Foreclosures and their effects on Community Association Insurance

From an insurance company’s perspective, Associations with foreclosures or impending foreclosures can adversely affect an Associations good standing. The concerns are that vacant units create more of an exposure:

1.      Unit Owner’s who can’t afford their assessments, rarely pay their utility bills or simply shut their heat off.  So in the winter months having no heat within the unit creates a high exposure for frozen pipes and broken pipes leading to water damage. This was a major problem this winter. 

Remedy – Tighten up on assessment receivables, nothing should be over 60 days. The sooner the Association takes action, the sooner they will have a financial solution.

The Association should seek legal counsel to proceed with foreclosures and liens on units.  The Illinois Condominium Property Act gives the ability for those Attorneys fees associated with a default to be added to the Unit Owners common expenses due. Using a CAI, Community Association Institute Attorney will give you a head start since they are already familiar with the Illinois Condominium Property Act foreclosure and lien proceedings.

Associations should create a maintenance program in which the unit is inspected regularly (weekly is recommended).  The water valves for the sinks, toilet, show/tub, and laundry within the unit should be shut off. The heat should be left on at a minimum of 65 degrees. The windows should be closed.  The Unit should be locked and secured.

The Association has the ability within the Illinois Condominium Property Act under Section 18.4 (j) to access a unit from time to time to maintain, repair or replace any common elements or for making emergency repairs necessary to prevent damage to the common elements or to other units. However, the Illinois Condominium Property Act does not apply to Home Owners Associations or Cooperatives. Those entities should review the Declarations or consult with an Attorney.

2.      The Associations finances also become a concern. If Unit Owner(s) are not paying their assessments, it is likely that the Association will not be able to pay their bills, payroll and maintain their property. Utilities, insurance, contractors and employees are all vital to a functioning Association.  While delinquent payments may get the utilities shut off or the insurance cancelled, it may also generate lawsuits from contractors or employees. This would be very unfortunate, particularly if the insurance were cancelled.

Remedy – Have enough money in reserves if needed.  If the Association doesn’t have the funds now, future budgets should accommodate for this. 

Contact your local CAI, Community Association Institute Banking Lender.  Specialized community association lenders are more likely to understand the situation and the legal recourse provided in the Illinois Condominium Property Act and are therefore more likely to provide a loan to the Association.

Again, contacting legal counsel sooner rather than later to follow through on the foreclosure process and a lien on the unit are crucial for the long term well being of the Association.

3.      Desirability, property values and resale values are also a concern. If the Association begins to show signs of deferred maintenance, or there are multiple foreclosures, the probability of the desirability to insure the account becomes an issue. Lower property values become an issue for owners and neighbors. Resale values become an issue for any owner and can adversely affect the entire neighborhood.

Remedy-  Many Associations throughout the Country have adopted higher assessments and /or special assessments to offset those that aren’t paying.  Is this fair to the other unit owners, those that are paying in a timely fashion, no. Is it a good solution, probably not but in some cases it could be a last alternative. 

Instead reassess the Associations expenses. Call your current Vendors and ask if they can give any decreases or extensions on payments. Get alternative quotes to be sure you are paying a fair amount for the service. 

Form a Maintenance Committee and ask those owners on the Committee to help maintain the property, by do some gardening, some light maintenance work, changing light bulbs or checking smoke detector batteries until the Association is back on its feet. Never should any member of the Association be performing anything other than easy, light duties. No work on a ladder, a roof, or with motorized equipment. Common sense should dictate how to safely pitch in and help maintain a property.

Contact the Associations legal counsel to help aid in a timely solution.  

4.      Insurance for the foreclosed unit – Unfortunately, during the foreclosure process a unit owner is not likely paying their insurance premiums for their unit insurance. Since the unit owner stills owns their unit, the Association does not have an “insurable interest” in the unit. Insurance Companies cannot legally insure something without their being an insurable interest.  So, the inside of the unit may be uninsured for a period of time if the unit owner is not keeping up on their insurance payments. Another reason, maintaining the unit is so vital! 

Once the unit is foreclosed, the bank which now holds title usually has an insurance department and will have the insurance put in place.

Many Attorneys and even the Illinois Condominium Property Act give the Association the ability to force place coverage on a unit that does not have its own insurance in place. Unfortunately, this is impossible to do. While the intentions of this forced placed coverage was a great idea, insurance companies are bound by the “insurable interest” clause and cannot sell such a policy.

The insurance industry is preparing for what may be an unfortunate time for community associations by amending their own underwriting guidelines to include the foreclosure exposure.

Some insurance companies currently obtain a Dunn & Bradstreet report on the Association before quoting their insurance. Going forward, it is likely more and more companies will begin to do this.  They will be looking closely at the Associations ability to pay and the amount of units in foreclosure. This may affect premiums or the ability to obtain insurance in a standard market.

Currently, insurance carriers are comfortable with a 5% - 10% threshold of total units in foreclosure, depending on the carrier. But, as the situation worsens, the guidelines may become stricter.

Also, keep in mind that the foreclosures and the Associations ability to pay their bills is also a change in exposure. Under Illinois State law, insurance companies can cancel the insurance coverage mid-term if they can show a change in exposure.  They are required to give 60 days notice however.

Additional material can be obtained on this topic through multiple sources, CAI, ACTHA, and IREM, among others.

Please also note, that there is Illinois legislation being addressed that would improve the Associations ability to collect more money faster in the event of a foreclosure. The Illinois Legislative Action Committee and the Condominium Advisory Council are more in support of this legislation.

Jennifer Eilert

CISA Insurance

CAI Member

ACTHA Member

ILAC Committee Member