What happens when an individual homeowner or condo unit owner has no insurance? The answer could affect the entire community.
Homeowners Associations (HOAs) and Condominium Owners Associations (COAs) spend a great deal of time reviewing the insurance carried by the association. But there is another important exposure that can easily be overlooked:
Does your association require every individual homeowner or condominium unit owner to maintain their own property and liability insurance?
If the answer is no—or your CC&Rs are unclear—it may be time for the Board to take a closer look.
The Master Policy Does Not Necessarily Cover Everything
One of the biggest misunderstandings in condominium communities is that the Association’s master insurance policy will automatically rebuild everything following a major loss.
That is not necessarily true.
Depending on the Association’s CC&Rs and master insurance policy, coverage may be written on a bare-walls, single-entity, all-in, or another basis. The responsibility for flooring, cabinets, countertops, appliances, interior walls, improvements and other portions of an individual unit can therefore vary significantly from one community to another.
The California Department of Insurance explains that condominium unit-owner insurance can provide coverage for personal property, loss of use, personal liability and damage to portions of the unit’s interior for which the owner is responsible under the condominium’s governing rules. It also recommends carefully reviewing the Association’s insurance to understand how coverage would apply following a loss.
What Happens If an Uninsured Unit Has a Major Fire?
Consider a condominium unit that suffers a devastating fire.
The Association’s master policy responds only to the property that the Association is obligated to insure. If the individual owner is responsible for portions of the interior and does not carry an HO-6 condominium policy, there could be a significant gap.
The Association’s insurance might repair the portions of the building insured by the master policy, but who pays for the uninsured owner’s cabinets, flooring, fixtures, improvements or other interior property that falls outside the Association’s responsibility?
In a severe loss, the unit could remain damaged or unfinished while the owner determines how to finance the repairs.
That does not affect only one homeowner. A visibly damaged or unfinished property can affect neighboring owners, create disputes within the community and potentially have a negative effect on the appearance and desirability of the development.
Liability Can Create an Even Bigger Problem
Property damage is only part of the concern.
Suppose a homeowner or unit owner negligently causes an accident that injures another person or damages another unit. If that owner has no personal liability insurance, there may be no individual insurance policy available to respond to the claim.
That can lead to disputes over who is financially responsible and potentially draw the Association into litigation.
This is one reason an Association should clearly understand where its insurance obligations end and the individual owner’s obligations begin.
For California common-interest developments, state law generally places responsibility for maintaining and repairing a separate interest on the individual owner unless the Association’s declaration provides otherwise. The exact responsibility, however, should always be determined by reviewing the Association’s CC&Rs, governing documents and insurance policies.
Consider Requiring Individual Owners to Carry Insurance
Boards should consider having their insurance professional and Association legal counsel review the CC&Rs to determine whether they adequately address individual insurance requirements.
Depending upon the community and applicable law, the Association may want its governing documents to require individual owners to maintain:
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Personal Liability Insurance — at least $300,000 is a reasonable starting point to consider, although higher limits may be appropriate.
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Dwelling/Building Coverage — sufficient to insure the portions of the home or condominium unit for which the individual owner is responsible, the interior.
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Personal Property Coverage — protecting the owner’s belongings.
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Loss of Use Coverage — helping pay additional living expenses when a covered loss makes the residence uninhabitable, so the unit owner who suffered the loss can live somewhere else while repairs are being made. Understand your mortgage loan does not go away when you suffer a loss and paying rent and a loan can create a severe financial hardship, even bankruptcy.
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Loss Assessment Coverage — particularly important for condominium owners because certain covered Association assessments may be insurable under an HO-6 policy.
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Additional coverage or higher limits when appropriate, depending upon the owner’s property and liability exposure.
For a detached-home HOA, the individual homeowner will generally need a homeowners policy covering the residence itself because the Association’s property insurance ordinarily applies to Association-owned property and common areas rather than privately owned homes.
Your CC&Rs and Insurance Policy Need to Work Together
This is where we frequently see potential gaps.
The CC&Rs may assign responsibility one way, while the Board assumes the master insurance policy provides broader coverage. Or the governing documents may have been written decades ago and may not reflect today’s insurance marketplace.
The Board should be able to answer several important questions:
What exactly does our master property policy insure?
Where does the Association’s responsibility stop and the individual owner’s responsibility begin?
Do our CC&Rs require individual owners to maintain property insurance?
Do they require individual owners to maintain liability insurance?
Is a minimum liability limit specified?
Are owners required to provide evidence of insurance, if permitted by the governing documents and applicable law?
Who is responsible for the Association’s deductible when a loss originates from an individual unit?
Do the insurance provisions in the CC&Rs match the way the current master policy is actually written?
If the Board cannot confidently answer these questions, the Association should consider having its insurance provisions reviewed.
Insurance Requirements Can Also Affect the Association’s Ability to Obtain Coverage
The commercial insurance market for community associations continues to involve detailed underwriting. Depending on the carrier and risk, insurers may ask about the Association’s governing documents, individual-unit insurance requirements, property maintenance, claims procedures and other risk-management controls.
An Association that clearly defines the insurance responsibilities of both the Association and its individual owners may present a stronger risk-management structure to an underwriter.
Insurance requirements should never be added to CC&Rs solely to satisfy an insurer without legal review. Changes to governing documents should be reviewed by qualified Association counsel to make sure they comply with applicable law and properly coordinate with the Association’s master insurance program.
Protect the Community, Not Just the Common Area
An Association’s responsibility goes beyond buying a master insurance policy and renewing it each year.
The Board should understand how the master policy, CC&Rs and individual homeowners’ policies work together.
A serious loss is the wrong time to discover that everyone assumed someone else was responsible for the damage.
Requiring appropriate individual homeowners or condominium insurance can help protect the individual owner, neighboring residents and the financial interests of the entire Association.
Something every HOA and COA Board should think about before the next claim occurs.
Need Help Reviewing Your HOA or Condo Association Insurance?
Insurance Incorporated works with Homeowners Associations, Condominium Associations and individual property owners to help identify potential insurance gaps and obtain appropriate coverage.
If you would like us to review your Association’s current insurance program and CC&R insurance requirements, or if you need a quote for a Master Association or individual condominium unit, contact:
Insurance Incorporated
877-898-9333
www.insuranceinc.com
For more information:
https://insuranceinc.com/business-insurance/specialized-business-insurance/condo-and-homeowners-association-insurance/
Insurance coverage and legal responsibilities vary by policy, governing documents, jurisdiction and individual circumstances. Associations should consult qualified legal counsel regarding amendments to CC&Rs or other governing documents.
