Condo Owners – What Makes These a Difficult Exposure to Properly Insure?

Condos, townhomes, townhomes, and townhouses – oh my! There are many names for shows that may look similar but may have very different insurance needs. There are six main reasons why these risks are difficult to adequately insure:

– Securing space vs. own the land Generally, if the exposure is to secure the living space and not the land, then the risk should be written on an HO-6 form. When the insured also owns the land and there is a firebreak between the insured’s property and the neighbor(s), these are generally listed on the HO-3 form. Either way, insuring them with the right amount of homeowners coverage (Cov A) is key here.

– Is there a Community of Owners? If there is an HO Association, it is imperative that the agent review the association’s Covenants, Conditions and Restrictions (CC&R’s) and the association’s master policy. These will tell you what the insured is responsible for insuring. This is especially important if you have a client who has owned the condo for some time. The master policies written to secure buildings and common areas have changed dramatically over the years. Associations have switched to high deductibles and less coverage to make the amount the association has to pay for insurance more affordable. The individual unit owner should be sure to fill any gaps in coverage with their own policy. The other problem for his client (if he has the opportunity to advise him before buying) is the solvency of the association. With the economy depressed in recent years, the insolvency of associations has increased. Non-paying landlords, poorly run associations, and aging buildings that require maintenance have all contributed to the problem. Before your client signs on the dotted line, they need to see some audited financial statements to see how good the house really is!

– How much homeowner’s coverage is needed? How often have I seen a lot of confusion regarding how much homeowners coverage is adequate? Most of the time, customers are required to insure themselves against “studs” in. (Remember the CC&R discussion above?) All drywall, wall coverings (including $200 per roll fabric wallpaper), cabinets, plumbing fixtures, floor coverings, and light fixtures need housing coverage. You must determine an amount per square foot determined by the quality of surfaces being used. This coverage is definitely not one size fits all.

– A tale of two loss assessments. There are two main types of loss assessments that this type of homeowner might face. The first is generally insurable. If there is a covered loss, for example, fire damage to a building; the insured may be responsible for paying their share of the association’s master policy deductible (which could be in the thousands of dollars). Again, CC&Rs should include information about this. The other type of assessment that is more difficult to obtain insurance for is a “maintenance type” loss assessment. Let’s say it’s time to replace the roofs on all of the association’s buildings. There may not be enough money in the HO association’s bank account to be able to pay this, so individual unit owners may be assessed to pay the difference. Not all companies have this type of loss assessment available, so you should inform your client of this exposure.

– Some exhibits are difficult to insure. The main ones that come to mind are Earthquake Loss Assessment and Earthquake Sprinkler Leakage (EQSL). These are coverages that can be difficult for an individual unit owner to obtain. If they are available, are you offering them?

– Increased liability exposure. These things happen. If your client lets the water run too long in the tub and the water overflows and runs down through the walls into the unit(s) below, the liability exposure can be enormous! This is an exposure that you do not have with a separate home. Be sure to give your client proper liability limits.

I tend to believe that the condo owner is one of the most difficult personal exposures to properly insure because there are so many possible variables. These policies tend not to have the “care” necessary to write them correctly due to the relatively low premium involved. I hope you’ll think about what you can do to offer your customers the best coverage available.