Buying a condominium can offer many of the benefits of homeownership without some of the maintenance responsibilities that come with a single-family home. But when it comes to insurance, condo ownership works a little differently.
In most condominium communities, protecting the property involves two insurance policies: one purchased by the condominium association and another purchased by the individual unit owner. Knowing what each policy covers before you buy can help you identify potential gaps in coverage and avoid unexpected expenses later.
Understanding the Two Types of Condo Insurance
A condominium is typically protected by a combination of the association’s master insurance policy and the unit owner’s individual policy.
The condominium association’s master policy generally covers the building, roof and common areas shared by residents. Depending on the policy, it may also cover certain portions of the individual condominium units.
The unit owner’s insurance policy, often called an HO-6 policy, is purchased by the individual homeowner. Depending on what is already covered by the association’s master policy, an HO-6 policy may cover interior features such as flooring, cabinets, fixtures and improvements or upgrades made by the owner.
A unit owner’s policy may also provide coverage for personal belongings, personal liability and certain assessments charged to individual owners.
Find Out Where the Association’s Coverage Ends
Not every condominium association carries the same type of master insurance policy.
Some policies may cover individual units as they were originally constructed. Others provide what is sometimes referred to as “bare walls” coverage, which can leave the unit owner responsible for more of the unit’s interior.
That distinction matters. Flooring, countertops, cabinets, fixtures and other interior components can represent a significant expense if they are damaged and are not covered by the association’s policy.
Before purchasing a condo, ask the condominium association, board or property manager for information about the master insurance policy. You’ll want to understand what the association covers and, just as importantly, what remains the unit owner’s responsibility.
A licensed insurance agent can then help you determine the appropriate coverage for your individual unit and belongings.
Is Condo Insurance Required?
Insurance requirements can depend on the condominium community, your lender and the type of financing you are using.
For condominium projects eligible for financing backed by Fannie Mae or Freddie Mac, the project generally must maintain master insurance coverage that meets certain requirements. Individual unit owners may also be required to carry their own insurance.
If you are financing a condo purchase, talk with your lender about the insurance requirements that apply to the specific property and your loan.
What Happens if the Association’s Insurance Falls Short?
An association’s master policy does not necessarily mean unit owners are protected from every expense.
In some situations, condominium owners may be responsible for a portion of costs that are not fully covered by the association’s insurance. This could include certain deductibles or costs associated with a covered loss that exceed the available insurance coverage.
This is where loss assessment coverage may become important.
Some HO-6 policies include loss assessment coverage that may help pay certain covered assessments charged to individual unit owners. Coverage limits and eligible assessments can vary, so ask your insurance agent whether your policy includes loss assessment coverage and whether higher limits are available.
What if Condo Insurance Is Difficult to Find?
Homeowners in areas with elevated risks from hurricanes, wildfires or other natural disasters may have fewer insurance options or face higher premiums.
If you are having difficulty finding coverage, an independent insurance agent may be able to compare policies from multiple insurance companies. Depending on where the property is located, other options could include surplus lines insurers that specialize in harder-to-place risks or a state insurer-of-last-resort program.
These alternatives may have different costs, coverage provisions and limitations than traditional insurance, making it important to review your options with a qualified insurance professional.
Ask Questions Before You Buy
Insurance may not be the first thing on your mind when you find a condo you love, but it deserves a place on your pre-purchase checklist.
Ask the condominium association, board or property manager about the community’s master policy. Speak with your lender about any insurance requirements tied to your financing. Then work with a licensed insurance agent to determine what coverage you may need as a unit owner.
The Community Associations Institute (CAI) also maintains a Directory of Credentialed Professionals, including insurance specialists, at caionline.org.
A REALTOR® can help you navigate the condo buying process and identify important questions to ask about the property and condominium association before making a purchase.
Source: NAR New Consumer Guide
