Insurance & Risk · Quorum Case Files Season 9 Companion · Coinsurance and Replacement Cost

Eighty Percent of What? The Flood Coinsurance Clause and the Warning in the Board’s Own File

A limit is not coverage. On the federal flood form every condominium association uses, a building insured below 80 percent of its replacement cost is paid a ratio of every loss, including the small ones. One seventy-unit association was told that twice, in writing, by its own broker. It kept the letters. The letters were read aloud in court, by the other side.

Educational notice. This information is educational in nature and should not be construed as legal or insurance advice. The case discussed is closed; every fact about it is drawn from the appellate opinion, which affirmed a summary judgment, and from the published text of the federal flood policy form. Consult qualified association counsel and a licensed insurance professional regarding your association’s coverage and jurisdiction.

Two Buildings, Two Letters

Bijou Villa Condominium Association sits on the Shark River in Neptune, New Jersey: two residential buildings, seventy units. That is as much as the record says about the community itself, and this article stays inside the record.

The association bought its insurance through a broker who had, earlier, served as president of its own board, and who owned a unit there. In January 2004 he wrote to the board. The flood policy on each building carried $250,000. That amount, he wrote, “is not nearly enough,” and the association “would be facing serious co-insurance penalties.”

In August 2006 he wrote again. The property policy, the one covering fire, wind, and the ordinary perils, insured the buildings for more than $6 million. The flood policy still carried $250,000 per building. He then did the arithmetic so that no one on the board had to. “Currently $250,000 represents only [ten percent] of what you should be insuring for,” the opinion quotes him as writing, and “if you had a $100,000 loss, the flood insurance company would only pay … $10,000.” Full coverage, he told them, would cost about $10,300 a year, an increase of roughly $5,900 over what the association was paying. He asked the board to have the buildings appraised so the flood limit could be set against a real replacement figure.

The board did not ignore him. The appellate opinion records that it raised the flood limits “gradually … due to financial constraints.” It never ordered the appraisal. When Hurricane Sandy arrived, the flood limit on each had climbed from $250,000 to $1.21 million, nearly five times where it started.

When the flood claim was adjusted, the insurer valued the two buildings at $3.8 million and $3.6 million and took the position that the association should have carried $3 million on each. Against a required $3 million, $1.21 million is about 40 percent. The insurer applied a coinsurance penalty of $450,000. Seventy owners absorbed it, the broker among them.

The association then sued the broker.

The Mechanism: A Ratio, Not a Cap

Most people understand an insurance limit the way they understand a ceiling. A loss under the limit is paid in full; a loss over the limit is paid to the limit. That is how a limit works on most things an association buys. It is not how building coverage works on the flood form condominium associations use, and the difference is the whole of this case.

Flood is not part of the property policy. It is a separate contract, written on a federal form through the National Flood Insurance Program (NFIP). The form for condominium associations is the Residential Condominium Building Association Policy, the RCBAP, which FEMA publishes as form F-144 and which is codified at 44 CFR Part 61, Appendix A(3). Article VII of that form is the coinsurance clause. Its text is public, and the following is drawn from it directly.

Article VII.A provides that the clause applies “only to coverage on the building.” Contents coverage is outside it. Building coverage is inside it.

Article VII.B sets the line. The association bears a penalty “unless the amount of insurance applicable to the damaged building is: 1. At least 80 percent of its replacement cost; or 2. The maximum amount of insurance available for that building under the NFIP, whichever is less.” At or above that line, the clause never operates. Below it, Article VII.C does.

Article VII.C is the formula: the amount of insurance carried, divided by the amount required under VII.B, multiplied by the amount of the loss, less the deductible. That is what the policy pays.

Three features of the clause follow from the text and deserve to be stated plainly, as general descriptions of the form rather than as anyone’s legal opinion.

• It is measured against replacement cost, not against the limit. An association cannot know whether it is above or below the line without a replacement-cost figure for each building. Raising the limit without that figure is movement without a destination.
• It applies to every building loss, not only to the catastrophic one. A broken riser and a flooded ground floor are paid at the same ratio as a hurricane. A board that is 40 percent insured is 40 percent insured on a Tuesday in April.
• It is federal. The same clause, in the same words, applies wherever an association buys flood coverage on the RCBAP. The 80 percent threshold is not a New Jersey rule, a coastal rule, or a carrier’s underwriting preference.

The Form’s Own Worked Example

The RCBAP includes a worked example, and it is the most instructive page in the document because it shows the clause operating on a loss that never approaches the limit.

The association in the example is $20,000 under the line on a $250,000 building. It takes a loss that is $30,000 below its own limit. Under an ordinary limit, that loss is paid in full. Under Article VII, roughly $15,000 of it is not paid at all, before the deductible. The shortfall on the limit was modest. The clause converted it into a shortfall on the claim.

