A condominium can be defined as a single real estate unit in a multi-unit development in which a person has both separate ownership of a unit and a common interest, along with the development’s other owners, in the common areas.1 Insuring your condominium is often not so easy, especially since it usually requires that you are covered by both your condominium’s master policy and your own separate individual insurance policy. It’s important to closely review the condominium association’s declaration document, which details what real property the unit-owner is responsible for insuring separately.

Today, most master policies contain a Single Entity approach. This approach extends coverage to general and limited common elements but also extends coverage within individual units to fixtures, walls, appliances, floor coverings, and cabinetry. What the Single Entity approach does not cover are things like personal property, medical payments, and betterments and improvements. An easy way of describing this approach is if the unit-owner could turn the condo upside down and shake it, he or she would need to insure whatever property would fall out of the condo. Therefore, it’s important for condo owners to purchase an individual condo insurance policy (HO-6), to provide coverage for situations in which a master insurance policy would not extend coverage.

For example, if the condo’s master policy contains the Single Entity approach, the bylaws should read something similar to this: “The association will cover the unit, and that unit owner is responsible for any improvements or betterments made to the unit over the years.” What this means is if at some point you decide to replace the original laminate floors with hardwood floors, you must add the cost to replace the hardwood to your unit-owner’s policy, specifically under the dwelling limit, called “Coverage A” in the HO-6.

While the Single Entity approach has the effect of shifting loss exposure from the personal unit-owner policy to the association master policy, there is still one noteworthy counter trend: the ever-increasing association master policy deductible. This has caused many coverage gaps for HO6 policy holders as these policies only provide $1,000 in loss assessment limits.

Association master policies often are written with $5,000, $10,000, or even $25,000 deductibles, but condos in hurricane-exposed coastal areas may have deductibles ranging from $50,000 to $100,000. Association documents usually include provisions allowing the association to allocate the deductible in various ways, and it is possible that the entire deductible could be assigned to a single unit-owner that the association believes is responsible for the loss. For example, the unit-owner negligently starts a kitchen fire. The loss totals to $30,000. Let’s assume the association deductible is $10,000. The condominium association policy would pay the $20,000 ($30,000 less the $10,000 deductible), and the negligent unit-owner may be assessed the entire $10,000 deductible. The HO-6 only provides $1,000 for loss assessments arising out of a master policy deductible even if the loss assessment (HO 04 35) endorsement is attached. Thus, the unit-owner is out $9,000. If the master policy deductible was up to $30,000 (not uncommon), the unit-owner would have to pay $29,000.

A solution to these high deductibles may be found within the association documents. If these documents make the unit-owner responsible for the deductible, many insurers will use the dwelling limit to pay the deductible. As a result, the dwelling limit would need to be increased in the amount of the deductible.

Ways to Avoid Coverage Gaps:

  1. The insured should request a copy of the association’s “declaration” document and provide it to his or her personal lines agent. This document will indicate what coverages the unit-owner is responsible for individually insuring.
  2. The insured and insurance agent should work together to evaluate the property insurance limit appropriate for the condominium. For example, if the insured has performed any remodeling work, damage to these updates will typically not be covered under the condominium master policy, and as a result, the dwelling limits under the unit-owners policy may be inadequate. Replacement cost estimator software packages are often helpful in this area.
  3. Finally, Sewer back-up coverage is highly recommended for the unit-owners policy to (a) provide coverage for direct damage to the unit and (b) broaden loss assessment coverage to include assessments from this peril.

Thought of the day:

Not everything that is faced can be changed, but nothing can be changed until it is faced.
– James Baldwin
1 Robin Olson. Personal Lines Insurance Coverage Gaps: Analysis and Resolution. IRMI Insights. Aug. 2019, p. 11. Available at: https://www.irmi.com/docs/default-source/authoritative-reports/insights/personal-lines-insurance-coverage-gaps.pdf?sfvrsn=10