The catastrophe in 2021 at Champlain Towers South in Surfside, FL, raised a lot of questions about loss assessment coverage and condominium unit owners’ HO6 insurance policies. In this blog, we cover some of the basics about loss assessment in typical HO6 policies and why the coverage offered is usually inadequate to protect the policyholder.
What Is an HO6 Insurance Policy?
An HO6 insurance policy is a homeowners insurance policy designed to cover a condominium or a co-op unit. While common areas and the building’s exterior are covered by insurance held jointly by the entire condo association, an HO6 policy protects a particular condo owner’s unit and its contents.
What’s Covered in an HO6 Insurance Policy?
A typical HO6 insurance policy includes:
- Unit/Dwelling/Building Coverage: This covers the structure of your condo unit, including walls, floors, and ceilings, protecting it from damage due to covered perils such as burst pipes, storms, or fire and smoke damage.
- Personal Liability Coverage: This provides protection if someone is injured or their property is damaged while in your condo, including legal fees and medical bills.
- Personal Property/Theft Protection: This covers your personal belongings (such as furniture and electronics) from damage, loss, or theft.
- Additional Living Expenses (ALE): This pays for temporary living costs (e.g., hotel, meals) if your condo becomes uninhabitable due to a covered event.
- Loss Assessment Coverage: This protects you from costs if your condo association issues an assessment to cover expenses for shared areas damaged by a covered event.
What Types of Damage Are Normally Covered?
The “named perils” included in an HO6 insurance policy typically include:
- Fire and lightning
- Smoke damage
- Windstorm and hail
- Explosions
- Riot or civil commotion
- Damage from vehicles or aircrafts
- Vandalism or malicious mischief
- Theft
- Falling objects
- The weight of ice, snow, or sleet
- Accidental discharge or overflow of water or steam
Does HO6 Insurance Cover Roof Damage?
HO6 insurance policies usually cover your unit “from the walls in,” meaning that the roof and the exterior of the building typically aren’t covered. Damage to these areas usually falls under the condo association’s master policy.
Does HO6 Insurance Cover Drywall?
An HO6 insurance policy typically covers drywall as part of its “unit or dwelling coverage.” This coverage protects the interior structure of a condo unit, which usually includes the drywall, as well as interior walls, ceilings, and sometimes flooring.
However, the specifics can vary based on your particular policy and the condo association’s master policy. If the master policy is “walls-in,” it might cover drywall, reducing the need for extensive interior coverage. But if the master policy is “bare walls,” HO-6 insurance is necessary to cover drywall and other interior features.
Does HO6 Insurance Cover Water Damage?
Whether or not your HO6 policy covers water damage depends on the type and source of the damage. HO6 policies typically cover sudden, accidental water damage from clogged drains, burst pipes in your unit, or plumbing problems. But water damage caused by an outside source, such as a leaking roof, a backed up sewer line, or another unit owner’s negligence, is more likely to fall under the condo association’s master policy. Determining responsibility in these instances can be particularly complicated, so it’s always best to consult with an insurance attorney to explore your best options.
How Much Does HO6 Insurance Cost?
While costs can vary greatly depending on your insurer, your property location, your coverage limits, and your deductibles, a national analysis showed that an HO6 insurance policy costs an average of $445 per year. That average policy included $300,000 for liability coverage, $100,000 in personal property coverage, and a $1,000 deductible.
What Is Loss Assessment on an HO6 Insurance Policy?
Loss assessment is the share of a fee that you, as a condo owner, may be charged by your condo association when a common area, like a lobby, roof, or pool, is damaged but the association’s insurance policy isn’t sufficient to cover the cost of the damages. Adding loss assessment coverage to your HO6 policy as an endorsement provides a financial safety net to help protect you from these unexpected costs when the association’s insurance falls short.
Loss assessment coverage is usually determined on a claims-made basis, meaning that the date of the assessment, rather than the date of the occurrence, controls coverage.¹ That means that you, as a unit owner, can be responsible for loss assessments that result from incidents that occurred before you purchased your unit in the building.
