Insurance is an important part of anyone’s financial plan. Being underinsured can wreak havoc on an otherwise solid financial plan, especially when something unexpected occurs. Since home prices are pretty high in the San Francisco Bay Area, more first-time homebuyers are turning to condominiums versus traditional single-family homes.
One of the main differences between home and condo ownership is how much of your residence you must insure. Buying a single-family home means you own and are responsible for both the inside and outside. Buying a condo, on the other hand, leaves you responsible for only the inside (“walls in”). Typically, the outside land, condo building structure, and building common areas are jointly owned by you and your fellow condo members and insured by your homeowners association (HOA) master policy.
Because condo living brings these slightly different responsibilities, it would not make much sense to arrange your condo insurance the same as you would a homeowners policy. Here is what you need to know when purchasing insurance for your condo:
Understand the Master Policy
Since the ownership of common areas is shared with other condo owners, the HOA typically purchases insurance coverage (a master policy) for the common areas, like the hallways, exterior walls, and anything else that’s considered “walls out.” The condo association’s policy will outline what is covered and what is not. There are three basic types of coverage under a master policy:
- Primary buildings and common areas
- Your unit and any items within your unit other than personal belongings
- Building, unit, and any fixtures
As you can see, the individual coverage you may consider depends upon the scope of coverage of the master policy. Start by determining what is and isn’t covered under the master policy—that can influence the coverage you need.
Know the Master Policy Deductible
An association’s master policy has a deductible that is typically charged pro rata among unit owners in the event of a claim. Determine that obligation because, while it may never materialize, it can represent a large financial commitment.
Dwelling coverage is where the difference from homeownership is most significant. On your condo policy, you will likely need just enough dwelling protection to rebuild the interior of your unit (“walls in”). Repairs on the outside of the building, exterior walls, hallways, elevators, etc., if they were ever destroyed by a covered risk, would fall under the HOA insurance. In some cases, your HOA includes coverage for the interior structures of your unit, too, which could lessen how much condo insurance you need.
Personal Property Coverage
Insuring personal belongings is the primary responsibility for condo owners, as your HOA master coverage does not typically extend protection to your stuff. In fact, the value of your electronics, jewelry, furniture, clothing, and the rest of your property is perhaps the key factor in determining how much condo insurance you need. Other coverage options you may want to consider are whether you need earthquake or flood insurance.
Special Assessment or Loss Coverage
As mentioned above, there are times when the outside of the condo suffers a loss or damage (whether structures, pools, playgrounds, roofing, structural improvements, even lawsuits, etc.) and are assessed. If your deductible on the master policy is used, they’ll charge owners a “special assessment”. On some occasions, the cost of a special assessment is VERY costly to owners. The most common kinds of condo policies should cover a loss assessment up to the amount listed, however, you’ll want to make very sure what this is. It is not unusual to see a $1,000 to $2500 loss assessment coverage limit on a condo policy. If it has $1,000 loss assessment coverage, that means if there is a loss to the associations property and all members are billed for a portion of the master policies' deductible, your policy will pay up to $1,000, and then you’re responsible for the rest. Examining and quantifying the risks in your condo complex is no easy task, so, it’s a great idea to get a condo policy with a higher assessment coverage amount than what’s standard. We’ve seen assessments range from a few hundred dollars to $40,000 per owner. You can and should try to offset this risk with Special Assessment or Loss Coverage on your Condo’s insurance policy.