Homeowner "HO-6" Policy
Owners can be required to carry an HO-6 policy ("Homeowners 6" or "Condominium Unit Owner Policy"). Without it, condominium owners are exposed to loss and are more likely to sue the association to cover their losses. Moreover, the secondary mortgage market (Fannie Mae) now requires protection for owners. Owners' insurance should cover the following:
- Personal Property. This coverage insures unit contents such as furniture, clothing, dishes, appliances, computers, etc. Owners with high-value jewelry, art, or collectibles need a "scheduled or unscheduled floater."
- Personal Liability. Although associations carry premises liability insurance for the common areas to cover claims for bodily injury or property damage, it does not cover injuries or damage inside an owner's unit. Condo owners must carry personal liability insurance if someone is injured in their condo. This should also cover injuries in neighboring units caused by fires or floods originating in an owner's unit.
- Loss of Use. This protection pays for extra expenses (hotel, restaurants, etc.) while the owner's home is uninhabitable because of damage.
- Loss Assessment. Loss assessment coverage covers the owner's portion of special assessments levied by the association resulting from insured losses.
- Walls-In. To satisfy FHA requirements, an owner's real property coverage must be a "walls-in" policy instead of "bare walls." It insures improvements not covered by the association's master policy, such as hardwood floors, carpet, kitchen cabinets, plumbing, and electrical fixtures, etc.
- Earthquake Loss Assessment pays for losses related to an earthquake.
Loss Assessment Insurance
Loss assessment insurance covers an owner's portion of special assessments levied by the association to cover losses that exceed the association's policy limits. Following are two examples:
- A child is seriously injured in the association's swimming pool, and $5 million in damages are awarded, but the association is only insured up to $2 million
- A director defames a homeowner, and a court awards damages that exceed policy limits.
- A fire causes significant damage to the clubhouse, but the association is underinsured for the loss; the cost to repair exceeds the association's policy limits by $300,000.
In each case, the association must levy a special assessment to cover the difference between the policy limits and the loss suffered. If a homeowner were to carry "loss assessment" coverage, they would pay his share of the special assessment.
Loss assessment insurance is purchased by individual homeowners, not the association. It can be a stand-alone policy, but more often, it is a rider added to an underlying policy purchased by the owner. Its availability is uncertain:
- If an association does not carry earthquake insurance, loss assessment coverage (if available) will pay for special assessments related to earthquake damage. (See the California Earthquake Authority (CEA) website for more information and talk to an insurance broker.)
- Only pays up to the amount of coverage purchased by the owner. If an Owner buys a $1,000 policy and owners are hit with a $9,000 special assessment, the policy will only pay $1,000. The homeowner will be responsible for the remaining $8,000.
- We will not cover special assessments for deferred maintenance.
- May or may not cover an owner's portion of the association's deductible. If an association has a $50,000 deductible, homeowners will be specially assessed to cover the deductible.
Amend CC&RS
Associations should amend their CC&Rs to require owners and tenants to carry insurance. To avoid potential liability, the amendment should also relieve the association of enforcement requirements related to the amendment. In addition, boards should regularly publish reminders that owners and renters must carry their own insurance.
ASSISTANCE: Associations needing legal assistance can contact us. To stay current with community association issues, subscribe to the Davis-Stirling Newsletter.