If you own or are purchasing a condo, you need a Condo Unit Owners insurance policy also known as an HO-6 policy. This policy will provide you similar coverage to a Homeowners policy (HO-3) but is specifically designed for condominium owners. If you live in a cooperative (co-op): for insurance purposes, condos and co-ops are treated the same and require the same insurance.
Master Condo Policy
Let’s first start with the insurance that the condo association has. The condo association, usually set up as an LLC or corporation, is made up of all the unit owners of the building. As an entity, they collectively own the building(s). When the building was built (or converted to condos) the builder or condo association purchased insurance to protect the building structure and common areas, and provide liability protection. This insurance is paid from the annual or monthly condo dues that each unit owner pays. Here are the 4 most common policies a condo association might have:
A Business Owners Policy (BOP), also called the Master Condo Policy: This policy has 2 main purposes: it covers the structure and common areas of the building(s) and provides general liability coverage for the condo association. In the event of a fire or other large catastrophe, the master condo policy will pay to rebuild the structure and common areas. Most master policies do not include any coverage for the inside finishes of the units. The general liability coverage will pay for bodily injury and property damage claims which the association may be liable for.
A Directors & Officers (D&O) policy should be present whenever there is a condo association board of directors or outside management company. The board has a fiduciary duty to the association members and that involves some personal risk to the board members. The board is trusted to make rules, enforce rules, settle disputes, control association finances, handle board elections, and hire contractors and vendors, among other things. All of these decisions could end up with a lawsuit brought against one or all of the board directors or officers. The D&O policy protects these individuals from personal liability when working on behalf of the association.
A Workers Compensations policy should be in place for most condo associations to protect work-related injuries. If a volunteer, board member, or uninsured contractor gets hurt while working on behalf of the association, the association could be ultimately responsible for medical expenses. The association should always hire contractors with their own Workers Comp insurance, but that doesn’t mean the association doesn’t need their own policy too.
A Commercial Umbrella will extend the liability coverage of the other policies, most importantly the Business Owners Policy. Most of these BOP policies will have a liability limit of $1,000,000 per occurrence. If there was a fire and deaths occurred because of poor building maintenance, you can imagine that the association may be liable for many millions in damages.
Condo Unit Owners (HO-6) Policy
Now let’s discuss the Condo Unit Owners (HO-6) policy. This policy typically includes “walls-in coverage” meaning each unit owner is personally responsible for damage inside their unit. Here are the common coverages in an HO-6 policy:
Dwelling Coverage: Your policy should have enough coverage to gut and replace everything in the unit including drywall, flooring, fixtures, the kitchen, and bathrooms. Your insurance agent can provide you with a Replacement Cost Estimate that shows how much the insurance company estimates you need in coverage.
Personal Property Coverage: This will cover the contents of your unit that aren’t permanently affixed. This includes clothing, furniture, decor, kitchenware, electronics, and appliances.
Loss of Use: This coverage will pay for living expenses if you are displaced from your condo after a covered loss. Let’s say there’s a serious fire and the building needs to be torn down and rebuilt. This could take 2 years. You will still need to pay your mortgage, so your insurance will pay for you to live elsewhere.
Personal Liability: This coverage will pay to settle claims and defend you in lawsuits regarding bodily injury and property damage for which you may be responsible.
Loss Assessment: An often overlooked coverage, this can be used to cover the deductible of the Master Policy or a special assessment after a loss that isn’t covered on the Master Policy. Some Master Policies have very high deductibles, as much as $50,000 for a large condo community. If the association makes a claim on that policy, they will assess each unit for a portion of that deductible. These Master Policies usually have many exclusions (things that aren’t covered). So, the association will pass those costs along to the unit owners in an assessment.
Other coverages you might add to your HO-6 are Water Backup Coverage, Identity Theft Protection, Personal Injury Coverage, or Equipment Breakdown Coverage.
Walls In vs Walls Out
In most condo associations, the Master Policy has “walls out” coverage meaning it doesn’t provide coverage inside the walls of the individual units. Each unit owner will need an H0-6 policy with “walls in” coverage to protect everything within the walls of their units.
In some cases, the Master Policy will include “walls in” coverage. There will usually be a clause (endorsement) added to the policy that says coverage is given to improvements within each unit including appliances. If your Master Policy has this, you will still need an HO-6 policy for your unit, but you may wish to purchase less Dwelling Coverage. We suggest you still have sufficient dwelling coverage as there may be exclusions to the Master Policy that the HO-6 could cover. The Master Condo policy could also be underinsured. So having your own coverage is paramount.