The Declarations Page

Every episode of this season stops at the same place, and so does every article in this series: what the board thought it had bought, what the policy actually provided, and what the distance cost. The record in this case supports all three answers.

The Record

The case is Bijou Villa Condominium Association v. E.A. King, Inc., No. A-4234-17T3, decided by the Appellate Division of the Superior Court of New Jersey on May 1, 2019. The opinion is unpublished, which means it does not set binding precedent in New Jersey, but it is the court’s public ruling in this case and the source of every fact above.

The association’s theory, as the opinion describes it, was that the broker should have brought it to adequate flood coverage and did not. A professional negligence claim against an insurance broker generally requires expert testimony establishing the standard of care and how the broker fell short of it. The association offered an expert. The trial court, Judge Perri presiding, barred that expert’s testimony as a “net opinion,” a New Jersey evidentiary term for a conclusion offered without a stated, testable basis. With the expert excluded, the court granted summary judgment to the broker: on the record as it stood, the association could not prevail, so there was no trial.

The Appellate Division affirmed. Its summary of the record is the sentence this series will keep returning to. The association, the court wrote, “disregarded [the broker’s] warnings that it was underinsured and subject to co-insurance penalties.” (The opinion refers to the broker by his first name; the bracketed substitution is ours.)

Two limits on the holding are worth stating with the same care the court used. First, the opinion does not find that the broker did everything right. It holds that the association could not prove he fell short, because its expert was out, and it characterizes the record as one in which the association disregarded the warnings it was given. Second, the opinion does not go behind “financial constraints.” It takes the board’s stated reason at face value and does not examine the board’s votes, its minutes, or the cost of the appraisal that was never ordered. Nothing in this article should be read as a conclusion about any individual director’s judgment. The record does not name them, and neither does this article.

The posture is closed. The appellate ruling of May 1, 2019 is the end of the record.

What the File Proved

The most important fact in the case is not a dollar figure. It is where the letters were (see institutional knowledge as a financial asset).

They were in the association’s own file. The board received a specific, dated, written warning in 2004, and a second one in 2006 with a worked example and a price for the fix. It kept both. When the association later sued its broker for failing to secure adequate coverage, the broker did not have to prove he had warned anyone. The association’s own records proved it for him.

The board at Bijou Villa did several reasonable things. It raised the limit, repeatedly. It kept its correspondence. It paid its premium every year. What it never did was obtain the one piece of information the coinsurance clause actually cares about, the replacement cost of each building, and insure to 80 percent of that figure. Without the appraisal, “gradually” had no destination. The board was climbing toward a line it had never located.

What a Board Does With This

CICSC Standard FIN-006, Master Policy Insurance Adequacy Review, exists for the failure this case illustrates: underinsurance that nobody decided on, produced by a number that went stale while re-checking it was nobody’s calendared job. The standard does not recommend a coverage type, a limit, or a carrier. It governs whether the board asks, when it asks, and what it records. Applied to the flood coinsurance mechanism, its practice looks like this.

The replacement-cost basis is established, dated, and attributed

FIN-006 § 2.4 requires that where an adequacy review depends on a replacement-cost figure, the board understands the basis of that figure, when it was produced, and by whom, and that a figure carried forward from a prior year is identified as such. For any association carrying flood coverage on the RCBAP, this is not a refinement; it is the only way to know where the 80 percent line sits. A board that cannot state its buildings’ replacement cost cannot state whether its flood limit is above or below the coinsurance threshold, no matter how recently it raised the limit.

The coinsurance question is asked in writing, at every renewal

FIN-006 § 3.1 sets out the questions a board puts to its licensed insurance professional in writing at each review. For an association with RCBAP coverage, the mechanism in this article suggests the form those questions take:

• What is the current replacement-cost figure for each insured building, when was it established, by whom, and by what method?
• For each building, what is 80 percent of that figure, what is the NFIP maximum available, and which of the two is the required amount under Article VII.B?
• What amount is currently carried on each building, and is it at or above the required amount?
• If it is below, what would it cost to bring it to the line?
• What has changed since the last review in limits, deductibles, replacement cost, or the program’s terms?

The board does not answer these questions itself, select the figure, or conclude that its coverage is adequate as a matter of law. It asks, records the answers, and acts on the gaps. Where the professional’s answer and the board’s own view differ, FIN-006 § 3.3 directs that the difference be recorded and referred, not resolved at the table.

The warning is answered in writing, and the answer is filed beside it

This is the practice the Bijou Villa record most directly argues for. When a professional puts a coverage warning in writing, the board responds in writing, with a decision, the number it has decided on, and the valuation that supports that number, and the response is filed with the warning. FIN-006 § 4.1 requires that each review be entered in the minutes (see board resolutions in practice) with the professional consulted, the questions asked, the answers received, any gap identified, and the board’s decision on each gap.

