Published: January 10, 2017

Do you own a condo or a townhome and have loss assessment coverage?  Do you know what it covers?  See below some useful inforamtioni about your HO 6 condo or townhome insurance policy. Loss Assessment Coverage Today, an owner of a condominium or townhouse is much more likely to have major insurance gaps in his or her property and liability insurance coverage than the purchaser of any other personal insurance policy is. There are several reasons for this. First, the basic structural coverage of the standard unit owners policy (HO 6) is generally quite inadequate. For starters, the perils covered are the equivalent of a homeowners form 2—named perils on building and contents. Also, the structural coverage limits are usually grossly inadequate. Typically, the Coverage A structural coverage under the HO 6 policy is just $1,000. Most unit owners are legally responsible for insuring much more than that. Additionally, coverage for loss assessments is inadequate in two ways. This can be loss assessments that are association-wide, such as those that arise when a lawsuit for serious injuries ends up in a judgment that exceeds the association’s general liability coverage limit, and the excess is assessed to all unit owners. This also can include loss assessments made against specific unit owners when a loss is caused by the unit owner’s negligence, such as a kitchen fire, and the entire association master policy property insurance deductible is assessed against that unit owner. An HO 6 policy usually comes with only $1,000 of loss assessment coverage. But, even if limits for loss assessment coverage are increased to, say, $25,000, in most cases, assessments for deductibles are still only covered for $1,000 under the increased loss assessment policy endorsement.   Measuring the Loss Assessment Exposure Another shortcoming of the basic HO 6 policy is the minimal amount of coverage—usually $1,000—for assessments made against all unit owners for uninsured or underinsured property or liability claims. Three examples, assuming 100 units in the association, follow.

  • The complex, insured for $5 million, is destroyed by a tornado and costs $8 million to rebuild. The $3 million shortfall would be assessed to the 100 unit owners—that is, $30,000 each.
  • A drowning occurs at the complex swimming pool. A lawsuit ensues, resulting in a $4 million judgment. The association carries $2 million of liability coverage, resulting in each unit owner being assessed $20,000.
  • Heavy rains lead to a massive sewer backup in the complex. Cleanup costs and repair costs total $75,000. The association board did not purchase sewer backup coverage, leading to an assessment of $750 to each of the unit owners.

Under the basic HO 6 policy, with $1,000 loss assessment and named perils coverage, our hypothetical unit owner will be personally out of pocket for $29,000 from the tornado assessment, $19,000 from the lawsuit assessment, and $750 from the sewer backup assessment (not a covered “named peril”). Because additional loss assessment coverage is so inexpensive, I recommend always including at least $25,000–$50,000 additional limits with each HO 6. A fringe benefit of broadening the perils covered is broadening coverage for loss assessment. Loss assessment coverage applies to those loss assessments arising out of perils that are covered by the particular unit owner’s HO 6 policy. When the coverage is broadened to special perils, the perils covered under the loss assessment optional coverage are also broadened. Coverage for sewer and water backup should be added as well, not only because the exposure otherwise isn’t covered but also because, by adding that endorsement, sewer and water backup coverage is added to the loss assessment perils covered.   Ensure Proper HO 6 Coverage I recommend the following 10 steps to help agents set up the proper coverage for their clients, using the HO 6.

  1. Request a copy of the association “Declaration” document. Make a list of building items not covered by the master policy (e.g., carpet, hardwood floors, tile floors, kitchen cabinets, plumbing and electrical fixtures, built-in appliances, unit owner improvements, etc.). (Be sure that the requirements are within your particular state law.)
  2. Have your client estimate the replacement cost of each of the structural items that are his or her responsibility. I find it easier and more accurate to write out a list of each type of item and have the client estimate the replacement cost of each category (see the earlier table for an example of how to accomplish that). Total the values. (Don’t forget the labor costs in your estimate.) To be safe, I add an additional 20 percent to the total to allow for estimating errors. That total should be the limit for Coverage A building coverage on your HO 6 policy.
  3. Add “special perils” coverage to Coverage A, changing perils covered from “named perils” to “all risk” unless excluded. This is important for three reasons: it covers more losses (e.g., water damage to walls and ceiling from roof leaks); it improves coverage for losses subject to the master policy deductible; and it changes the perils covered by loss assessment coverage from named to special.
  4. Add special perils contents coverage (e.g., roof leaks, paint spills, etc.).
  5. Increase the loss assessment coverage limits to $50,000.
  6. Find out the current master policy deductible as well as the maximum deductible authorized in the declaration. Choose the higher (so that your client is protected when the association decides to raise the deductible to the next level). If the insurance company you are using does not offer that high of a deductible assessment coverage limit, change insurance companies.
  7. Add sewer backup coverage to provide coverage for the direct damage to the unit or contents from sewer backup and sump pump failure and to broaden loss assessment coverage to include assessments for sewer backup (i.e., loss assessment coverage only covers assessments for perils covered by the HO 6 policy).
  8. Assess the need for flood or earthquake coverage. If there is an exposure to earthquake, remember to add earthquake loss assessment coverage, which normally is not included in general assessment coverage.
  9. Buy adequate and consistent liability coverage (i.e., $500,000) in limits equal to your client’s other personal liability coverages, or in limits high enough to satisfy the umbrella underlying insurance requirements.
  10. Buy an umbrella policy. Be sure it includes coverage for association volunteer activities including nonprofit directors and officers (D&O) liability coverage in case your client ever serves on the board. Caution: Because an umbrella policy only covers claims arising out of bodily injury, property damage, and personal injury, this umbrella coverage clearly doesn’t replace the need for that board to carry D&O coverage.

Illustrated by Rick Cline: All Access Insurance Written by: Jack Hungelmann