As most — if not all — condominium associations in South Florida have encountered substantial cost increases to insure their property, many board members and unit owners are questioning whether this financial burden can be avoided by obtaining lesser insurance coverage. While this approach may sound tempting to avoid extreme increases in an association’s budget or the levying of a special assessment, condominium associations in the State of Florida must comply with the minimum insurance coverage requirements set forth in Chapter 718, Florida Statutes (the “Act”), and run the risk of being found in violation of the Act for failing obtain the minimum required insurance coverage.

Under Florida law, residential condominiums must obtain “adequate property insurance” pursuant to Section 718.111(11)(a), Florida Statutes, as follows:

Adequate property insurance, regardless of any requirement in the declaration of condominium for coverage by the association for full insurable value, replacement cost, or similar coverage, must be based on the replacement cost of the property to be insured as determined by an independent insurance appraisal or update of a prior appraisal. The replacement cost must be determined at least once every 36 months.

While the foregoing language makes it clear that adequate insurance means full replacement cost, Section 718.111(11)(f)(1)-(2), Florida Statutes, describes what property must be insured. Specifically, the following property must be insured:

1. All portions of the condominium property as originally installed or replacement of like kind and quality, in accordance with the original plans and specifications.

2. All alterations or additions made to the condominium property or association property as a material alteration or substantial addition to the common elements.

When considering the replacement cost of an association’s property and the insurance thereon, an important consideration is the deductibles on the insurance policies. Pursuant to Section 718.111(11)(c)(1)-(3), Florida Statutes, “[p]olicies may include deductibles as determined by the board[,]” but the approved deductibles must comply the following:

1. The deductibles must be consistent with industry standards and prevailing practice for communities of similar size and age, and having similar construction and facilities in the locale where the condominium property is situated.

2. The deductibles may be based upon available funds, including reserve accounts, or predetermined assessment authority at the time the insurance is obtained.

3. The board shall establish the amount of deductibles based upon the level of available funds and predetermined assessment authority at a meeting of the board in the manner set forth in s. 718.112(2)(e).1

Notably, this section on deductibles requires their approval annually at a meeting on fourteen (14) days of notice, similar to a budget meeting. This is an important statutory formality that should not be overlooked in the rush of renewal season.

Unfortunately, despite the full replacement cost coverage being required as explained above, there is a potential, especially in today’s insurance market, that full replacement cost coverage may not be available to an association. Several factors, including but not limited to, the age of a building and any ongoing structural repairs, could result in the unavailability of full replacement cost coverage. To account for this situation, Section 718.111(11)(d), Florida Statutes, requires an association to “use its best efforts to obtain and maintain adequate property insurance to protect the association, the association property, the common elements, and the condominium property that must be insured by the association.” (emphasis added).

The Florida Fourth District Court of Appeals addressed the “best efforts” standard in the case of Citizens Property Insurance Corporation v. River Manor Condominium Association, 125 So. 3d 846, 852 (Fla. 4th DCA 2013), finding that “the statute was intended to impose upon condominium associations an obligation to use their ‘best efforts’ to secure the designated coverage, implicitly recognizing that market forces may in some instances prevent this objective from being achieved.” (emphasis added). Therefore, if an association finds it is impossible to obtain the full replacement cost level of coverage, this impossibility lends itself to the conclusion that the association has undertaken best efforts to obtain adequate insurance. Alternatively, a claim that an association did not obtain full replacement cost coverage because it is available, but simply too costly, would likely not support that the association used its best efforts to obtain adequate insurance. In the event full replacement cost coverage cannot be obtained, an Association should document its efforts to obtain adequate coverage.

It should be noted that there is an argument to be made that the “best efforts” language included in the most recent version of the statute may not apply to an older association Declaration that does not incorporate future amendments to the Florida Condominium Act. See Kaufman v. Shere, 347 So. 2d 627, 628 (Fla. 3d DCA 1977) (holding that when a provision of a Declaration of Condominium “unequivocally states that provisions of the Condominium Act are adopted ‘as it may be amended from time to time[,]’” it is “the express intention of all parties concerned that the provisions of the Condominium Act were to become a part of the controlling document of [the condominium] whenever they were enacted.”). Older versions of the Florida Condominium Act did not require insurance for full replacement cost, and instead, provided flexibility to an association’s board of directors concerning same, while also emphasizing that if the governing documents required full insurable value, deductibles can be factored to reduce the total coverage below it. The availability of this argument should be employed with caution and after consulting with legal counsel as to its availability to your community.

In summary, condominium associations must utilize best efforts to obtain adequate insurance coverage for all portions of the condominium property and any additions or alterations, and adequacy is based on the replacement cost as determined by an independent insurance appraisal obtained within the last 36 months. However, if the Association is unable to obtain full replacement value insurance, there is no penalty under the Florida Statues so long as “best efforts” were utilized and documented. Additionally, while the Board may incorporate deductibles, it should make sure to document consideration of the factors to consider in approving deductibles, and compliance with the technical formality of officially approving/ratifying deductibles on fourteen (14) days of notice so the existence of deductibles is transparent to the membership. Rising insurance costs are certainly a tough pill to swallow, but obtaining adequate coverage not only complies with applicable Florida law, but protects the condominium association and its members in the event of a catastrophe. If you have any questions regarding your community’s coverage and the adequacy of same, you are encouraged to contact your association’s insurance broker and legal counsel.