Understanding Condo Insurance and Co-op Insurance
The Essential Information You Need to Buy the Best Condo Insurance
Do you own a condominium (condo) or co-operative apartment (co-op) or are you thinking of buying one?
Insurance for co-ops and condos is a lot more complicated than homeowner insurance. A lot of people invest in condos without understanding the full implication of their responsibility, or they may run into a series of frustrations and surprises because they didn't understand how their condo insurance works. Co-ops also have their own issues, very much like condos.
You can avoid problems and save money by understanding exactly how your condo or co-op insurance works, how it relates to your association policy, and what your responsibilities will be if you have a claim.
Do you really need condo insurance?
Every condo owner or co-op owner should have their own insurance. One of the problems that owners face when purchasing condos or co-ops is confusion about the insurance. Unlike homeowners, they do not always need to provide a binder of insurance to the mortgage company, because the basic building itself is insured on the condo's or homeowner association's policy. This sometimes leads condo owners to think that everything is covered, so they forget about purchasing the individual policy.
This step-by-step discussion will take you through the insurance basics of owning a property like a condo and a co-op as well as tips to help you figure out the coverage you need so you won't have any surprises or extra expenses in a claim.
The two insurance policies you need for a condo or co-op
When you own a condo or co-op you will have two insurance policies that cover your investment in your unit and personal belongings.
- Your own insurance policy
- The master policy, which is managed by the condo association, homeowners association, or co-op board
Your own condo insurance covers:
- Your personal liability
- Your personal property
- Your improvements, betterments, additions, or alterations
- Loss assessment
In addition to the basic coverages, condo, and all residential insurance policies contain numerous clauses which limit coverages on certain items of high value. Depending on how relevant each of these coverages is to you personally, you may also want to learn more about a rider for jewelry, fine arts or other limited items, as well as umbrella liability.
Your insurance representative will be able to review your coverage options and recommend suitable insurance endorsements if you would like to adjust or improve your coverage.
Claims Problems Specific to Condo Owners
When you have a claim that involves the building and your unit, you are not just dealing with one insurance company or policy. A condo or co-op owner will have to rely on both the building's master policy and their own policy to settle the claim. Sometimes if a third party like another unit owner is also involved and you feel they were negligent or responsible for the damage, then the insurance of the other unit owner may also come into play. All insurers will have to figure out what each party's actual loss is and who is responsible for paying before settling the claim. This is often a multi-step claims process.
A common type of claim in condos and co-ops where several of the insurance policies are required to pay out is water damage claims.
Depending on the type of coverage the master HOA policy has, you may also run into gaps in coverage. Don't get stuck in a difficult or unexpected claim situation.
What you need to know about condo insurance
We are going to cover everything you need to know about the insurance implications for your condo insurance so that if a claim happens, you will know exactly what you're in for, and how to get the best claim settlement, including:
- Condo Insurance: unit assessment coverage and shared areas
- Questions you need to ask your condo association about the HOA insurance
- Understanding all-in vs. bare walls in HOA master policy coverage
- Major risks and perils not automatically covered In most condo and co-op policies
- Warning: not reading your HOA or condo association insurance policy could cost you hundreds of thousands of dollars
First, let's start with the difference between condo and co-op, and homeowner insurance.
Difference Between Condo Insurance and Home Insurance and Co-ops
Although co-ops and condos may seem quite similar as living spaces, they are actually very different legally and financially. Because of the legal differences between condos and co-ops, the ways they are insured vary.
Getting the Best Insurance for Your Condo or Co-op
To understand condo insurance and co-op insurance, we need to look at the difference between condos and co-ops and how the needs for these types of homeowners vary from standard single-family homeowner's needs.
How does a co-op work?
Co-op's (sometimes referred to as co-ops) are owned by a corporation, which means that as an owner of the unit, you don't actually own the building or the property, what you do own is a share of the holdings of the corporation. Small co-ops may only have two or three owners, whereas large co-ops may have hundreds of shareholders. In the event of a loss, the share of ownership in the building will come into play. Think of co-ops as multi-unit apartment buildings. The building has one owner: the corporation and the residents are tenants. The way they get the right to live there is via the purchase of shares in the building. They do not own the walls or any specific part of the building. The co-op management is taken care of by all members (shareholders), as a community. The building is, therefore, a communal property that may be unevenly divided based on the number of shares each "owner" has purchased.
How does a condo work?
Condos are owned by the condo owner. The condo owner usually owns their unit from the walls inward. Condo owners are property owners of their units. The condo building is made up of all the individual units, plus the common areas or shared areas. A master insurance policy is usually responsible for insuring the condo structure as a whole, including the shared areas, and then each individual condo unit owner is responsible for protecting their personal liability, their specific unit features (additions, alterations, or upgrades), as well as their personal property.
How is a condo or co-op insurance different from home insurance?
As you can see by the definitions above, the owner of the building is different in all of these situations.
Condo Insurance and Owner Responsibilities
In one circumstance, you have the condo, where the owners own the unit they have purchased. They potentially own the walls, ceilings, and floors of their dwelling, but not the building itself. So in a condo, the owner has to insure the unit and its contents.
Home Insurance and Owner Responsibilities
In a home, you have one owner for the building and contents, and responsibility for anything that happens as a result of your actions or ownership of your property. It is pretty straightforward.