§ 4.2 addresses the harder case, where the board decides against the coverage. A coverage that is offered, priced, and declined is recorded as declined: what was offered, what it cost, and how the board voted. The standard’s reasoning applies with unusual force here. A coverage that is absent because the board never considered it and a coverage that is absent because the board weighed the cost and voted no look identical on the declarations page. They look entirely different in the record. Had the Bijou Villa board minuted a decision in 2006 to carry less than the required amount, at a stated price, for stated reasons, the record would have shown a board that decided. What the record shows instead is a board that moved gradually toward a figure it had not established.

The owners are told where the association’s coverage stops

FIN-006 § 5.1 calls for an annual plain-language statement to members of what the association’s policy covers, what it does not, and where owner responsibility begins. For a flood-exposed association, that statement would ordinarily make clear that building coverage carries a coinsurance condition and whether, per the professional’s most recent review, the association is at or above the line. The association does not tell owners what to buy for their own units (§ 5.2). It tells them, factually, what the association’s own policy provides and on what basis.

The cost of adequacy enters the budget as a known figure

Where the review identifies a gap with a price, FIN-006 § 6.3 directs that the price enter the budget cycle as a known input rather than a surprise. In this case, the price was in the file: about $5,900 a year, in the broker’s 2006 letter. The opinion’s phrase “due to financial constraints” describes a board treating that figure as a line item to be approached over time. The coinsurance clause does not operate on a schedule. It operates on the ratio in force the day of the loss.

When to Consult Counsel and the Insurance Professional

Boards typically bring the following to counsel and to their licensed insurance professional rather than resolving them at the table:

• Whether the association’s governing documents or applicable statute require flood coverage on the common elements, and in what amount or on what basis;
• How replacement cost should be established for each building, by whom, and on what cadence, and whether the current figure is a professional valuation or a carried-forward estimate;
• Whether the amount carried on each building meets the Article VII.B requirement, and what it would cost to reach it;
• How a coinsurance condition on the association’s policy interacts with the boundary between association and owner coverage under the declaration;
• What the minutes and the insurance file should contain to document each renewal review, each identified gap, and each decision, including any decision to carry less than the required amount;
• How a written coverage warning from a professional should be acknowledged and answered, so that the board’s decision and its basis are on the record.

The Season 9 Companion Series

1. The Liability Limit Is Sized to the Loss the Board Can Imagine — the liability limit vs. the loss
2. Eighty Percent of What? The Flood Coinsurance Clause and the Warning in the Board’s Own File — the warning the board shelved (this article)
3. Who Gets the Mail: Coverage That Lapses During a Management Change — the notice nobody forwarded
4. Per Occurrence or Aggregate: Reading the Declarations Page Instead of Asking the Broker — the limit the board misread
5. A Paid Claim Is Not a Funded Rebuild — the proceeds and the vote
6. The Appraisal Clause, Both Ways — the appraisal clause, both ways
7. Same Street, Two Policies: The Renewal Decision Is the Only One That Survives the Fire — two boards, one street, two renewals
8. The Twenty Percent Building — the building the market would not insure

Tags: coinsurance · RCBAP · NFIP · flood insurance · replacement cost · 80 percent rule · FEMA F-144 · 44 CFR Part 61 · insurance adequacy review · FIN-006 · broker warning · net opinion · Bijou Villa · Hurricane Sandy · Quorum Case Files

Disclaimer. This article is published by the Common Interest Community Standards Council for educational and informational purposes only. It is not legal, insurance, or financial advice and does not establish an attorney-client relationship. Facts about the case are drawn from Bijou Villa Condominium Association v. E.A. King, Inc., No. A-4234-17T3 (N.J. Super. Ct. App. Div. May 1, 2019), an unpublished opinion affirming a grant of summary judgment; the opinion does not set binding precedent, and its description of the record is the court’s, not a finding after trial about any individual’s conduct. The coinsurance clause is quoted from the Residential Condominium Building Association Policy, FEMA form F-144 (2021), as codified at 44 CFR Part 61, Appendix A(3); the worked example is the form’s own. Figures described as arithmetic are computed from the stated source figures and are approximate where so labeled. No individual director is named in the record or here, and nothing in this article is a conclusion about the conduct or judgment of any person. Questions about a specific association’s coverage, claim, or exposure are questions for association counsel and a licensed insurance professional. CIC-SC, its authors, and its members assume no liability for actions taken in reliance on this content.

Published by the Common Interest Community Standards Council (CICSC). Companion to Quorum Case Files Season 9, Episode 2, and to CICSC Standard FIN-006, Master Policy Insurance Adequacy Review. Part of the CICSC Member Education Library. © 2026 CICSC. Educational use permitted with attribution.