HOA Loss Assessment Coverage: 10 things you should know Denver Colorado
Do you own a condo or a townhome and have loss assessment coverage? Do you know what it covers? See below some useful information about your HO 6 condo or townhome insurance policy.
Loss Assessment Coverage
Condo and townhouse owners face significant insurance gaps compared to other homeowners. The basic HO 6 structural coverage is often inadequate, typically providing only $1,000 of loss assessment coverage.
Coverage for loss assessments is insufficient in two key contexts:
- Association-wide assessments – such as lawsuits or damages that exceed the association’s liability limits, resulting in assessments to all unit owners.
- Individual unit owner assessments – such as deductibles from unit owner negligence that the association passes back to the responsible owner.
Standard HO 6 policies come with only $1,000 of loss assessment coverage, which is far below the potential exposure most condo and townhome owners face.
Measuring the Loss Assessment Exposure
To understand the potential financial exposure, consider these three hypothetical scenarios involving a 100-unit association:
- Tornado damage: A tornado destroys the complex insured for $5 million, but the actual cost to rebuild is $8 million. The $3 million shortfall is assessed equally, resulting in a $30,000 assessment per unit owner.
- Liability lawsuit: A drowning occurs at the community pool, resulting in a $4 million judgment against the association, which only carries $2 million in liability coverage. The $2 million gap means a $20,000 assessment per owner.
- Sewer backup: A sewer backup causes $75,000 in cleanup costs, but the association has no sewer backup coverage. Each unit owner is assessed $750.
These examples clearly demonstrate that the standard $1,000 loss assessment limit is woefully inadequate. We recommend purchasing $25,000 to $50,000 in additional loss assessment coverage limits to properly protect yourself.
Ensure Proper HO 6 Coverage
Here are 10 recommended steps to ensure you have proper HO 6 coverage:
- Request the association Declaration document and create a list of all building items that are not covered by the master policy. These are items you must insure on your HO 6 policy.
- Estimate replacement costs for all owner-responsible structural items and add a 20% buffer to account for unexpected costs.
- Add special perils coverage for the structural portion of your policy to change from named perils to all-risk coverage, providing much broader protection.
- Add special perils contents coverage to ensure your personal belongings are also protected under all-risk coverage.
- Increase loss assessment coverage limits to $50,000 to adequately protect against association-wide and individual assessments.
- Determine current and maximum authorized master policy deductibles to understand your potential exposure if the association increases its deductible.
- Add sewer backup coverage to protect against sewer and drain backup damage, which is typically excluded from standard policies.
- Assess earthquake and flood coverage needs based on your geographic location and risk factors.
- Buy adequate liability coverage – we recommend at least $500,000 in personal liability coverage.
- Purchase an umbrella policy that includes Directors and Officers (D&O) coverage if you serve on the association board.
By following these steps, condo and townhome owners can significantly reduce their financial exposure and ensure they are properly protected against the unique risks associated with shared ownership communities.