Friday, January 15, 2021

HO-6 Condominium Insurance - What is it and What does it Cover?

Many retirees decide at some point to sell their family home, with its big lawn and extensive outside maintenance requirements, and move to a condominium. However, if you have never owned a condo before, you need to know that you should purchase a condominium or HO-6 insurance policy. In some ways, this is very similar to the homeowner's insurance you had in the past, so having insurance to cover your new home should not be strange to you. However, there are certain differences between insuring a condo and insuring a house.  What do you need to know about condo insurance?

What is Condo or HO-6 insurance?

A condo insurance policy protects your specific condo unit, and also provides both personal liability coverage and living expense coverage in the event your residence becomes uninhabitable. HO-6 policies are sometimes called "walls-in" coverage, because they protect the interior of your individual unit, while the condominium homeowners association's master policy will cover the building's common areas.

It is important to know that a standard condo insurance policy will not protect you in certain situations, such as floods, unless you purchase a separate policy. You may also want to consider purchasing other additional policies, depending upon where your condo is located and how much time you spend there.  For example, my husband and I live in Southern California, where we do not have to worry about flooding in our community, but earthquakes are a serious concern.  As a result, we have purchased an additional earthquake policy.  One of the things I like about earthquake insurance is that it not only covers repairs and major losses, but also alternate housing while making the repairs.  We chose a policy with a high deductible. It was less expensive, but it will not cover minor damage to our property, such as the television or a piece of artwork getting broken.  Instead, we have done our best to make sure important items are securely anchored, so they are less likely to be damaged in a minor earthquake.  Ask your insurance agent if there are special policies you may require in your area.

Anyone buying a condo for the first time may also find it helpful to read "Condominiums and Townhouses: What You Need to Know Before and After Buying."  It could help you avoid a variety of issues and misunderstandings with your new neighbors and homeowner's association. 

What Will My Condo Association Cover?

Many people assume, incorrectly, that if they live in a condo and anything happens, such as the hot water heater leaks or there is a kitchen fire, the condo insurance will take care of the problem and cover the cost of all the repairs.  That is NOT normally true. The condo association insurance will not make repairs inside your condo. Those repairs are your responsibility and they can be quite expensive.

Before you can buy the correct HO-6 insurance policy, you need to know specifically what your condo association insurance does cover.  Typically, all common areas in a condominium building are covered under a "master insurance policy" which has been purchased by the condo association or HOA. This policy includes not only the building's roof and exterior but also internal areas such as elevators and hallways.  In other words, they take care of the building outside your front door, and you are responsible for the interior of your home.

The cost of the master policy is shared by all unit owners, usually in the form of monthly condo or association fees (which also covers other expenses the association may have, such as employees, pool maintenance, common area electricity, lawn maintenance, etc.).

There are three main types of condo master insurance policies:

Bare walls coverage is a limited master insurance policy which covers the structure, as well as most fixtures and furnishings in the common areas, only. This policy also covers any property that is collectively owned by the condo association, such as clubhouses.  If this is the type of insurance your association has purchased, your HOA fees may be lower, but the condo policy you personally need to buy will probably be more expensive.
Single entity coverage offers everything included in  the bare walls coverage described above, PLUS it provides coverage for built-in property such as the fixtures in individual condo units.  This may include fire damage to things such as appliances, but NOT repairs due to age or wear-and-tear. 
All-in coverage applies to all property collectively owned by the condo association, or which is part of the condominium structure. It is the most comprehensive condo master insurance policy,  and covers all condo improvements and additions. It will enable you to buy the most affordable personal condo policy, but will probably result in higher homeowner's association dues.
Essentially, you will pay for fully insuring your condo in one way or another.  Some of the coverage will come through your homeowners association master policy, and some from your personal policy.  

The type of master insurance policy your HOA or condo association has purchased will directly impact the type and amount of condo insurance you will need to purchase in order to have complete protection. Your personal insurance broker and mortgage lender will ask the association for a copy of its declaration page, which gives them details about the policy and what it covers.  Then, they will be able to tell you the type of HO-6 insurance you need and how much your policy will cost.  Make sure you fully understand exactly what is covered under each of the different policies.

Why Do You Need an Additional Policy if Your Condo Association has One?

Even if your condo association has a pretty comprehensive policy, you still need to have your own policy for a number of reasons.

Liability if you cause damage to someone else's condo - What if your hot water heater or washing machine overflows and water pours into the condo below you or next door to you?  What if you inadvertently cause a fire which damages not only your own condo but those of your neighbors?  These are common issues and they can be very expensive to resolve.  You could be liable for making the repairs to your neighbor's home, and would need to pay for another place for your neighbors to stay until the repairs are made.  Without insurance, the costs to repair both your condo and your neighbor's, as will as provide temporary housing for your neighbors, could easily amount to $50,000 - $100,000 or more, depending on the extent of the damage.

Liability if someone is injured on your property - What if you are having work done inside your condominium and a worker is injured?  If they sue you, your policy might help cover any judgement against you, depending on the coverage you choose.

Personal protection if your home is damaged - You also need to be protected if something happens to your condo and it becomes temporarily unlivable while repairs are made.  A few years ago a broken pipe in the concrete slab of our condo broke and the insurance adjuster discovered that there was also another, slower pipe leak in a wall, and it had caused extensive mold and mildew damage in the walls.  Our entire kitchen and the nearby bathroom had to be torn out and rebuilt, including flooring, cabinets and pipes.  We had to stay in a hotel. We were so grateful for the insurance. 

Reimbursement if your condo is burglarized and/or vandalized - Depending on the insurance riders in your policy, you may receive some reimbursement if your home is burglarized and/or someone breaks in and vandalizes it.  Ask your agent if you need a special rider to cover the loss of personal property.   

Other Condo Insurance You May Need

As mentioned above, in addition to your basic condo insurance policy, you may need additional policies or riders to cover special circumstances. These include flood insurance, earthquake insurance or loss assessment insurance. This last one will help protect you if the repairs to a damaged common area exceed the insurance coverage, and the association decides to assess all the residents with a fee to cover the cost of the additional repairs.  

Another type of protection you may require is vacant condo insurance.  If you plan to travel or be away from your condo for more than a month at a time, your regular policy might not cover you if something happens while you are gone, since insurance companies believe vacant condos are a higher risk. Make sure you have this additional rider on your insurance policy.

The Bottom Line on Condo Insurance

Because some retirees pay cash for their retirement condo, and no lender is involved, they may decide they do not need to get any insurance in addition to what is provided by the association.  This can be a serious mistake, primarily because of their liability risk if they accidentally cause damage to other condos.

It is also important to have a good condo insurance policy if you buy a condo as a rental property for retirement income, and you plan to lease it out.  You want to make sure repairs to your condo and all your liability coverage is in place before you allow strangers to reside there. It is a good idea to expect your tenants to also purchase a renter's policy, because your HO-6 policy is unlikely to cover their personal property.  Proof of insurance should be a condition of the lease.

Make sure you discuss all your insurance options with a trusted insurance broker before you move into your new home or allow renters to move into a property you own.  Unexpected things can happen, and it is always wise to be prepared!

You may also want to read "Condo Buying Mistakes: 46 Costly Mistakes Condominium Buyers Make and How to Steer Clear of Them." (Ad)  It could make your home purchase much more pleasant. 

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1 comment:

  1. Great tips, especially requiring renters to show proof or a renters policy.


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