Loss Assessment Coverage Tips

Properties with shared ownership, such as homeowner and residential and commercial condominium associations, pose special challenges for unit owners and their insurance companies. Damage to property in common areas in such an association may end up being the responsibility of the unit owner. Loss assessment coverage can help in these cases, but it has limitations. Helping clients understand the complexities and providing proper coverage when dealing with shared ownership properties, is another value-added service of the professional insurance agent.

Condominium/townhouse and homeowner association insurance can pose a challenge for owners and agents alike. Coverage requirements for various building and common property items in these shared ownership situations is mandated by provisions of the master deed and bylaws. These requirements vary from association to association, and may change depending on what features were present when the unit was purchased. In addition to insuring the owner’s unit and contents, there is also exposure from common areas, including buildings, elevators, pools, clubhouses, and gyms.

Condominium and homeowner associations have master insurance policies that cover property and liability for common areas. Unit owners may need loss assessment when the master policy limits are insufficient, or to cover the deductible in the master policy. In these cases, the association assesses all of the unit owners for the uncovered damage. For example, the master policy has a limit of $600,000, with a deductible of $25,000. Fire damage results in a loss of $750,000. The deductible is applied against the loss amount. The master policy pays the policy limit of $600,000. Unit owners are assessed their share of the difference, or $175,000. If there are 100 units, then each unit is assessed $1,750.

Unit owners pay a monthly fee to the association to cover such things as insurance and maintenance. Well- managed associations have adequate insurance and reserves to cover most losses. Loss assessment does not respond to maintenance or upkeep costs, such as roof replacement due to age or failure to budget enough money for snow removal. Likewise, loss assessment may not respond to uninsured liability events.

In recent years, many associations have increased deductibles on their master policies to save on insurance costs. It is important to note that loss assessment coverage typically includes a cap, often $1,000, for assessments for a master policy deductible. While some insurance companies offer higher limits of loss assessment coverage to manage unit owner risk of higher deductibles, not all do. In addition, loss assessment applies only to losses that were covered, or would have been covered without the deductible, under the master policy. If the loss is caused by an excluded peril, such as flood, loss assessment coverage does not apply.

Physical damage to common property is not the only time loss assessment coverage comes into play. Liability exposures – brought about by injuries that happen in the common areas – can also trigger a loss assessment. Coverage for both property and liability loss assessments should be purchased.

It may not be an option for unit owners to purchase building coverage to address these gaps. If the unit owner does not own the building, and is not responsible for insuring it, the policy may not respond. It is essential to discuss with the insurance company prior to a loss how the policy will apply in such cases.

When considering condominium and homeowners associations, it is essential for agents and policyholders to understand the unique exposures and how to address them. Helping clients navigate the puzzle and ensure proper coverage is another sign of the true insurance professional.

This article was previously published in Insurance Advocate® magazine and is provided courtesy of MSO®, Inc. (The Mutual Service Office, Inc.) for non-commercial use only. For any other licensing requests or permissions, please contact squimby@msonet.com. © MSO®, Inc. 2024

MSO provides advisory services for all property and casualty lines except workers compensation. This includes customized forms and manuals for insurers, MGA’s, and agents/brokers. Additional information is available at www.msonet.com.

This article is for educational and discussion purposes only and it is not insurance or legal advice and should not be relied upon when making insurance or legal decisions. Nothing herein shall be construed to constitute a legal or underwriting opinion. Nothing herein shall be construed as offering any political, social, or public policy opinion by the author or MSO. Neither the author nor MSO are responsible for errors in, or the accuracy or currentness of, the article.