Condominium insurance is often misunderstood, and for good reason.

Typically, owners are protected under two insurance policies: a master policy for the condo association and an individual, or HO-6, policy. The confusion arises over what each policy covers and the potential for gaps — or a lack of coverage — for certain, often costly, occurrences.

The result can cost unsuspecting owners hundreds or even thousands of dollars.

“Most condominium owners have no idea what they are responsible for in the event of calamities such as a fire, flood, windstorm or other disaster that causes damage to either the common areas of the building and/or to their individual units,” said Jack Hungelmann, author of “Insurance for Dummies.” “To add to the problem, insurance agents often don’t get it right and leave the owners underinsured.”

Basic association master policies generally provide one of two types of coverage. One is “walls-in,” extending from the exterior framing inward but not covering fixtures within the unit. The other — “all-in” coverage — includes interior surfaces of the walls, floors and ceilings but might not include improvements, such as new countertops, bathroom and kitchen fixtures, and upgraded flooring.

Both of those policies come with a deductible, normally set by the association’s board of directors. If faced with an increase in the cost of the master policy, board members may opt instead to increase the size of the deductible. Notification of the change will be made to the owners but can easily be overlooked if it is buried within a lengthy year-end report.

Individual HO-6 policies cover interior walls; paint; improvements such as cabinets, flooring and fixtures; and personal property. They also provide liability coverage for certain incidents. Loss assessment coverage is critical: In instances where a unit owner could be held liable for damage to other units or common areas and required to pay the association deductible, it can cover all or part of any payment.

“More and more associations are changing their rules so that the master policy deductibles are no longer always assessed against all unit owners but rather are assessed against an affected individual unit owner,” Hungelmann said.

“For example, HOA master policies can have large deductibles for structural damage — in the range of $10,000 to $20,000 or more — and if a fire in an owner’s unit damages the common areas, then he or she could be held liable for the full deductible amount,” Hungelmann said.

In some jurisdictions, when a unit owner is found to be negligent — such as when a bathtub overflows or there is a kitchen fire, and other units or common areas are damaged — the owner can be held responsible for paying the entire association deductible.

That’s not always the case. In Maryland and the District, said Robert M. Diamond, a partner at the Reed Smith law firm in McLean, “there is a limit or cap of $5,000 on the master policy deductible that owners — who may or may not be negligent — could be required to pay.”

To compound the confusion, condominium insurance laws vary from state to state, and they can change from one year to the next.

For example, in 2014, the District approved legislation requiring condo unit owners to buy insurance with dwelling coverage of at least $10,000 and personal liability coverage of at least $300,000. Virginia has no mandate for owners to carry individual insurance; however, in practice, most condominium associations require both a master policy for the association and HO-6 policies for owners. Florida approved a statute in 2008 requiring mandatory unit owner coverage, then repealed it two years later. California’s insurance law, although broad and voluminous, has no specific insurance requirement for condominium owners.

The Foundation for Community Association Research and the Community Associations Institute publish a database of state-by-state statistics and state summaries at www.cairf.org/research/factbook . “Historically, less than 20 percent of owners had HO-6 insurance, but that number is now at about 50 percent,” said Clifford J. Treese, who collects and maintains the data for the groups. “The rise was not due to state statute . . . but because lenders insisted on it.”

Treese points out that condo owners who have a government-sponsored mortgage, such as from Fannie Mae or Freddie Mac, are required to provide proof of sufficient insurance. If the master policy is found lacking, the individual must also buy an HO-6 policy. Owners with an existing mortgage may find that because of a change in the lender’s insurance requirements, they will be asked to update and provide new proof of insurance to fulfill their coverage obligation.

Yet another challenge that owners face is finding an agent who is knowledgeable about condominium insurance requirements and is willing to spend the time needed on a relatively low-commission HO-6 policy. “Personal insurance agents may not be as motivated as commercial brokers who write more-expensive policies,” Treese said. “A master condo policy may have a premium of $40,000 and pay a commission of 15 percent, or $6,000, while an individual HO-6 policy may cost the owner $700 with a 15 percent commission of $105. You can guess which policy will get the most attention.”