HO6 Policy Limits for Loss Assessment
The typical coverage for loss assessment in a standard HO6 policy is often inadequate to protect the policyholder. Most HO6 policies have a very minimal amount of coverage for assessments made against all unit owners for uninsured or underinsured property or liability claims: usually just $1,000. Even when the limit for loss assessment coverage is increased to $25,000, in most cases, assessments for deductibles are still only covered for $1,000 under the increased loss assessment policy endorsement.
These limits apply both to an association-wide loss assessment in which a judgment exceeds the association’s general liability coverage limits and the excess is thus assessed against all unit owners, and to a loss assessment made against a specific unit owner when a loss is caused by that person’s negligence and the entire association’s master policy property insurance deductible is assessed against that unit owner.
Examples of HO6 Loss Assessment Coverage
In “10 Steps to a Well-Designed HO-6 Policy,” Jack Hungelmann cites some useful examples assuming a complex with 100 units:
- The complex, insured for $5 million, is destroyed by a tornado and costs $8 million to rebuild. The $3 million shortfall would be assessed to the 100 unit owners — that is, $30,000 each.
- A drowning occurs at a condo complex swimming pool. A lawsuit ensues, resulting in a $4 million judgment. The association carries $2 million of liability coverage, resulting in each unit owner being assessed $20,000.
- Heavy rains lead to a massive sewer backup in the complex. Cleanup costs and repair costs total $75,000. The association board did not purchase sewer backup coverage, leading to an assessment of $750 to each of the unit owners.
Under a basic HO6 policy with $1,000 loss assessment and named perils coverage, our hypothetical unit owner will be personally out of pocket for $29,000 from the tornado assessment, $19,000 from the lawsuit assessment, and $750 from the sewer backup assessment (not a covered “named peril”).
How Much Loss Assessment Coverage Do You Need?
Before you determine how much loss assessment coverage you need with your HO6 policy, you should learn about your condo association’s master policy to determine the rate of coverage. The better the association’s master policy, the lower the likelihood of steep loss assessments against its members.
That said, we recommend seeking at least $50,000 in loss assessment coverage when possible. Some carriers limit their loss assessment endorsements to $50,000 or $100,000 in coverage. Boosting your loss assessment coverage to a $50,000 or $100,000 cap may only cost you tens of dollars more per year in premiums. And as we saw in the previous examples, a multimillion dollar suit against your condo association could leave you on the hook for tens of thousands of dollars in loss assessment.
As always, it’s best to consult with an insurance attorney to review your policy and advise you on the meaning of the policy language.
Recommendations for Getting Better Loss Assessment Coverage for HO6 Insurance Policies
A few years ago, we published a post on the Merlin Law Group Condominium Insurance Law Blog, Condominium Owners Purchasing Insurance Beware! Buy The Right HO-6 Policy From a Qualified Agent. In it, we mentioned that HO6 policies have numerous options through endorsements which can broaden the amount of loss assessment coverage found in the basic and cheap form of HO6 coverage many agents sell. Check out that article for 10 recommendations on how policyholders can make sure they’re better protected by their policy.
More Resources on Insurance Law
At Merlin Law Group, our attorneys have decades of experience making sure policyholders are properly protected. Contact us to see how one of our attorneys can help you.
To learn more about how we help our clients, check out these resources:
- Condominium Hurricane Preparedness
- Fighting Against Insurer Tactics
- Filing a Property Insurance Claim
- Hiring the Right Insurance Claim Attorney
Why Merlin?
Are you fighting an insurance company that won’t pay out on claims? With nearly 40 years of practice and $2 billion in recovered claims, our team stands by your side to ensure you can face any insurance challenge with confidence. Contact us today for a consultation, or read more about how we act as your trusted advocate.
¹ This was noted in an FC&S Expert Coverage Interpretation article, “Date of Loss, Date of Assessment, and Policy Effective Date,” in which a policyholder received a loss assessment from their condo association regarding Hurricane Wilma damages. The date of the loss assessment was 3/1/2007, but the actual date of loss was 10/24/05, prior to the start of the policy. Their client was still responsible for the loss assessment, however, because the policy states “we will pay up to $1000 for your share of loss assessment charged during the policy period against you,” without any mention of the date of the actual loss.
