Why is Condo Ownership so Complicated?

Condo ownership is complicated, which makes condo insurance complicated.

Condo insurance is often treated as a one size fits all type of policy. Real estate agents often tell buyers the HOAs master policy covers the structure and that the buyer only needs to cover their personal property and personal liability. Most real estate agents are not insurance agents, and this is terrible advice that could leave a unit owner with a major gap in their policy. Even insurance agents oversimplify the coverage, especially if they have never lived in a homeowners association and experienced the claims process. I have lived in condos for over 15 years and have been the president of the board of directors for my HOA's board for over eight and have dealt with over 70 claims in my complex. In this post I am going to discuss the need to understand your CC&Rs and your unit structure coverage, Coverage A, which often referred to as improvements and betterments, so unit owners can better decide what type of coverage, or at the least the amount of coverage they need, for their units structural components.

For those of you who are unfamiliar with homeowners' associations (HOAs), unit owners have exclusive ownership to parts of their unit as well as a common interest/shared ownership in the HOA complex they have bought into. That right there sets up complications. The HOA is governed by a document known as the CC&Rs, which stands for Covenants, Conditions, & Restrictions. This legal document states what the HOA owns, which is known as the common area and what the unit owner owns, which is known as exclusive use. It states what each party is responsible for maintaining, which is different than what each party is responsible for insuring. A major common misconception is that the unit owner is responsible for airspace inside their unit and the HOA is responsible for everything else in the unit and/or exterior of the complex, but while this is more the norm it is not 100% accurate, which again complicates things. Therefore, a one size fits all approach to writing a condo owner policy, also known as an HO6 policy form, can leave a unit owner exposed to uncovered or limited coverage for claims that happen in their unit. One other thing to note is CC&Rs have hold harmless clauses for sudden and accidental losses making the unit owner(s) and HOA, who are affected by a claim to deal with the claim on their own, except where a unit owner or the HOA is negligent.

Unit owners should consult their CC&Rs and discuss with their management company what the HOA is responsible for covering and what the unit owner is responsible for covering when it comes to the structure. As I referenced above the typical CC&Rs will state the HOA is required to maintain a master fire insurance policy for the whole complex, and the unit owner is responsible for their additions and alterations, even if made by a prior owner. At the same time, the CC&Rs will state who is responsible for maintenance of the complex and unit. Unit owners usually have a responsibility to maintain their drain lines, while the HOA is responsible for the repair of those lines if there is a failure of the line, because they run through the walls, which is typically considered a common area because the wall is usually shared with another unit. If there is something flushed down the toilet that causes a backup that is a failure to maintain the line and the unit owner is responsible for damage done to both the HOA common area and their exclusive use unit interior, due to their negligence. But if there is a drain line failure, like a tree root causing a backup or a broken line causing a backup, or in the case of water lines a pinhole leak, the HOA and the unit owner(s) are both individually responsible for their own portions of the loss. If unit an owner is in a multi-level structure, like I am, they often have water lines and drain lines running through their ceilings. Of the 70+ losses in my complex since I have been here all, but ten, was either a drain line or water supply line related mainly affecting the unit below. Water damage to a kitchen can require a complete gutting of the kitchen, which depending on the size of the kitchen could easily exceed $50,000 to replace the counters, cabinets, flooring, lighting, and built-in appliances. If one took the misguided advice of a real estate agent that told them they only needed personal property coverage, they would not be covered for a sudden and accidental loss to a kitchen that must be gutted.

Now if an HOA's CC&Rs are atypical they may state the unit owner is responsible for the utility lines in the walls and slab. Some CC&Rs also state that the unit owner(s) is/are responsible for the HOA's deductible before the HOA is responsible for any common area repairs and that those losses to the common area in the unit(s) not meeting the deductible are the sole responsibility of the unit owner(s) affected by the sudden, accidental loss. For those HOAs with CC&Rs putting the HOA deductible back on the unit owner(s) I have seen master policies with $25,000 plus deductibles. Going back to the to a kitchen needing to be gutted in the paragraph above, that was in reference to the unit owner's portion of the claim. If a unit owner now has to be responsible for common area losses up to a certain amount, before the HOAs master policy is triggered, then the unit owner could be responsible for the water mitigation, cleanup and drying out of the unit as well as drywall repair and/or replacement. Again, depending on the size of the kitchen in this example at a minimum is usually $5000 and could easily exceed $10,000, but may not reach a high deductible. This is yet another reason why condo insurance gets complicated.

Through out this post I have been using the example of a loss to one room, the kitchen. Let's stick with the kitchen needing to be gutted due to a water loss from above, but as is common with water losses multiple rooms being affected is not uncommon, especially to base boards and flooring that may run through multiple rooms and hallways. That just increases the cost to repair the interior of the unit that unit owners are typically solely responsible for when a sudden and accidental loss takes place. So to summarize it is important for unit owners to understand their CC&Rs and master policy, especially the deductible. Unit owners should also consult with their management company regarding these things as well, so they can have an informed conversation with their agent on what amount of coverage they want to have for the structural components of their unit's interior that they are responsible for. It is also important to find out if they are buying into or have bought into an atypical HOA, so their agent can match them with the right carrier to meet the atypical responsibilities found in the CC&Rs. Not all HOAs are alike and not all condo owner policies provide the same type of coverage, making condo owner coverage complicated. Being informed is the only way for a unit owner to properly identify their coverage needs with their agent.