Understanding insurance in a multi-unit dwelling/Association can be daunting. What does the Association’s master policy cover? What does my personal insurance policy cover (usually referred to as an “HO6” policy)? Which policy kicks in for a particular loss?
Unfortunately, there are a number of variables that makes it impossible to give a universal answer to these questions. Here are some important concepts to understand.
Coverage – In general, the most important thing to do is read your Governing Documents (typically the Declarations) and try to understand what the Association is responsible for insuring. Does it say the Association will insure wall coverings, floor coverings, cabinets, fixtures, etc.? These are some common terms used to state it is an “all in” type of a policy. Another important distinction is whether the Association will or will not insure “betterments and improvements” or is it “original specs.” If none of these items are listed, it may be stated or implied that the policy is a “walls out” policy and nothing on the interior of the unit is covered.
You should discuss with your personal insurance agent what the Documents state on insurance coverage. One of the first questions your agent should ask when writing your policy is to review the Governing Documents. It can also be helpful to call the Association’s agent and verify what, in fact, the Association has for scope of coverage. Even better, tell your agent they should contact the Association’s agent and “cross the T’s and dot the I’s”
Remember, the role of your HO6 policy is three-fold. 1.) at a bare minimum, to insure construction of the unit (sometimes known as “real property”) up to the Association’s deductible. 2.) to insure components of the property outside of what the Association’s master policy covers. 3.) to insure your personal items/property. In short, understand the Association’s insurance coverage and bridge all gaps with your HO6 policy. *** The amount of coverage to carry on an HO6 policy is completely subjective and up to you, as the owner. Again, at a bare minimum, you want to carry coverage up to the Association deductible on construction already covered under the master policy.
Loss Assessment – Another important aspect of insurance when living in an Association is “Loss Assessment Coverage.” Again, read your Governing Documents. Some Association’s legally require homeowners to carry this type of policy. Loss Assessment Coverage provides protection to the owner should the Association have a loss that exceeds the coverage limits of the master policy, or should/when the Association assess the owner for their share of the master policy deductible. Loss Assessment Coverage would help the homeowner with such an assessment. The amount to carry is very subjective and up to you and your agent to determine – but at a minimum, it should be equivalent to the master policy deductible.
Deductible – Which brings us to the last important component of Association insurance – deductible. It is very important to know what the Association’s master policy deductible is. And to stay on top of it from year to year, as it can change. In most cases, the master policy will not kick in coverage unless a Loss exceeds the deductible. Your HO6 would pay if it is under the deductible. If the Loss does, in fact, exceed the deductible, you/your HO6 would be responsible for the amount up to the deductible.
For example – you live in a condo building and the master policy is an “all in” policy with a $10,000 deductible. There is a $15,000 water loss in your unit. Your HO6 policy covers the first $10,000 – while the Association’s policy covers the remaining $5,000.
To Recap – read your Governing Docs to understand the Association’s insurance scope. Talk in depth with your agent and the Association’s agent, if needed, to develop an HO6 policy that bridges all coverage gaps and requirements. Consider carrying, if you are not already required to, Loss Assessment Coverage. And finally, stay on top of your Association’s policy each year as it renews to make necessary adjustments to your HO6 policy.