Monday, December 14, 2009

Ho - 6 and Condominium Policy considerations for Homeowners in Covenant Protected Communities

As an individual condominium or townhome owner residing within a covenant protected community there are specific questions a homeowner needs to consider when purchasing a policy for their individual condominium or townhome. New homeowners are advised to carefully review the homeowner association's Declarations and Covenants, as well as the Rules and Regulations prior to purchasing their coverage. Here are just a few of the questions one should be asking when considering purchasing an HO-6 or Condominium policy.

Not all Homeowner Association blanket Commercial General Liability insurance policies are alike. Unlike cookie cutter policies, the Commercial General Liability Policy for one homeowner association may be significantly different than that of an adjoining community association next door. Contrary to popular belief, the Blanket Commercial General Liability Policies are often designed by the underwriting company keeping the specifics outlined in the associations' Declarations and Covenants, as well as the Rules and Regulations. Some association Declarations are straight forward in that they cover anything on the outside and nothing on the inside. Some associations have the associations' responsibilities end at the door. This includes such items as sewer lines, water lines, electrical, etc. In addition, they often exclude coverage for such items as exterior doors and windows.

Other associations, such as condominium associations, may provide limited coverage for the interiors of the association. Under a "Paint In" policy, the associations' insurance may cover such items as interior plumbing, electrical wiring, structural framework, etc. While others have a "studs in" form of coverage. Under a "Studs In" policy the associations' policy may provide coverage for damages to drywall. The terms and types vary from one risk underwriter to another. Generally, most companies carry what is known as an "HO-6" or "Condominium" policy. These types of policies usually provide limited liability and contents coverage. The liability coverage is often set to $300,000.00 or above. Policies that provide for "Contents Coverage" are often based upon the value of an individuals personal belongings. Things one needs to keep in mind when purchasing an HO-6 or Condominium Policy are as follows:

1) What type of coverage for personal contents does this company provide?

2) What method is used in determining the value of my personal belongings should a loss occur?

3) Does this policy provide financial assistance for lodging should I be required to vacate the premises as the result of a loss?

4) Does the policy have an inflation component for increased costs associated with replacement?

5) What level of liability coverage is provided in the basic policy and can I purchase additional levels of coverage?

6) What levels of medical coverage does the policy provide? Can I purchase additional levels of coverage?

7) What are the various deductible levels and can they be modified?

These are just a few of the basic questions a new homeowner purchasing a townhome or condominium within a covenant protected community should consider. Additionally, a new owner may want to check and see if the underwriting company provides "Loss Assessment" coverage, the levels of such coverage, and whether or not the levels can be modified and/or increased.

LOSS ASSESSMENT - What is "Loss Assessment Coverage? Loss assessment coverage is coverage that kicks in whenever the association requires the enactment of a Special Assessment due to a loss. For example. The Homeowner Association suffers a loss to its roofs as a result of a violent hail storm. Suppose the cost associated with replacing the roofs requires a 2 or 3 percent wind and hail deductible. If the association does not have sufficient funds in its reserves to cover the loss, the difference is generally passed on to the homeowners.

Many HO-6 or Condominium policies provide a basic level of "Loss Assessment" coverage. This level is generally $1,000.00. Several companies, however, have recently increased their basic levels so that the minimum coverage is $10,000.00 with a maximum of $50,000.00. Very often, the companies that have increased their Loss Assessment levels are those companies that have begun utilizing a 2-3 percent wind/hail deductible. Under these policies, a homeowner could easily expect to be hit hard with additional roofing replacement costs associated with a Special Assessment. Therefore, it makes sense, for a homeowner to consider spending the additional funds for the added coverage. Generally, the costs of such additional coverage can range from as little as $8.00 per year for $10,000.00 of additional coverage to $18.00 for $50,000.00. You will have to check with your insurance agent to obtain an exact quote.

LIABILITY - Additional liability coverage should be considered. Today, most people seeking a law suit seem to be fixated with the $1 million price range. Therefore, check with your agent to see what level of liability coverage is provided and whether or not you can purchase additional levels of coverage.

MEDICAL COVERAGE - Another item to consider is the level of medical coverage that is provided with your policy. Most ofetn, these policies only provide $5,00.00 of coverage. If you or a guest becomes injured and requires hospitalization and/or medical treatment are you adequately covered?

SEWER BACKUP - Does your policy provide for sewer backup? Many homeowner association policies only carry a minimal level of coverage for damages related to backed up or broken sewer lines. These levels usually are in the $5,000.00 to $10,000.00 price ranges. Check with your agent to see if your HO-6 or Condominium policy provides such coverage and at what levels. Also check to see if you can purchase additional levels of coverage.

BETTERMENTS - Will your HO-6 or Condominium policy provide for inflationary upgrades or betterment replacement? What are betterments? These are improvements that were made to your property during its lifespan. For example, let us assume that you purchased a townhome with standard formica counter tops. You later upgrade your kitchen with granite counter tops. A fire hits your kitchen and you have to have it replaced. Will your company replace the kitchen with the formica (which is what was there when it was built) or will it replace it with the granite? Having additional "Betterments" or "Improvements" coverage will insure that you have the counter tops replaced with what was there at the time of the loss.

FLOOD - Is your property located within a FEMA (Federal Emergency Management Administration) recognized flood plain? If so, can you purchase coverage from your private insurer or are you required to seek coverage from FEMA. Be advised, most private companies and/or FEMA will not issue policies to those private residential communities that are not situated within a FEMA recognized flood zone. However, that may be a question one might desire to ask as part of the purchasing and seller disclosure process. After all, it may be a deal breaker if it is. The flood coverage price tag associated with the property may make it cost prohibitive. Especially if you the owner are required to make improvements, provide a minimum level of maintenance, or are hit with an extremely high deductible.

Finally, remember that not all blanket coverage policies for homeowner associations are alike. These policies can change from year-to-year. Indeed, most homeowner association Declarations and Covenants require the Commercial General Liability Policy to be reviewed and placed out to bid on an annual basis. As such, you may want to review the associations' policy yourself to insure that should a subrogation issue arise you are not left under insured. When in doubt it always pays to ask your agent. In addition, you may want to have your agent communicate these questions and coordinate coverage with the homeowner associations' insuring agent.
Author: David C. Stiver MA
Team Strategy Inc.© 2009
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