Condo Insurance

Condo insurance is a homeowners policy written for the owner of a condominium unit, known in the industry as the HO-6 after the standard form, "HO 00 06 (Homeowners 6-Unit-Owners Form)." The Texas Department of Insurance, approving that form, described it as "issued to an owner of a condominium or cooperative unit used for residential purposes" and said it "covers items of real property which are the insured's responsibility under the governing rules of a condominium association." Like other homeowners policies it also covers personal property, loss of use and personal liability.

The policy exists because a condominium splits ownership. The association insures the building and common elements under a master policy, and the owner owns a defined unit plus a share of the rest. Condo insurance covers the owner's side of that split, which is why the right amount of coverage depends on documents the owner did not write: the declaration that defines the unit and the master policy the association bought.

Where the master policy stops. No single national rule divides the building between the two policies. The declaration defines the unit, and the condominium page explains the model-act default under which finished surfaces such as wallboard, paint and finished flooring belong to the unit while what is behind them is common. The master policy may then cover only the structure and common elements, or also the original interior fixtures, or nearly everything in the unit. The market calls these arrangements "bare walls," "walls-in" or "single entity," and "all-in," but no regulator defines those labels, so the only reliable answer is in the master policy and the declaration. Florida shows one statutory version: its master policies "must exclude all personal property within the unit or limited common elements, and floor, wall, and ceiling coverings, electrical fixtures, appliances, water heaters, water filters, built-in cabinets and countertops, and window treatments," and "such property and any insurance thereupon is the responsibility of the unit owner" (Fla. Stat. 718.111(11)(f)).

What the policy covers. The owner's share of the building, including improvements and upgrades the owner has made, is covered under the policy's dwelling coverage, often called Coverage A. In the 2000 edition the Texas Department of Insurance described in 2002, that coverage carried "a basic limit of $5,000" that "can be increased to meet the unit owner's exposure need," so the default figure is a starting point rather than an estimate. Personal property, loss of use and liability follow the homeowners pattern, and flood and earthquake are excluded as they are on other homeowners forms.

Loss assessment coverage. When the association suffers a covered loss to property all owners hold in common and the master policy does not pay all of it, because of a large deductible or a shortfall, the association can assess owners for the rest. Loss assessment coverage pays the owner's share of such an assessment, within its limit. Florida requires every unit owner's residential property policy issued or renewed on or after July 1, 2010 to include "at least $2,000 in property loss assessment coverage" with a deductible of no more than $250, and no deductible at all if one was already applied to the owner's own loss from the same event (Fla. Stat. 627.714). Elsewhere the amount is whatever the policy provides, so an owner in a building with a large master deductible may want more.

Who pays the master deductible. That depends on the declaration and state law. Florida makes property insurance deductibles and excess damages a common expense of all owners, except that a unit owner is responsible for repairs not paid by insurance where the damage was caused by that owner's "intentional conduct, negligence, or failure to comply with the terms of the declaration or the rules of the association" (Fla. Stat. 718.111(11)(j)). Elsewhere a declaration can charge the deductible to the unit where a loss began, which can leave one owner with a large bill that only their own policy can absorb.

What lenders require. Fannie Mae requires a unit owners policy when "any portion of the interior of the unit or improvements to the unit are not covered by the master property insurance policy, or the master property insurance policy includes a per unit deductible." The policy must be on a replacement cost basis, preferably on a special form, and must be at least the greater of the cost to restore the uncovered interior and improvements or the master policy's per-unit deductible, with a deductible no higher than the greater of 5% of the coverage amount or $2,500.

To size condo insurance, an owner reads the master policy's certificate and the declaration to see what the association insures, then buys enough dwelling coverage to rebuild everything inside that line which is the owner's responsibility, plus personal property, loss of use, liability and loss assessment coverage.

Consider an example in Florida. A hurricane damages the roof of a 40-unit building, and the association's master policy pays the repair minus a $50,000 windstorm deductible. The declaration allocates common expenses equally, so the association assesses each owner $50,000 ÷ 40 = $1,250. Esperanza's unit was not damaged, so no deductible has yet applied to her for this storm. Her policy has the $2,000 of loss assessment coverage Florida requires, with a $250 deductible. It pays $1,250 − $250 = $1,000, and she pays the remaining $250. Had her own unit also been damaged in the storm and her policy's deductible applied to that claim, Florida law would apply no deductible to the assessment, and the policy would pay the full $1,250.

Pros

• Covers the owner's belongings, upgrades and the parts of the unit the association does not insure.
• Loss assessment coverage can absorb the owner's share of a master policy deductible or shortfall.
• Includes the owner's own personal liability coverage.
• Pays extra living costs if a covered loss makes the unit uninhabitable.

Cons

• The right coverage depends on the declaration and master policy, so an owner who has not read them can miss a gap.
• Default dwelling and loss assessment limits can be far below what an owner actually needs.
• Flood and earthquake are excluded and must be bought separately.
• A large master deductible charged to one unit, or an assessment above the policy's limit, can still leave the owner with a substantial bill.