HO-6 Insurance: Understanding Condo Insurance

Condo owners have very specific property insurance needs. While condo owners have dominion over their individual unit, homeowners associations are usually responsible for the exterior of the building as well as lawn and landscaping features. Likewise, there is an incredible amount of variance in the governing laws of different homeowners associations that frequently affect the insurance needs of condo owners. As such, HO-6 insurance policies are customized for individual policyholders more often than other types of home insurance.

An HO-6 insurance policy offers you the same sort of financial protection that any homeowners policy does: If you don’t have it, you could be in for plenty of financial pain.

Not taking out this insurance, even if you have the option, simply doesn’t make sense, say real estate brokers, insurance agents and attorneys.

“Given the pricing of condo insurance, it is worth the peace of mind to know that your possessions will be replaced if they are stolen or that someone will be taken care of if they hurt themselves in your unit,” says Collin Bond, a real estate broker with New York City-based Douglas Elliman.

How HO-6 insurance works

The Insurance Information Institute says that individual HO-6 policies cover your personal possessions, structural improvements that you have made to your unit and additional living expenses if you are the victim of fire, theft or other disasters spelled out in your policy.

Condo insurance also provides you with liability protection in case someone is injured in your unit or if, say, water leaks from your bathroom into the unit below you, damaging that owner’s condo space. Your insurance will pay for the repairs that your downstairs neighbor now needs to make.

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When you apply for a mortgage loan, you’ll have to take out an insurance policy for your condo. Banks won’t pass out mortgage dollars without one, just as they won’t provide mortgage loans to buyers purchasing detached single-family homes without first requiring that they buy homeowners insurance.

Many condo owners are surprised by this. They think that the master insurance policy that protects an entire condominium building, and is taken out by the condo association governing that building, is all that they need, and that this policy will cover their individual unit should their dishwasher flood their kitchen. But that’s not true.

These master policies cover just the common areas of a condo community, says Bill Herbert, regional sales director with Los Angeles-based Mercury Insurance. This includes the exteriors of a condo building, landscaping, pools and walkways. As Herbert puts it, master policies do not cover much within the units of individual owners, leaving everything from countertops to kitchen and bathroom cabinets to flooring and owners’ personal belongings unprotected.

Coverage for those items? That’s where individual condo insurance policies come in.

“Condo insurance is very important for the condo owner,” Herbert says. “Without condo insurance, one of your largest assets could be left vulnerable to coverage gaps in the master policy. In order to ensure your condo is fully covered, you must purchase condo insurance.”

Stefani Tygar Barnes, head of Wells Fargo Personal Insurance, says that condo insurance provides other important benefits.

First, it keeps you off the street, Barnes says. A condo policy will pay for you to live somewhere temporarily should your condominium become unlivable because of a catastrophic event.

Secondly, it can reduce the financial impact of any improvements required by your condo association. As Barnes says, the policy takes care of assessments that an association will levy for items such as a roof repair that is needed after a severe storm.

“Condo insurance fills in where the condominium master policy leaves off,” Barnes says. “It provides protection for both liability and personal property claims.”

How much condo insurance should you buy?

Knowing you have to invest in condo insurance is one thing. But knowing how much to buy is another challenge. This decision, of course, varies on the age, size and location of your condo and the value of your individual possessions.

The good news is that HO-6 insurance is fairly affordable. Herbert said that the price of this insurance can be as low as $400 a year or as high as $2,000 or more each year depending on the value of your possessions.

Stacey Giulanti, founder and board member with Florida Peninsula Insurance Co., says that many condo owners make a big mistake when determining how much insurance to take out: They look only at the value of their condo unit itself and not what it would cost for them to replace the personal possessions that these units hold.

Giulanti gives this example: Say you live in an older condo that is only worth $50,000 on the market today. This doesn’t mean that you should only insure the unit for that amount. What if a water leak or fire destroys your clothing, furniture and computer? Would it cost more than $50,000 to replace these items and restore your condo unit to its condition before the disaster?

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Instead, you should insure your condo for what it would cost you to recover from a catastrophic event.

“People often fail to realize that the insurance doesn’t cover the market value of the condo but what it costs to replace lost items and repair interior damage,” Giulanti says. “Your condo might only be worth $50,000, but to repair it might cost much more than that.”

Say you have a leak that destroys your wood floor. Wood flooring throughout a condo can cost a lot. Replacing damaged property like couches, TV sets, your tablets, your bedding, all of that is covered.

“It’s important to understand that it’s not the market value but how much it would cost for a general contractor to come in and repair the damage,” Giulanti says.

Condo insurance provides liability coverage

Condo owners need to make sure that their insurance provides enough liability coverage, too.

Say your washer springs a major leak because you failed to replace a faulty hose. If the condo unit below you is damaged by your leak, the odds are high that the owner will sue you, Giulanti said. Without enough insurance, you could face a financial hit.

“If you don’t have coverage, you are on the hook to pay for these damages,” Giulanti says. “That damage can get expensive. Your condo insurance covers paying for that. You’ll be covered for damage due to negligence and you’ll be covered for the attorney fees necessary to defend you.”

These same reasons − replacing damaged possessions and covering yourself in case you damage another owner’s unit − mean that it makes sense to continue to pay for condo insurance even if you don’t have a mortgage or you’ve paid it off.

Thomas Simeone, an attorney with Washington, D.C.-based Simeone & Miller, says that liability coverage in particular is an important feature of condo insurance.

“Without this, an owner can be personally liable to guests, delivery people and nearly everyone else entering the unit if they are injured,” Simeone says. “If the condo owner has a dog or a private balcony, or has frequent parties or visitors, the risk of injury is even higher. Just as a homeowner needs homeowner’s insurance, a condo owner should not skimp on this.”

Tips for buying HO-6 condo insurance

• The first step in buying condo insurance is checking with your homeowner’s association to see what insurance is already provided for the unit. This insurance, sometimes called a Masters policy, rarely covers personal property or interior spaces, but some policies cover more than others, such as condo owner’s liability. Moreover, there may be certain requirements or restrictions for the condo insurance you buy, as determined by the governing rules of the homeowners association.
• One of the most important items to consider in this Masters Policy is the coverage cap for damages. If your building experiences a total property loss, this Masters Policy may run out. To fully protect your condo in this type of event, you should buy contingent or loss assessment coverage, which specifically address this problem.
• Once you have the broad strokes for your HO-6 condo insurance needs, you still need to follow general guidelines for home insurance policies. Consider how local climatic dangers might require supplemental insurance, such as flood or earthquake insurance. Moreover, make sure your condo is outfitted with safety and security measures, such as smoke alarms and security systems, that will lead to discounted premiums.
• Of these general guidelines, shopping for online insurance quotes is quickly becoming a new staple. With an online referral service, like NetQuote, not only will online quotes reduce overhead leading to lower rates, but you’ll be able to comparison shop in just a fraction of the time. Plus, you’ll be able to talk to insurance agents about the details of your policy, premiums, deductibles, and coverage limitations from the comfort of your own home.