Management Corner: Why an HO-6 Policy and Proper Loss Assessment Coverage Is Important to Condo Owners

Many people living in community associations are under the impression that they’ll never have to shovel snow again, everything is handled, and everything on their property is covered by the association’s insurance. Unfortunately, this isn’t the case, and insurance coverage is one of the most financially dangerous myths. Many things are covered, but not all things. Read on to learn more about association insurance coverage, HO-6 policies, deductibles, and more.

Insurance Basics

MYTH: My association has insurance, so my personal property is covered.

FACT: Yes and no. Many governing documents require an association to have hazard insurance; however, you may still be liable for a loss assessment up to the association deductible. In addition, the association policy generally does NOT include coverage for: 

• Personal belongings
• Repairs if the damage is less than the deductible
• Items not covered by the master policy

It’s crucial for townhome and condominium owners to have an HO-6 policy to cover these items unless you’re choosing to self-insure. This could result in a $10,000 to $25,000 or more loss assessment—and it’s typically better to pay a few hundred dollars a year to avoid this scenario. Some associations require homeowners to have an HO-6, but even if yours doesn’t, having proper insurance is necessary. 

What is an HO-6 policy?

An HO-6 policy is insurance lingo for townhome and condominium owners. It covers your personal property, personal liability, and anything else NOT covered by the association’s insurance. Additionally, how much the association policy builds back during a claim usually depends on what the governing documents state—it isn’t simply determined by the board of directors, manager, insurance adjuster, or association-approved contractor. The most common types of policies are:

• Bare Walls – Treats the unit and common elements separately. The association policy doesn’t insure any unit paint, partitions, cabinets, appliances, fixtures, etc.
• Original Spec – Treats the unit and common elements as one. The association policy insures the paint, partitions, cabinets, appliances, fixtures, etc., that were part of the original unit. The owner’s personal property and unit improvements are excluded.
• All-In – Extends the original spec concept to insure the unit as it exists at the time of a loss, including improvements. An owner’s personal property is excluded.
• A variant of original spec and all-in, frequently called modified original spec.

What’s excluded from the association policy?

Flooring is an example of something that might be excluded. All homes will have unique flooring types, from carpet and laminate to hardwood floors and imported Italian marble. Because different flooring types have drastically different costs, they may be excluded from the association coverage, requiring homeowners to cover that item through their HO-6. There could be many other exclusions; that’s why it’s imperative to have the correct loss assessment coverage.

Deductible Basics

Due to massive claims from hurricanes, wind and hail damage, and other climate-related events, the insurance industry has changed dramatically, leading to various deductible structures for association insurance. A $5,000 or $10,000 per occurrence deductible for any and all types of loss was very common; now, those policies are impossible to find. Today, there are increased deductibles for all other perils and separate deductibles for wind or hail damage.

• Wind/Hail Deductible: a specific deductible exclusion for damage resulting from wind or hailstorms.
• All Other Perils (AOP): every other type of loss, such as fire, flooding, pipe breaks, accidents, and other damage.

Typical deductibles are currently in the range of $10,000 or $25,000 per occurrence or per building for AOP, with wind or hail damage deductibles being a percentage of overall building value: 1%, 2%, or even 5%. Additionally, if an association has a history of a specific issue, like frozen pipe water losses, there can be a separate deductible for that particular type of loss.

Real-World Examples

There are generally two types of claims that can affect association owners: those that affect all units and those that originate in or affect just one unit. Let’s dive into examples of each and how homeowners may be assessed.

Use the following information for the below examples:

Happy Homeowner Condominium Association

100 homes

$10,000 per occurrence AOP deductible

2% wind/hail deductible

Total building value: $32,000,000.00

Modified Original Spec, Exclusion: flooring

Example 1: A hailstorm damages every home’s roof in the association, resulting in a complete re-roof of all homes.

In this claim, the association’s insurance deductible will be 2% of the entire building’s value of $32,000,000. That deductible is calculated as $32,000,000 x 2% = $640,000. This amount would then be equally assessed among all 100 affected homeowners in the association: $640,000 divided by 100 homes = $6,400 per home.

In the event of a wind/hail claim affecting all homes, each homeowner would be assessed $6,400.

Each homeowner then opens a claim on their HO-6 policy for that amount. As long as they have the correct coverage, the homeowner will only have to pay their HO-6 deductible. All the roofs are replaced, and everyone is happy.

Example 2: An upstairs washing machine overflows while the homeowner is away, causing $35,000 in damage to the rest of the home; $6,000 of that amount is the cost of the affected flooring.

This is an example of an AOP claim. The association policy kicks-in above the deductible amount, less any exclusions. The board of directors selects a contractor to make all the repairs other than flooring to the home to safeguard the association’s future insurability. The homeowner is assessed the entire $10,000 AOP deductible, and the association’s policy covers the rest of the claim except any flooring.

This homeowner then files a claim on their HO-6 policy for the $10,000 association loss assessment and the cost to replace the damaged flooring, which they’d need to coordinate themselves. The total amount for the HO-6 will be $16,000. But again, the homeowner will only end up paying their HO-6 policy deductible out of pocket. In this case, they need to have loss assessment coverage of at least $16,000. If they only have $10,000 in coverage, then the flooring cost is out of pocket. 

If this homeowner or their agent didn’t pay attention to exclusions to ensure appropriate coverage, it would be easy to miss the flooring exclusion and only have coverage for the $10,000 loss assessment.

All homeowners must have an HO-6 insurance policy on their homes with the proper coverage for loss assessment AND exclusions. In either of the above examples, a homeowner who is assessed from the association then opens a claim on their personal HO-6 policy, making them only responsible for the deductible they set up.

How to Ensure Proper Coverage

Insurance is a complex industry, and this article isn’t all-inclusive of every possible type of claim or policy coverage. If you don’t have an HO-6 policy or are unsure, check in with your licensed insurance agent immediately and get proper coverage in place before any future claim. Share the association’s HO-6 letter, Certificate of Insurance (COI), and Declaration insurance section with your agent. These documents contain everything they need to confirm accurate coverage and should be reviewed annually, as policies can change. Also, if you’re a landlord, you’ll need unique coverage. Talk to your agent to ensure you have appropriate loss assessment coverage on your landlord policy.

More from the Management Corner

"You can't tell me what to do!" is a phrase CAMs often hear from homeowners regarding their property in an HOA. Contrary to popular belief, this phrase is accurate—CAMs don’t tell homeowners what to do; they’re merely the messengers. When you purchase a home in an HOA, you've agreed to abide by the association's governing documents, or the documents that detail what homeowners can and cannot do. Read our article, “Management Corner: What You Should Know About Association Governing Documents,” to learn about these documents, their importance, and more.