A condominium is a form of homeownership in which the apartments in a building or houses in a development are individually owned, but common areas, such as lobbies or halls are jointly owned. Condominiums constitute 4.7% of all housing units according to the US Census Bureau. Another way of saying that is that about 95% of homes are not condos. Being that owning a condo is relatively unusual, it is not surprising that there is confusion over what insurance is adequate to protect the condo buyer’s interest.
Two Types of Insurance Recommended for Condo Owners
Buying a condo is a lot like buying a home in many ways. However, insurance considerations are a little different when buying a condo than when you buy a home. A homeowner typically is concerned with insuring his home with a homeowner’s insurance policy. The homebuyer has no financial stake in any other property in the neighborhood. The homebuyer does not purchase insurance to cover any common areas that may be granted to the homeowner to use and enjoy along with the purchase of his physical home. For the homebuyer, the homeowner’s association may offer rights to use amenities such as pools, tennis courts, and playgrounds in exchange for a small fee to maintain the common area. The homeowner does not have an interest in purchasing insurance for the common areas because if an accident occurs that causes damages the homebuyer is not affected in his physical home.
Unlike homeowners who only have to worry about insuring their home, condo owners have a financial stake in both their individual unit home and the structure of the building itself. In a sense when you buy a condo, you have a stake in the entire neighborhood. For this reason, when purchasing a condo, the buyer pays for insurance for the common areas through the association policy AND should purchase insurance on his individual unit with a homeowner’s unit policy.
1) Association Policy
In a typical homeowner’s association (HOA) common areas are provided for homeowners to use and enjoy separate and apart from their individual home. The condo association’s insurance policy functions much like a homeowners’ association insurance they buy on common areas in a neighborhood. If a child gets injured playing on the playground in an HOA the individual homeowners have no liability. The HOA charges fees to insure and maintain common areas in a neighborhood. One major difference is, the condo association’s insurance policy covers the physical structure of the condo building along with the common areas.
The condo buyer, like the homebuyer pays association dues to cover the condo association’s expenses in insuring and maintaining these common areas such as reception rooms, gyms, pools, elevators, game rooms, and hallways. The condo buyer, however has an incentive to have the entire building covered against structural defects. The condo buyers are in a unique situation where they are all subject to perils together. For example, in a neighborhood if there is a landslide, only a few homes may be affected. If there is a landside on a condo structure it could affect each individual unit.
The association’s policy however does not cover the individual units purchased by the condo buyers. It is important when owning a condo to be informed about the extent of the association’s coverage. It is not what many condo buyers might expect. Some things covered by the association’s insurance policy are essential for the use and enjoyment of the individual condo unit such as the physical structure of the unit or access via elevator or hallway. Other things may be more luxuries such as swimming pools, gyms, game rooms etc.
The condo association’s insurance policy provides coverage for liability due to injury to third parties and structural damage to the physical structure of the condominium complex. However, the association’s policy does not cover individual condo owners for liability or structural integrity of the individual units owned.
The vast majority of association insurance policies do not cover or provides very limited overage for things like walls, appliances, fixtures attached to the unit or windows. Moreover, the association’s policy will virtually never cover the personal property of the condo buyer within the individual unit. Think of these things being gaps in the insurance policy. Each association’s insurance policy can be unique. However, it should be provided to any condo buyers as a part of the master deed. It is important for the condo buyer to review the master deed so he or she is informed of the gaps in the associations policy to know what coverage to purchase for their individual unit.
2. Condo Owners Policy
The Condo Owner’s Policy also known as the gap filler ideally covers a condo buyer for all the things that are not covered by the association’s policy the gaps. If the interior of a condo unit is damaged by weather, fire, or other commonly occurring events, the association’s policy typically does not cover it. A condo insurance policy provides coverage to the interior of the condo and often goes above and beyond by covering the personal property of the condo owner as well as providing excess coverage in some instances.
If you do renovations to your condo, the new hot-tub you installed could be covered by purchasing a condo owner’s policy. Often disasters seem to be a chain effect. If something goes wrong with the hot tub, it’s likely also going to affect the new hardwood floors you installed. This too could be covered by an individual condo unit insurance.
In addition to improvements, a condo owner’s policy provides coverage to appliances within the condo and even the personal property of the unit owner. Perhaps most importantly, a condo owner’s policy protects the owner against claims of negligence by third parties. If someone is injured in your condo and file a lawsuit against you, the insurance policy indemnifies you if it is ultimately found there was negligence. In the meantime, the insurance company will provide attorneys to defend you against claims of negligence.
What if your negligence causes a fire and the fire damages other units? Won’t their individual insurance policies cover it? Well, maybe but ultimately you guessed it, you’re on the hook for liability. To avoid liability that you as a condo owner/buyer incur as a result of natural phenomenon, human error or negligence from yourself or third parties, it is important to purchase insurance that fills the gaps.