HO6 Condo Insurance – The Other Half of Your Condo Insurance

Frequently I speak with condo and townhome owners that are misguided as to what they need to properly insure their residence.  HOA’s master policies are not sufficient on their own to insure a condo or townhome. 
Not included in the master policy is coverage for personal liability, personal property (contents), interior improvements and upgrades and more. Those who do not have an HO6 (walls-in) insurance policy in addition to their HOA master policy are risking more than they realize by not being properly insured – and most who do not have an HO6 don’t even know the difference.

Why do lenders require an HO-6?

Until around 2010, lenders did not require condominium owners to obtain property insurance beyond coverage provided in the condominium association’s master policy.  New condominium and townhome lending guidelines from Fannie Mae (FNMA) and FHA now require borrowers to obtain an HO-6 insurance policy.

The one question that sizes your HO-6

People describe this as “studs out” versus “walls in”, but that is a two-way split for something that comes in three. Which one your association carries decides how much building coverage your own policy needs, and the gap between the three is large.

Bare walls. The master policy insures the structure and common areas up to the unfinished surface of your perimeter walls, and stops there. Drywall, paint, flooring, cabinets, countertops, fixtures and built-in appliances are all yours to insure. This puts the most weight on your HO-6, and the building coverage on it needs to be correspondingly high.

Single entity. The master policy reaches into the unit and covers original fixtures and finishes as the builder installed them. What it does not cover is anything you have upgraded since. If you replaced builder-grade counters with stone, the difference is yours.

All in. The master policy covers the structure and the interior finishes whether original or upgraded. Your HO-6 then does less building work and concentrates on contents, liability, loss of use and the master policy deductible.

Where the answer lives. The boundary is set by the association’s governing documents, the CC&Rs and bylaws, and the master policy is written to match them. That is why the useful step is not guessing from the building type. Ask the board or property manager one question in writing: is the master policy bare walls, single entity, or all in. Then ask for the master declarations page and the insurance section of the CC&Rs.

The same request answers a second question worth knowing: the master policy deductible, and whether the association can assess it back to unit owners. That figure is what loss assessment coverage on your own policy is there to meet.

What the HO-6 adds beyond the walls

In addition to the HO6 condo owner’s policy insuring the improvements inside of the unit, the HO6 policy also provides coverage for the unit owner’s contents as well as personal liability coverage.  Personal liability insurance is an important part of your insurance portfolio that provides coverage if you’re found liable for bodily injuries to others and/or damage to their property, your HO-6 policy will generally cover you up to certain limits.

Which perils an HO-6 names, and which it does not

An HO-6 policy will cover losses caused by certain perils named in the policy. Typically, these perils include fire, smoke, explosion, vandalism, theft, riot, lightning, storm, broken glass, aircraft, and volcanic eruption. To cover additional perils, you may want to purchase separate protection such as an earthquake insurance policy and a flood insurance policy as those perils are not covered under a standard HO-6 policy and if the HOA has a master policy for those perils the same issues arise when it comes to the improvements in your unit as well as contents within the unit.

Loss assessment coverage

HO-6 policies can also provide coverage for assessments applied to an individual unit due to a direct loss to the condominium. The loss must be covered under the unit owner’s individual policy, not be levied by a governmental agency, and not be related to earthquake or flood damage.  Note that not all special assessments are covered.  A condo policy usually includes loss assessment at a modest default limit, often a four figure sum, with higher limits available to purchase. The figure on your own declarations page is the one that matters, and it is frequently smaller than owners assume.  This coverage is like a “safety net” to protect the unit owner against a special assessment that might result when there isn’t adequate coverage in the Master Policy.  As associations and their properties get older and reserves don’t keep pace with the need of the association, special assessments occur more often.  Loss assessment does not reach an assessment arising from deferred maintenance, normal wear and tear, latent building defects, or anything else not tied to a covered cause of loss.

The California gap worth naming. Loss assessment on a unit owner’s policy excludes earthquake, and many master policies carry no earthquake coverage either. A seismic special assessment can therefore land on a unit owner with nothing answering it. The California Earthquake Authority writes a condominium policy that includes a loss assessment component, and private carriers write earthquake for unit owners as well. Whether either fits is a question for the master policy and your declarations together, and it is worth asking before an event rather than after

When you really consider the alternatives the HO-6 policy is a must have for every condominium owner, regardless of what your associations master policies may cover.

A condo loss usually involves two policies at once, and the association bylaws decide where one ends. Bring us the CC&Rs with your declarations page. Start a quote and we will read the two together.

Disclaimer

This article is provided by Schneiderman Insurance Agency for general informational purposes only. It is not legal, tax, financial, claims, or coverage advice. We are licensed insurance professionals, not attorneys, accountants, or financial advisors, and nothing here should be relied on as a substitute for advice from a qualified professional in those fields. This content is general in nature and is not a review of, or a recommendation for, any individual reader’s specific insurance needs, policies, or circumstances. Insurance coverage depends entirely on the specific terms, conditions, endorsements, exclusions, limits, underwriting eligibility, carrier, and facts of each situation, and the actual policy language always controls. We do not guarantee any coverage, pricing, eligibility, underwriting approval, or claim outcome. Reading this article does not create an agent-client relationship. To understand how these issues apply to your situation, please review your own policy and speak with a licensed insurance professional, and consult legal, tax, or financial advisors where appropriate.