Said Diamond, “You can’t expect your personal insurance agent to read through the association documents, but you can expect him or her to call the property manager and request a copy of the certificate of insurance for the master policy and then make a determination as to the insurance coverage you should have.”

Hungelmann suggests several steps owners can take to set up the proper HO-6 coverage:

• Make a list of the building items not covered by the master policy: hardwood floors, tile floors, kitchen cabinets, plumbing and electrical fixtures, built-in appliances, owner improvements, etc.
• Estimate the replacement cost of each structural item that is the responsibility of the individual owner. To be safe, add an extra 20 percent to the total to allow for estimating errors.
• Add “special perils” coverage (water damage to walls and ceiling from roof leaks), and increase coverage for losses subject to the master policy deductible.
• Find out your association’s master policy deductible, as well as the maximum deductible authorized in the condo documents. If an insurance company does not offer an amount high enough to cover a potential master deductible assessment, consider contacting a different insurance agent.
• Buy adequate liability coverage.

Amy Silk has been renting her extra large one bedroom apartment on Village Boulevard in North Palm Beach, Florida for the last two years. She loves it there – the location and amenities of the property fit her needs perfectly. The rent is affordable and she likes her neighbors and the security the property affords. Without warning, Amy received a letter from the apartment Management company, informing her that the property is going to be converted to condominiums. As Amy went on to read the letter, she noticed that existing renters were going to be given the opportunity to buy their apartments (called a “first right of refusal”) before any other offers from potential Buyers were to be considered. The existing renters were to be given a price reduction before the apartment was offered to the general public for sale.

While Amy was relieved that there was an alternative to moving (buying the apartment), she wondered what she should do to prepare for the purchase, and what information she should gather before she committed to a purchase. The first consideration would be the asking, or Sales Price, of the unit. Next Amy would want to ask about the monthly maintenance fees (to the Condominium Association that would be established), and if there were any assessments coming up. She would want to ask to review the Articles of Incorporation of the Association and the Condominium documents, governing what can or cannot be done at the property. Since insurance is usually included in the monthly maintenance due, Amy would be responsible for insurance for her individual items (within the unit itself). If Amy decided to buy her apartment, she would be buying the walls and interior of the unit, together with a percentage ownership in the common areas of the building or property. Amy should also ask what percentage of the units would be allowed to be rented out (and for what length of time). Many condominium projects limit renting out your unit to once a year, or once every two years. Many lenders also limit the percentage of units which may be used for rental purposes.

The biggest advantage to Amy of buying her existing apartment is knowledge of what she she would be buying. Since she has lived in the property for two years, she is familiar with the location, construction, and over-all environment in the complex. She should be aware of the neighboring properties as well, and have a feel for the direction the neighborhood is taking. Is it on the up-swing, with owners improving their properties, or is it declining in value and desirability? Another advantage is her ability to qualify for a mortgae. A lender would probably look favorably on Amy’s past history of paying rent at the property (assuming she had paid rent on time during her occupancy). The development company handling the conversion may be offering “owner financing” to existing renters, which may be a consideration for Amy. Most lenders issue financing on condominiums, so Amy could certainly also look for other financing options from banks.

One last option that Amy can consider is staying put and hoping that the new buyer will allow her to continue to rent the unit. If this is a possibility, Amy would want to ask the new owner what the rent would be, and what length of time the rental lease agreement would cover.

Copyright © 2005 Sandy Gadow. This article may not be resold, reprinted, resyndicated or redistributed without the written permission from Escrow Publishing Company.

Related Question

How will the condominium association determine the monthly fee for each unit?

Often the monthly fees set up by the developer are based on the square footage of each unit. This means that the largest units will pay a higher monthly assessment than those a smaller unit. This is somewhat similar to how property taxes are assessed by the county tax assessor: the higher priced units will pay a higher tax than the less expensive units. The association’s covenants, conditions and restrictions determine how the monthly homeowner fees must be assessed and the method of determining the monthly dues can be changed only by a vote of the membership.