement Value Matter

The amount of property coverage on your association’s policy cannot be wrong. If the value is too high, your community is paying unnecessary premium dollars. If it’s too low, your association may be underinsured, and that’s where things get costly.

Underinsurance means there may not be enough funds to repair or rebuild after a loss. The shortfall often results in special assessments, out-of-pocket expenses for unit owners, or even lawsuits against the Board for failure to procure adequate insurance.

Board members have a fiduciary duty to act in the best interests of the Association, both financially and ethically. That means understanding your coverage, reviewing policies annually, and working closely with your insurance agent to confirm that the property replacement value is accurate and current.

How Property Replacement Values Are Determined

There are several ways associations determine replacement cost values, some more accurate than others.

• Insurance Appraisal:
  The most accurate method. Conducted by a qualified engineer or appraiser, this process includes a thorough site visit and assessment of materials, structure, and condition. The appraiser’s signed affidavit or engineering stamp verifies the accuracy of the value.
• Software Estimations (CoreLogic, Verisk, Marshall & Swift):
  These tools provide estimates based on assumptions and square footage, but they do not reflect the property’s actual condition. They’re useful as a starting point, but not a substitute for a professional appraisal.
• Contractor Estimates:
  Builders and local contractors can also provide estimates, though these vary widely due to differing overhead costs, profit margins, and assumptions about materials and labor.

Over time, construction costs and material prices fluctuate. After major events like hurricanes or supply chain disruptions, replacement values can shift dramatically, making annual reviews essential.

Legal Protections and Responsibilities

Board members are typically protected by their state’s nonprofit statutes and the association’s governing documents, which often include hold harmless provisions. However, protection only goes so far.

Directors & Officers (D&O) insurance is a critical safeguard.  It covers defense costs if board members or managers are sued for decisions made in good faith, including claims of failure to procure proper insurance. A stand-alone D&O policy that protects both the Association and Management Company is strongly recommended.

If the Association does not have the correct D&O, especially the Failure to procure Insurance coverage, then the Manager as legal “agent” does not have the correct D&O.  This could mean an uncovered claim against the management company and high legal bills. 

The manager implements the Board’s decisions, and many times, the management company is brought into lawsuits from homeowners against the Association. Coverage for failure to procure insurance will defend both the Association and the management company. If it is determined that the amount of insurance was incorrect or insufficient, the insurance will not pay for the shortfall. This will still be paid by the Association as a common expense, by the affected unit owners, or through a special assessment.

Three Key Recommendations for Every Association

1. Obtain an insurance appraisal to determine the most accurate replacement value for your property.
2. Understand each Board member’s fiduciary duty and the consequences of breaching it.
3. Confirm coverage for “Failure to Procure Insurance” under your D&O or related policies.

Important Property Coverages to make sure you understand.  Each property policy should have the endorsements, Ordinance or Law Coverage, and Water Sewer Back-up Coverage.  Ordinance or Law Coverage has 3 three parts. After a claim and the Association is rebuilding, if there are any increases in cost to bring the building to today's building ordinances or codes, this endorsement is how the increase is paid for.  If this endorsement is not included, then it is an out-of-pocket expense for the Association.  Regarding Water Sewer Back-up coverage, make sure you understand what this endorsement covers.  It is a water backup that is on the city side or caused by the municipality, and there is resulting damage in the building.  This coverage is based on the location of the incident that causes the damage.  If the Association is located in a coastal area, it is recommended to have Wind-Driven Rain Coverage.  This endorsement pays for interior damage to a building when there is no exterior damage.  Water is blown in through soffits, around seals of the doors and windows.  The resulting damage from the water is covered.  If you do not have this endorsement, there is no coverage for the water blown inside the building. 

The Bottom Line

Your Association’s property insurance is too important to guess at. Replacement values should be verified, reviewed, and supported by professional data each year. Confirm in writing that the coverages needed are in place. 

Meet with your trusted experts. Your attorney, engineer, and insurance agent should meet at least annually to ensure your coverage keeps pace with current realities. These conversations help the Board make informed, defensible, and fiscally responsible decisions for the community.

Is Your Property Coverage Based on Facts, or a Guess? 

Why Accurate Property Coverage Matters for Every Condo and Townhome Association 

When it comes to your association’s property coverage, one of the most important questions a Board of Directors or Community Manager can ask is: Where did this replacement value come from? This question might sound simple, but the answer can determine whether your community recovers smoothly from a loss or faces financial and legal turmoil.