Co-op Insurance and Owner Responsibilities
Whereas owners of a co-op do not own their unit at all, they are only owners of a percentage of the building, which means that the insurance they need for their personal property is really very much like a tenant policy. A separate policy will cover the building managed by the corporation. The tenant insurance would be in the co-op owner's name, and the building will be in the corporation's name.
Condo Insurance : Unit Assessment Coverage and Shared Areas
Understanding Shared Areas and Unit or Loss Assessment in Condos
One of the more difficult things to understand with condo and co-ops is how claims play out in the shared areas of the building. Here is what you need to know to help you understand why these coverages are important.
What Is a Shared Area in a Condo or Co-op?
Shared areas represent areas that are not within the unit dwelling you occupy, but are on the property.
Examples of shared areas include hallways, elevators, gardens, rec rooms, gyms, and pool areas.
Condo Owner Liability for Shared Areas
Special assessments may make you liable for:
- A portion of medical costs or damages to a guest being injured in the shared areas of the property.
- Claims arising from injuries in shared areas of the building.
Why Is Loss Assessment Coverage Important?
Loss assessment helps to protect you from the unexpected expenses that you may have to pay as a result of damages and issues related to the building your condo is in.
Master Policy Coverage and Unit Assessments After a Claim
When the Master Policy or HOA policy covers a loss, but the damage exceeds coverage available in the HOA insurance policy, the members of the association and owners of the individual units may then become liable for their shared portion of the damage that the underlying association insurance was not sufficient to cover.
The Master Policy of a Condo Association or HOA May Have a High Deductible
Since the condo master policy is a commercial building insurance the deductible is usually quite high, sometimes ranging over $10,000. When the deductible becomes payable in a claim, the amount may be divided among all the owners through an assessment.
Loss Assessment Insurance Limits
Policies have specific limits for loss assessment coverage on your individual condo policy. Make sure to find out what your limit is, and also find out whether there is a limit for assessments due to your deductible.
What Kind Of Damage Does the HOA Insurance Cover vs. Condo Insurance
What does the association master policy insurance cover?
Usually, the following basic coverages are included in a master policy, however, the conditions of coverage vary. For example, is the building insured to full value? You will have many questions to ask beyond these basic coverages:
- Damage to the building
- Damage to the shared areas
- Injury in shared areas
Condo association insurance does not cover additions or alterations, appliances, fixtures, or improvements which are in your unit, also referred to as the "residence premises." You need to get your own policy to cover anything else, including your belongings and personal liability.
Understanding the Different Kinds of Master Policies
There are two different kinds of policies that might insure the building: "all-in" or "bare walls." Continue on to the next section to learn what these cover and how they affect you and your choice of insurance.
Understanding All-In vs. Bare Walls HOA Master Policy Coverage
In order to insure yourself properly and protect yourself, you need to understand which parts of the structure of your apartment or condo are insured by the master association's policy. Does the association's policy insure the walls only, or will it include the fixtures that were originally part of the building when it was built?
The Two Types of Insurance Coverage Your Association May Have
- "Bare walls"
"All-In" Condo Insurance Usually Covers:
- The original structure, walls, floor, ceilings, and fixtures as it was delivered when the building was originally built.
As the condo owner, you would then only need to insure additions and alterations made since the original structure was built, such as new flooring, upgrades in cabinetry, or bathroom or plumbing fixtures. Some policies may cover the additions and alterations of previous owners, but you need to ask so you can be aware. Sometimes, you find an amazing condo or co-op apartment that has been fully renovated, and you may assume that's covered by the master policy, but it might not be.
"Bare Walls" Condo Insurance Covers:
- Bare walls
Bare walls will not cover any fixtures, like in bathrooms or anything else.You would need to insure all this on your personal condo policy.
Choosing Your Personal Condo or Co-op Insurance Policy
Read your condo or association by-laws or for co-ops the proprietary lease. Then ask questions about the master policy to find out how much insurance you need for additions or alterations to your condo policy.
You may need to insure more than is provided on a standard condo policy by getting an endorsement, or by switching to a high-end insurer like ACE (formerly Chubb), who will offer you higher limits in the policy.
Once you know what is covered by the HOA or association, speak to your insurance broker or agent to make sure you choose the right insurance coverage for your needs. You have options.
Beware of These Major Risks Not Covered In Most Condo Policies
Water Damage May Not Be Covered by Your Master Policy
One of the major insurance risks for condo owners is water damage claims. When you purchase your personal condo insurance policy make sure and get as much coverage as possible to protect you from any kind of water damage. The problem with condos is that you are at the mercy of your neighbors when it comes to this coverage: if their washing machine breaks down, their sink overflows, or a pipe breaks, you have absolutely no control over how people are maintaining their units. Even in the best circumstances, water damage happens and when it does the risks can be huge.
Do not rely on the building HOA insurance policy for water damage. Make sure you also have your own coverage in place to cover damage to your personal property, additions, and alterations (otherwise known as "betterments" or "improvements").
Just because you have loss assessment coverage, it doesn't mean all special assessments are covered!
Suppose, for example, an earthquake damages the building, but the building did not have earthquake insurance. Or the earthquake insurance deductible was so high that the damage falls below the amount required to claim. The building may then impose a special assessment on the owners of the units to share in repairs and the cost of damage.
You have loss assessment in your condo policy, so you assume it's going to be covered, right? Wrong.
If your personal condo policy did not include the riders like earthquake insurance, then you would not be covered under the loss assessment portion of your policy, because the loss assessment is only for covered losses.